IO – The CEO of a company admitted that he didn’t expect the impact of the Corona virus outbreak on his business as so extensive and profound. “We specifically did not include this in our business risk review. I think all companies are the same,” he answered in a conversation last week. “The outlook is very negative. All are affected. Companies and governments in 186 countries are affected. Like a rice stem trapped in a whirlwind and snapped off. Where do you go for help?” he continued.
The government seems to have failed to anticipate the impact as well. Ministers still remained optimistic till last February that Indonesia’s economic growth in 2020 would reach five percent. Finance Minister Sri Mulyani was among those who expressed this opinion on various occasions.
It was only in early March that President Joko Widodo said the government had carried out silent operations regarding the situation, discussing the impact of the Coronavirus spread from various aspects. It is not known whether the discussion in detail was. Was it a rough outline, or if they were confident the patients would recover in due time because of robust immunity.
Later it was observed that there was a sudden rush in preparing emergency hospitals with all their facilities. There was an insufficient number of ventilators. Medical staff were not geared with adequate Personal Protective Equipment (APD).
This phenomenon is happening in almost all provinces. Infected victims are finding it difficult to get treatment because hospitals are already filled up. Meanwhile hospital administration also do not hold any medical history as to whether those suffering have pre-existing medical problems.
Failure to understand the Corona virus’ behavior is proving fatal. In less than 30 days, Covid-19 has invaded 31 of 34 provinces. “As of Monday afternoon, March 30, 2020, the number of people in care (ODP) had already reached 1,414, with 122 reported has died and 75 others cured.” stated Achmad Yurianto spokesperson on Covid-19 task force.
What really happened?
The delay in anticipating the raging spread of the Coronavirus raises the question, were there lack of coordination between agencies? And how does this fit with the state’s financial condition?
Regional government opinions differ from that of central government in determining available choices, whether it’s implementing social distancing status, a national scale lockdown, or an arbitrary regional-scale lockdown – is that a sufficient solution? Each of these choices bares its own risk.
To this day, there has been no meeting (even via teleconference) between the government, the diplomatic community or the business community, even though the government has always affirmed the importance of tourism, investment and trade.
The foreign and business communities need to know what are government policies and to which directions they are heading. Both require first-hand information.
With regards to state finances, senior economists Rizal Ramli has warned us about the fragility of the Indonesian economy. “Growth will only reach four percent, because the government must pay down its debts. The trade balance is in deficit. There are differences between revenue and expenditures in the budget, excluding interest payments and negative loan installments – not to mention the impact of the state owned Insurance company, Jiwasraya and Reksadana cases,” he observed. “If the influence of the Coronavirus outbreak is taken into account, economic growth will only reach two percent,” he concluded, a few days ago.
This year the government is obliged to pay interest of IDR 295 trillion on debt, along with IDR 351 trillion on principle. Meaning it must spend 23% of the total State Budget of IDR 2,291 trillion.
Some time ago, the government and the Parliament agreed on a budget deficit of IDR 307.2 trillion, or at around 15% of the state budget amounted to IDR 2,540.2 trillion – all while the realization of state revenue only amounted to IDR 1,677.1 trillion. This means there is a difference that must be covered by policies, such as the issuance of Government Securities (SUN) and Sharia Government Treasuries (SBN).
The Asian Development Bank (ADB), once pointed out succinctly that some 38.5% of Indonesian government debt instruments are held by foreign investors, noticeably higher than in other Asian countries. If by some chance a run on the market and selloff surge comes to pass, we forsee a high risk for the sustainability of the Indonesian economy.
Does Government have any money?
The government cash balance as of February was more than IDR 270 trillion, consisting of an Over Budget Balance (SAL) at the end of 2018 which amounted to IDR 175.24 trillion, Remaining Financing Budget (SiLPA) 2019 amounting to IDR 465 trillion and the Remaining Financing Budget at the end of February of IDR 50.13 trillion.
Rizal Ramli pointed out the funds for infrastructure projects, amounting to IDR 430 trillion, could also be used to deal with the Coronavirus outbreak.
Reportedly, the government is seeking loans from the International Monetary Fund (IMF) and the World Bank. The IMF has stated that they will provide USD 50 billion to deal with the Coronavirus outbreak. They set a total of USD 10 billion from that USD 50 billion in the form of loans with no interest and quick disbursement to the poorest countries.
Many parties in Indonesia will readily criticize the government if they resort to going deeper into debt. Both institutions usually provide long-term loans and low interest rates, but with burdensome requirements.
The loan conditions set by the IMF to Indonesia during the 1998 crisis were seen as a deterrent. At the time, the IMF suggested the government implement a tightening when in fact what was needed was some kind of quantitative easing. The result was, economic growth shrank to minus 13.5%. Indonesia then fell into a chaotic multidimensional crisis.
A Fragile Economy
The Coronavirus outbreak is already interupting the national economy. While paramedics struggle to save lives, from MSME entrepreneurs to CEOs of multinational companies must swallow the bitter pill. They are equally facing difficulties, and this is not due to mismanagement.
They share the same perception, that the Coronavirus is dangerous. The first priority is saving lives, and the economy comes second. On that basis, all parties predict the economic situation will worsen. Various steps are to be taken, and generally it involves policies for securing assets. Whether the steps is logical or not is another matter.
The impact of the Coronavirus outbreak is seen in the capital market. Investors became alarmed when the IDX Composite The informal sector are far less fortunate when compared to civil servants. Taxi drivers, public transport drivers and online transportation workers are currently suffering a significant reduction in the number of customers. Their frustration are clearly heard or read in Whats App groups.
“It’s already two in the afternoon, and I only got one passenger,” said Rizky, an online transportation driver we met in the Depok area, even though he activated his application at six in the morning.
It is estimated that there are 2.7 million online transportation drivers throughout Indonesia. These are generally unemployed individuals who have no real opportunity for formal employment, so it becomes very risky if there are no fundamental “safety net” policies to provide for them. Warung Tegal’s (Warung Tegal is a traditional food vendor serving afordable yet filling meals) willingness to provide free food is a solace, while the statement that the monthly payment of motorcycle loans be postponed for a year sounds like a normative call.
The same can be said about the fate of the public transportation driver. One taxi driver broke into tears because he couldn’t even get a single passenger, thinking he has to feed his family. (He shared his experience on his Whats App group, later it became viral) This driver is not alone, as one sees more and more taxis parked in their pools or just along the empty streets in front of empty shopping malls.
The airline industry is even more sluggish. Even though Indonesia has hundreds of domestic flight routes, this has had no effect whatsoever. They were devastated after lucrative routes such as those to Saudi Arabia and China were suspended; in fact, they rely on such international routes to get dollars to pay for aircraft lease.
Informal traders share the same fate. Street vendors selling cigaretes, beverages and snacks, gado-gado vendors, bakso vendors, soto vendors, they all complained. Coffee shops are closed down. Since they have no customers, staff pack up and head back to their villages in Garut, Kuningan Central Java and other cities.
Their homecoming also runs the risk of expanding the areas of infection. Ironically, these are also regions that do not have adequate health facilities.
People with excess money are able to be more selective. They are able to place primary needs first. The immediate impact is felt in the decline in sales of property and high-end products. Car and motorcycle sales are down. Airline seats are empty. Hotel rooms are low in occupancy.
The occupancy rate of hotels in Jakarta fell by only nine percent. Big iconic brands displayed on the top of buildings seem meaningless. Pictures of food displayed on the side of the road do not catch the consumer’s attention any longer. Cash is king.
Many shopping malls are temporarily closed, at least until the first week of April 2020. Leave without pay and termination of employment begin to make the daily news.
Informal workers are the unfortunate ones. Employees who are laid off. Everything is bad news for banks and non-banking financial institutions. How do debtors pay installments or principal on their debt?
That’s the picture of Jakarta now – an economic realm where 80 percent of all money is circulating in the country. Conditions in the regions match up because the Corona virus is present in various provinces.
The majority of provinces in Indonesia succumbed to infection because they already have efficient transportation. Distance is no longer a problem. A Banda Aceh-Papua round trip can be accomplished within a single day.
The problem is health. If a host of infectious diseases is running rampant, then those they meet potentially become infected.
Bali Province is the most appropriate example in the context of tourism income. According to the Bali provincial Immigration service, in February 2020, 392.842 tourists visited Bali, down 33% from the previous month. Hotel occupancy rates fell to 70%.
Government efforts
The Covid-19 Outbreak will at some point result in a sharp decline in demand or the expenditure side of the consumers, as well as the supply or production side of the economic chain. Today both aspects are showing signs of weakness.
Soon it will be the turn of banking and non-bank financial institutions affected by the outbreak. Is it the debtor who will experience losses when installments or principal cannot be paid?
On a global scale, the fundamental question is what will happen to the food, energy and economic crisis? Will Indonesia be affected or be able to take advantage of it?
A number of countries that experienced the Covid-19 outbreak took the policy of closing down or quarantining their countries for 30 days. This decision was accompanied by spreading funds to help the people and boost the economy.
The Parliament and the Singaporean government agreed to issue a resilience budget of USD 48 billion. The United States government provides stimulus assistance of USD 2 trillion, while the Central Bank (The Fed) twice lowered interest rates in a week, to 0-0.75%, zeroing the required statutory minimum. It allows banks to withdraw 90-year loans from one another.
The Fed may print money again, along with lowering interest rates an activity only known to a few. Foreign leaders who are trying to downplay the role of the greenback will not have much luck. Look at the fate of Saddam Hussein who wanted to increase the non-dollar transactions in oil sales!
Malaysia enforced a lockdown for two weeks and provided an economic stimulus of 250 billion ringgit or IDR 925.4 trillion; approximately 125 billion Ringgit of this was channeled into programs to protect the people.
So far, the government has launched policies oriented towards maintaining people’s purchasing power, creating a social safety net while overcoming the Covid-19 outbreak. Sri Mulyani emphasized that the handling of Covid-19 should not be obstructed by budget problems, meaning that expenditures that have not been tendered, at around IDR 10 trillion, and funds for regional transfers, at around IDR 17.7 trillion, can be reallocated. Thus, the total amount that can be reallocated is IDR 27.7 trillion.
Nine steps to downplay the impact
President Joko Widodo (Jokowi) on Tuesday, March 24, 2020, announced nine moves to combat the effects of the Coronavirus outbreak:
1. Ordering all ministers, governors, and mayors to cut down non-essential budgets, such as business trips, meetings and any spending that does not have a direct effect on increasing people’s purchasing power.
2. Requesting all ministries/institutions at the central and provincial levels to reallocate budgets for handling the Coronavirus. This means that the government will focus on the health sector in the 2020 State Budget on the basis of Presidential Instruction Number 4 of 2020 concerning Refocusing Activities, Budget Reallocation and Procurement of Goods and Services, in the framework of Accelerating in The Handling of Coronavirus Disease 2019 (Covid-19).
3. Government agencies at the central and regional levels guarantee the availability of basic commodities and maintain people’s purchasing power, especially for laborers, farmers, and Micro and Small and Medium Enterprises (MSME) entrepreneurs.
4. Ministries/institutions, such as the Ministry of Public Works and Public Housing (PUPR), the Ministry of Transportation, the Ministry of Maritime Affairs and Fisheries (KKP) are to expand their labor-intensive programs.
5. Increasing the allowance for the Cheap Basic Food Needs Card program, from IDR 150 thousand to IDR 200 thousand per month for one family. Funds for this program amount to IDR 4.5 trillion.
6. Speed up the distribution of pre-employment cards. This is to reduce the impact of the risk of layoffs due to coronavirus. The budget allocation provided in the pre-employment card program is IDR 10 trillion, so that each participant is given an incentive of IDR 1 million per month for three to four months.
7. The government will bear the income tax (PPh) Article 21 or employee salary tax. This policy will be valid for six months. The funds provided are IDR. 8.6 trillion.
8. The Financial Services Authority (OJK) to apply relaxation on loans for MSMEs with a value of under IDR. 10 billion. This relaxation will be provided by the banking and other non-bank financial industries (IKNB). A decrease in interest and delay of installments for one year will also be given.
9. The government will pay subsidies for interest difference, targeted at interest which amount to more than five percent for ten years for low-income people who will apply for subsidized mortgage loans. The government will provide a down payment subsidy for people who apply for credit for subsidized homes. The funds are IDR 1.5 trillion.
A warning from Singapore
The Government, through the Head of the National Disaster Management Agency, Lieutenant General Doni Monardo, on March 17, extended the Status of the Specific Emergency Situations of the Coronavirus Disease in Indonesia to May 29, 2020. This means the government is targeting the Corona virus outbreak to disappear or to be overcome within three months.
The recovery period will be far longer than the time it takes for the outbreak period to subside. It can be six months; it can be more than one year. Estimates are based on the experience of countries affected by Severe Acute Respiratory Syndrome (SARS) and Middle East Respiratory Syndrome (MERS) a few years ago.
PM Lee Hsien Loong in his speech on March 27, warned that despite efforts to overcome Covid-19, it is difficult to predict the results because of the high uncertainty. Moreover, there is a tendency that the success of overcoming Covid-19 does not necessarily mean that we are safe. There is still the next wave coming.
The message for his people is actually worth observing, because the population of Indonesia is 50 times greater than the population of Singapore. Indonesia has at least 135 points of entry. Singapore has fewer than ten. Singapore provides a USD 48 billion resilience budget. While Indonesia shifted the 2020 APBN budget and requested financial support from the public.
Lessons Learned
History plays a role in discovering repetitive patterns. History can also be the source of correction in this time of economic decline.
President Sukarno, who suffered from the greed of capitalist countries himself, applied a policy of self-reliance or standing on our own feet. Policies that encourage Indonesia to be self-sufficient in the fields of various types of food crops, marine products and their derivatives. Being selective in exploring and exploiting natural resources and mineral resources.
Unfortunately, this policy was condemned and associated with a closed economic policy, similar to the policies of the leader of Myanmar (Burma at the time), General Ne Win.
On the other hand, the prescription offered by Western institutions (in fact, former colonizers) the World Bank and the IMF were praised. The recipe was used in development strategies starting in the early 1970s. Development was based on foreign loans and foreign investment. Since then, Indonesia has also played a role as a provider of raw minerals and minerals, as well as a market for their products.
As time passed, the amount of foreign loans or debt continues to grow until the present. Foreign investment absorbs many workers, but is still classified as a sunset industry. Sectors in which Indonesia has a high chance of excellence, such as food and the marine sector, are being ignored. The proof is the ongoing import of rice and industrial salt.
Infrastructure and economic development then birthed new growth poles such as Medan, Jakarta, Surabaya and Makassar. Around these cities, factories were built to attract newcomers, causing problems in the fields of housing, health, education and so on.
Development generates new economic power, namely, the private sector, which later also assumes political power. They got their chances because they were facilitated by the government which needed economic actors to accompany SOEs, although it turns out that their character is different from that of the late Hasyim Ning or Dasaad, businessmen and industrialist during the era of the Indonesian struggle, contributed grately to the cause.
The private sector also received a breath of fresh air with the arrival of British Prime Minister, Margaret Thatcher, in 1985. It is widely known that Thatcher supported the privatization of SOEs, reduced the power and influence of trade unions, and deregulated the financial sector. Thatcherism!
It turned out that out-of-control private companies were the factors that caused Indonesia to be hit the hardest in the 1998 crisis. They borrowed in foreign currency but their products were sold domestically. So, when famous speculators like George Soros placed their bets, the private sector was shocked and frustrated because the value of the Indonesian Rupiah (IDR) against the US dollar collapsed.
Enhancing the Role of SOEs and Villages
A number of governments post-Soeharto era made various modifications, but the development strategy still relied on foreign loans and investment. The difference is that the jargon that debt is a mirror of trust has disappeared.
In this context, there is no other way but to increase the role of SOEs as the agents of development.
SOEs can be a partner of the government to manage strategic sectors such as food, health products and marine products.
One example of the benefits of SOEs is reflected in the response of PT Garuda Indonesia President Director Irfan Sebuahutra when asked, what would Garuda Indonesia do about the impact of the Covid-19 outbreak?
Garuda is a State-Owned Enterprise (BUMN), so its policies must be aligned with those of the government; he answered some time ago.
In the era of free markets, developing SOEs is no longer a taboo. Singapore’s economy is strong because their SOEs are managed by great talents.
Aside from that, rural areas must receive greater attention. Those who embezzle village funds should be categorized as criminals because they impede development. On the other hand, high appreciation deserves to be given to regional leaders who are creative and have succeeded in advancing the countryside and developing the people’s economy. (Sjarifuddin Hamid)
Sjarifuddin Hamid is a senior journalist. He was Chief Editor of Business Indonesia daily news. He studied in the faculty of Social and Political science at Universitas Indonesia where he earned a Bachelor degree. He writes for theIndependent Observer