Coronavirus and economic recession

19
Fuad Bawazier Former of Finance Minister

IO – When the world was hit by the Coronavirus case, and every country was busy diagnosing Covid-19 patients or fingering suspects, Indonesia continued to claim that there were no Coronavirus patients or those who were suspected of being exposed to the Coronavirus. Extraordinary! For an instant, the world was impressed by Indonesia, but soon they realized, became more critical and doubted the honesty of the Indonesian government. There is no reason that Indonesia is immune from the Coronavirus. Because the countries above the territory of Indonesia such as Singapore, Malaysia, Thailand, Vietnam and Australia which are geographically under Indonesia, have announced Coronavirus patients in sufficient detail. Though Indonesia is more intense in dealing with China compared to these countries. The world and the market believe that Indonesia has failed to detect the spread of the Coronavirus in Indonesia, whether it is intentional or not. The credibility of the government in the eyes of the international community dimmed, just as doubts of the economists at home and abroad concerning the curiously stable economic growth rate in the range of 5%, even though many economic indications have changed. Those prolonged international doubts will in turn degrade the credibility of governments in the eyes of the world, especially in the eyes of global markets and investors. 

Following the attitude of the central government, practically all local government officials and hospitals went along to chop up and remain silent about the Coronavirus by always saying they were well-prepared to detect and treat Coronavirus patients. Once again, the market was amazed at the greatness of Indonesia and those who chuckled “It’s bullshit”. 

Amid doubts or accusations of lies in Indonesia’s claim of “immunity”, suddenly DKI Governor Anies Baswedan revealed patients who were being monitored for possible exposure to the Coronavirus. The market appreciates the transparency and the courage of the DKI Governor. This action is valued as international hospitality. A bold, honest step and shows the readiness of DKI against the Coronavirus outbreak. Unfortunately, on the next day, it was denied by Minister of Health Terawan. People get confused: which statement is correct? What kind of political game is this? Who wants to besmirch whose credibility? 

But the following day, President Jokowi officially announced that there were 2 patients who tested positive for the Coronavirus in Depok, and DKI officials, including the Governor, were secretly smiling because they had already revealed this, were bolder, more transparent and honest in dealing with reality. DKI even looks more alert by preparing its fleet and team to quarantine patients who feel they have an indication of exposure to the Coronavirus. So as not to be noisy and to avoid accusing each other, just assume that there is a little miscoordination or miscommunication between the Minister of Health and the Governor of DKI. After President Jokowi announced that there were 2 corona patients, the attitude of the Regional Government other than DKI would have been more courageous and honest, following the steps of the DKI Governor. It is no longer just a matter of refuting, because people are increasingly critical, especially with the dissemination of information through social media. 

This Coronavirus knick knacks will still be long and, to be honest, Indonesia’s readiness is still questioned by the international community. But this is a challenge and a test for all of us. There is still a lot of conflicting information, and the story behind the Coronavirus issue is a murky one. Its origin is still a matter of debate. The story begins with the animal market, the leaked Chinese bioweapons laboratory, part of the intelligence war and the economic war, the struggle for world supremacy between whites (USA) and yellow skins (China), to speculation about efforts to undermine and sabotage OBOR (One Belt One Road) program. 

At the national level, there is also much speculation circulating. Revocation of the status of Indonesia from the list of Generalized System of Preferences (GSP) by the United States government so that Indonesian exports to the USA no longer get GSP privileges or import duties. In order to meet the requirements for changing the status of import duties that will be imposed on exports from Indonesia, whether we like it or not, the USA must classify Indonesia as a developed country, and Indonesia can no longer be considered as a developing country. While this US policy is detrimental to Indonesia, many even consider it as punishment because we are too close to China. But for those who are foolish, borrowing the term from Rocky Gerung, this is proof that Indonesia has become a developed country. 

Now it is also starting to be soundly predicted that (propaganda?) Indonesia’s economic growth in 2020 will be 4.7%. Assuming that if China’s economic growth falls by 1%, the Indonesian economy will decline by 0.3%. So from 5% to 4.7%. Amen, if that’s true. We all must be relieved. But I am convinced domestic and foreign economists will doubt the 4.7% again. With various indications and approaches, it will possibly sink below 4.7%. This will be a serious challenge for Statistics Indonesia (BPS) to maintain its credibility. 

Another issue related to the Coronavirus is: will the world economy, and Indonesia in particular, experience a contraction, recession or crisis? Global economic growth in 2020 is clearly declining, as the IMF and World Bank confirm. The Indonesian economy is no exception: it is clearly suffering a contraction. In quarter IV / 2019 the contraction is 1.74%, even though the impact of the Coronavirus had not yet emerged; then, there is a corruption virus, and a complicated, slow and expensive bureaucracy virus, aka our “high-cost economy”. So it can be ascertained that the I / 2020 Quarter will experience an even greater contraction, since two consecutive quarters of contraction, by definition or consensus, are called “recessions”. And this will in turn spur a financial crisis, essentially because the supply of dollars to the Indonesian economy is drying up, compared to demand. Exports continue to decline; the trade balance and current account are both in deficit. Foreign direct investment (FDI) and foreign portfolio investment are sliding downward; inevitably capital outflows have begun. This shortage of dollar supply to the Indonesian market will repeat the events of 2018, when the exchange rate of the Rupiah to the USD reached IDR 15,300, as Indonesia was short by USD10 billion. At present, the potential dollar shortage for 2020 is estimated to exceed that of 2018. Thus, the Rupiah exchange rate will decay, drifting downward. This is the beginning of a financial crisis that will drag or shake the capital markets. 

The debt-rich style of Finance Minister Sri Mulyani seems no longer to be that effective: it has proven to be both blunt and dangerous. Foreign investors have begun to hesitate before buying Government Securities (SUN). Logically, the Rupiah exchange rate will be worse, but fortunately the interest rate of the dollar has been set lower and there is an easing of the dollar by the US government, or the Fed, so that the strength of the dollar declines. Foreign investors in Indonesia who will scatter with their assets also “regulate” the rhythm of the Rupiah exchange rate so that it does not fall too much; otherwise, they too would be losers. Without the “help” of these two factors, the Rupiah exchange rate would have skidded off the road. 

During January and February of this year, the majority of SUN purchased by BI reportedly amounted to IDR 70 trillion. This is all thanks to BI policy, because other sources, such as pension funds and insurance and hajj funds have dried up, were siphoned off by the previous SUN, or drained into a variety of specific targets, such as grand infrastructure projects. With the help of BI, the State Budget had “survived”, even though the deficit had overshot its target. I cannot imagine what would have come to pass if BI had not bought the SUN: a State Budget crisis would have been inevitable. Meanwhile, the debt will continue to mount, to the point where it is likely that we will be unable to pay it down. Bear in mind that in 2020 around IDR 426 trillion of debt will come due, around 60% of which is foreign-held, which will certainly suck money abroad, amounting to around USD18.5 billion. Where will the money to pay this debt come from? Inevitably, this debt will be “covered” by taking on new debt. 

Unfortunately, January-February 2020 tax revenue is lower than receipts for the same period in 2019, when the economy allegedly grew 5%. This is perplexing for me to explain, because from past experience, I know normal tax revenues should increase 2-3 times as much as economic growth. Why are they drying up instead? In the past, when economic growth was 6-7%, tax revenues tended to rise by 15-20%. 

Since tax revenues fell, State Budget spending followed downward. In January 2020, State Budget expenditures were 9.1% below those of January 2019. Now, when exports appear to fall, state spending follows; foreign investment (FDI and PORTFOLIO) will potentially fall as well; manufacturing shrinks and layoffs rise, most likely resulting in a decrease in demand. This essentially means that we are headed for an economic crisis that completes the financial crisis. Rule of thumb: this crisis will likely turn into a political crisis. When? It depends on many factors. 

1. How bad and how long the Coronavirus spreads throughout the world. Although in China it has reportedly “decreased”, the absolute number of people infected and dead is still rising. Unfortunately, other countries are slow to react to the danger as they are just beginning to be attacked by the Coronavirus. 

2. Are there stimuli and is there any creativity that can emerge from government circles besides loading up with more debt? The most recent economic policy packages are blunted only on paper, while the forthcoming Omnibus Law is controversial and most likely counterproductive: it clearly violates the 1945 Constitution. Will this continue on the same track? 

3. It also depends on the government’s ability to manage the Coronavirus from non-quantitative factors, such as fear, panic, and coordination. 

4. Can the government reform its State Budget to improve and clean up from misallocation, fat, markup, waste and fictitious items? Such a State Budget reform is both urgent and invisible, but will require a special quantity of courage, because all parties previously involved will feel ashamed at being exposed, even though all this time they were praising their own work: “the prudent State Budget”. Some even championed this patently false title. 

Last, but not least, this Coronavirus could be “greeted as a blessing” by certain parties, such as those who can use it as a scapegoat for the government’s economic policies. Or who can “get the blessing” for import licenses to bring in urgently-needed medical devices and commodities such as garlic and sugar in order to maintain food stability. Or who can hoard a warehouse of face masks, driving up prices for extra profit.