Crisis incoming, Government must announce Stimulus Package soon

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Anthony Budiawan Managing Director of Political Economy and Policy Studies (PEPS)

 IO – Indonesia’s stock market is still under severe pressure. The Indonesian Composite Index remained depressed until Wednesday, 18 March 2020, at minus 2.83%. The Composite Index closed that day down to 4,330. 

This Composite Index rate is the lowest within the past four and a half years. Within a mere two and a half months, i.e., from the start of 2020 to 18 March, the Index has spiraled downward 31.25%. That’s its worst performance since the time of the 2008 global crisis, when it plummeted some 50%. The 2020 crisis might end up even worse than the 2008 crisis, as the Coronavirus disaster just started, and might persist quite a long time. 

Naturally, this disaster also had the effect of depressing the Rupiah exchange rate, which slipped rapidly within two months, from IDR 13,600.00 to IDR 15,232.00 per USD. Within the past week alone, pressure on the Rupiah worsened: it went down IDR 900.00 per USD, from IDR 14,323.00 on 11 March to IDR 15,232.00 on 18 March. 

Things can still get worse. The Composite Index can still fall further than it did in the 2008 crisis, and the exchange rate also has a potential of a deep dive – even as far as setting a new record low. It is entirely possible for the Rupiah to fall lower than IDR 16,000.00 per USD within the next few days. A rupiah exchange rate of IDR 18,000.00 or even IDR 20,000.00 per USD might even become a horrid reality instead of just a nightmare. 

This is entirely possible if investors lose their confidence that our Government can successfully handle this two-fold crisis, i.e. the health crisis due to the Coronavirus and the economic crisis. In such a case, foreign investors will dump their financial as sets, whether in the form of shares or Government bonds, resulting in a rush of dollars flowing out from Indonesia. This will further depress both the Composite Index and the Rupiah exchange rate. Bear in mind that global market sentiment also remains negative as stock markets everywhere continue to tank. 

Our Government has announced no plan or policy for mitigating the growing emergency. Globally, many countries have responded by issuing stimulus packages to shore up their wobbly economies. America is preparing more than USD 1 trillion for the purpose, while Germany is pumping in EUR 500 billion in soft loans to all domestic companies, large and small, affected by the global pandemic, plus provisions and underwriting of export credits. France is preparing EUR 45 billion plus in stimulus packages for individual employees, and EUR 300 billion as soft loans to affected companies. 

It is unclear how Indonesia’s fiscal policies will be able to withstand the current triple crisis: a state budget crisis, a balance of payments crisis, and a ballooning economic crisis. Add the health crisis to the mix, and Indonesia’s sufferings become even more complete. In the end, the Government will be hard-pressed to provide sufficient stimulus to mitigate such a torrent of challenges. 

 Consider, for example, how global oil prices have turned downward sharply. WTI (West Texas Intermediate) price is down to about USD 21.00 per barrel, its lowest rate in 18 years. Brent is down to about USD 25.00 per barrel, its lowest since 2003. In the assumption used for the 2020 State Budget, Indonesia Crude Price (ICP) is set at USD 63.00 per barrel. The fall of oil prices naturally drags the prices of other commodities down as well, and depresses State Budget income sharply. Furthermore, tax income will also dry up, along with much lower economic activity during the Covid-19 crisis. A state budget crisis looks inevitable. 

Consequently, it will be hard if not impossible for the Government to provide a stimulus package sufficiently large to mitigate the corona pandemic as well. However, to repeat: if ignored, investor trust will fade, causing a capital (dollar) outflow and depressing the Rupiah exchange rate even further (in the worst case, much lower than IDR 16,000.00 per USD). The capital outflow that we stand to lose is extremely large: a whole USD 410.8 billion by the end of January 2020. Therefore, the Government needs to quickly herald a sufficiently strong economic stimulus policy that can calm the market. Do not delay – every second, minute, hour, and day is valuable. Poor timing will prove fatal.