IO – We are pleasantly and proudly surprised by President Jokowi’s speech in the latest Cabinet Session held on 18 June 2020. In the speech, he strongly warns the ministers of his cabinet that the global economy is suffering a crisis thanks to the COVID-19 pandemic. There is a great chance that economic growth worldwide 2020 will actually be minus 7%. Indonesia’s economy is undergoing a prolonged crisis and might suffer a minus as well.
The President urged his cabinet to work extra hard due to the abnormal situation. He warned them against acting “business as usual”. This is understandable, because Indonesian officials frequently cover things up, claiming that they have done what they should and that they are on the right track, while they did not take any extraordinary steps. They act as if everything is normal, that there is no big deal let alone a crisis – “Everything is OK, there is no problem,” while the crisis has already become a huge one.
President Jokowi reiterates that he would not hesitate to take any necessary steps, including a cabinet reshuffle and disbandment of any institution that obstructs necessary work or those with bad performance. In fact, some institutions have terrible performance and are nothing but a hindrance to the economy. The President will not hesitate to issue whatever rule or regulation necessary in order to mitigate this complex crisis. It is now up to his officials to implement them in reality.
Even though the speech was only released 10 days later on 28 June, many groups appreciate it. His speech is a ray of hope amid despair. We the economists agree with the President. In fact, we have been thinking this way for a long time: Indonesia has been suffering a prolonged multi-dimensional economic crisis. The real sector, finance sector, State Budget and financing, and banking sector all face serious problems. The Working Cabinet (sic) must really work, instead of, forgive us for saying this, relaxing and partying all the time.
The Real and Financial Sector
Looking at its current situation, we believe that Indonesia’s economy will contract down to a minus growth rate. Both supply and demand have drastically fallen, as is obvious from the large number of factories, shops, recreational spots, eating spots, transportation businesses, etc. that are closing. There are mass layouts, up to 6 million recorded in the formal sectors alone. And that’s only to the extent formally monitored by the Ministry of Labor. The formal sector comprises only 35% of all existing workers. The remaining 65% comprises of informal work sectors, so it is entirely possible that the number of workers in the informal sector who lost their jobs is actually double or triple the number of newly unemployed in the formal sector. Furthermore, data is available for up to May this year only, and we can expect this condition to persist.
The “control” of inflation is not an achievement. It is an illusion caused by lowered buying power.
Sales of all goods and services, including of cars and motorcycles, have dropped. Our processing sector has definitely crashed, with exports down 28.8% and raw material imports down 29.6%. To make a long story short, we quote our colleagues at the Indonesian Chamber of Commerce that our real sector was shaky even before COVID-19…but it has now crashed.
In the financial sector, we suffer continued capital outflows, with constant investments in foreign portfolios. The current transaction balance is chronically deficit for no less than 3% of the GDP, about equal to USD 30 billion. Therefore, despite frequent BI interventions, the Rupiah exchange rate continues to weaken again because it is a pure and simple lack of dollar supply. The market tends to fight fiercely to gain and keep dollars. The only cure for our economic illness is to increase our exports and to gain foreign investments in the real sector to gain dollar income and refill our dollar reserves, instead of going into debt in dollars.
Foreign investments in Indonesia are actually very low, only 5%-10% of our economic earnings. Now, we are hoping to be blessed with relocation investments from companies that left China, hoping against hope that they will invest in Indonesia instead. However, in view of their bad experience concerning the strength and trustworthiness of our regulations, very few, if any, foreign investors are interested in investing in Indonesia. Our regulations are complicated, costly, and rife with obstructions. This causes foreign investors to prefer investing in our portfolio sectors – “safer” sectors that do not generate real job opportunities for us, but that would allow them to escape along with whatever capital and profit they can get at any time.
State Finances and Budgeting
It’s a public secret that our State Budget is dying. Daily Government cannot run without the crutch of debt, let alone development. Our Central Bank (BI) has been on alert for decades. Our State Budget, with a total volume of let’s say, IDR 2500 trillion, suffers a deficit of IDR 1000 trillion or a whopping 40%. We are forced to drive up debt to cover up, whether we want to or not. We can expect Government debt to jump to up to 40% of GDP by next year. On the other hand, our tax ratio continues to subside to below 8%, causing the ratio of debt interest payment to tax income to soar to 28%. We haven’t even counted the instalment payment of principal debts and other necessary expenditures. In the past, SOE net wealth was bigger than Government debt, allowing them to theoretically serve as collateral for national debts. Not anymore. None of them is solvable.
Banks are known to be facing trouble nowadays. The total of non-performing credits and restructured credits is about IDR 600 trillion. Liquidity problems are getting obvious – some banks cannot liquidate checks from their customers. There are daily talks of deposit accounts that cannot be liquidated. This is eerily similar to the 1998 Monetary Crises, wherein the domino effect of bank problems in liquidating assets extended far and wide.
Indonesia’s economic is really in a multi-dimensional crisis, but it seems only the President has a proper sense of crisis in the Government.