The economy in 2021, A reason for optimism?

Illustration: Agung Wahyudi/IO

IO – How optimistic are we in our outlook for 2021? We will most likely have differing opinions. Some observers and business players have expressed their caution about whether Indonesia’s economy will revive in 2021. Others are even more pessimistic, believing that the economy will not recover until 2022. In their view, it will take longer for the economy to pick up.

On the other hand, many people are also highly hopeful and optimistic that this year the global economy, including Indonesia’s, will recover. Governments and international financial institutions are of course among those who strike more optimistic tones.

Several independent institutions, such as CORE Indonesia, have even projected that Indonesia’s economy could grow by 6 per cent in 2021, if some prerequisites are met.


Even though it was in red at the opening session on Monday, January 4, 2021, the Indonesian Stock Exchange (IDX) immediately gained momentum. Driven by improvement across sectors, the Indonesian Composite Stock Price Index (IHSG) strengthened by 125.82 points (2.1%) to the position of 6,104.89. As many as 299 stocks rose, while 188 fell and 143 others remained flat. A buoyant capital market endured through Tuesday, January 5, 2021. IHSG rose by 32.45 points (0.53%) to 6,137.34.   This time it was supported by the increase in prices of 229 shares.

The promising signs shown on the opening day after the long year-end holiday were in line with expert predictions. Global capital market rally towards the end of the year, when the Indonesian capital market was closed, boosted investors’ confidence that the local financial market will be pulled along in tandem.

The capital market rally was followed by the strengthening of the Rupiah and lower yields on sovereign debt paper (SUN). On Monday, the Rupiah strengthened significantly, breaking the psychological threshold, at Rp13,895 per US dollar. Meanwhile, the SUN yield with a ten-or of 10 years fell 2 bps, to 5.87 percent. The decline in SUN yield reflects higher prices tracking strong demand.

The strengthening of IHSG, the appreciation of the Rupiah and the decline in SUN yield cannot be separated from the enthusiasm of both domestic and foreign investors in their positive outlook for 2021. In 2020, domestic investors played a significant role in saving financial markets, by supplanting foreign investors. This was later bolstered by the return of said foreign investors in early 2021.

The swell of financial markets reflected the high optimism from financial market players that the Indonesian economy would soon recover. Financial markets are known for their forward-looking orientation. They tend to make a move in advance to anticipate any changes that are likely to occur in the future.


There are many arguments supporting an optimistic stance that Indonesia’s economy will be better in 2021. First, there is a Covid-19 vaccine. Those who believe that a vaccine will be an effective defence against the pandemic are generally the optimistic ones.

The single greatest cause for Indonesia’s economic collapse in 2020 was the Covid-19 pandemic. A subsiding number of cases will restore economic confidence and eventually spur economic growth to its normal level of around 5 per cent annually. The vaccines will also help build herd immunity, which will eventually bring the pandemic under control or even see the end of it.

The challenge now is how to quickly vaccinate the majority of Indonesians, across thousands of islands. According to the information from the Finance Minister, in order for the vaccination to be effective in creating herd immunity, a minimum of 70 per cent of the total population in Indonesia must be inoculated. That means the government must vaccinate at least 180 million people.

Realizing such a gargantuan challenge, from the start the government has prepared a fairly comprehensive plan on how to administer vaccinations quickly, from budgeting, procurement and distribution to implementation.

To ensure the success of a vaccination program, the government has announced that vaccines will be given free of charge to all Indonesians. Thus, a projected budget of IDR 74 trillion will be needed to procure vaccines, an increase of 26.48% from a previous figure of IDR 54.4 trillion.

Even though a fairly large budget has been prepared, the government does not rule out increasing it again for vaccine procurement and immunization. A final figure is still being calculated so that vaccination can be carried out quickly.

In addition to preparing a budget for vaccine procurement, the government is also working on assuring vaccine procurement, by entering into bilateral and multilateral agreements. Vaccines are to be sourced from several producers, namely, Sinovac, Novavax, Covax, AstraZeneca and Pfizer.

Meanwhile, the government has a multilateral agreement with GAVI-COVAX to obtain free vaccines for 3-20% of the population, or around 16-100 million doses.

In addition, the government works to ensure that Indonesia will be able to produce its own “Red-and-White vaccine”. It is still in a research stage and is expected to start production in 2022. With the domestic production of vaccines, the government can ensure that Indonesia is truly ready to vaccinate all its people so that it can be Covid-free as soon as possible.

Of all the vaccines that have been ordered by the government, the one that has arrived in Indonesia is Sinovac which, to date, numbers around 3 million doses and has been distributed to all provinces in Indonesia.

The next step is to create a vaccination plan. The initial targets are those at the forefront of the fight against the pandemic, namely, health personnel. Following their inoculation, the government will gradually vaccinate diverse groups of people.

It must be admitted that despite careful planning, this is not an easy feat. Some groups in the community doubt the safety and efficacy of the vaccines. Refusal to be vaccinated by these groups will of course become an obstacle in achieving herd immunity. Therefore, the government should to intensify familiarization efforts, to convince those who are still doubtful.

The next source of optimism is positive developments on the global stage. The inauguration of Joe Biden as President of the United States in January 2021 to succeed Donald Trump is expected to improve global trade climate, which will lead to quicker post-pandemic global economic recovery.

Donald Trump’s “unique” leadership style has raised not only tensions between the United States and its trading partners but also impeded international trade in many regions of the world. Through his tweets, Donald Trump often triggered upheaval that impacted the global politics, security and economy.

No one know whether Joe Biden will change Trump’s policies. Although he no longer uses “America First” jargon, Joe Biden will certainly prioritize US interests, something any president in any country is expected to do.

However, it seems that everyone agrees that Joe Biden’s leadership style will be more accommodating and conducive, especially for the global economy. Aimed at maintaining American hegemony, Joe Biden will prefer to restore traditional diplomatic channels that many are more comfortable with. What is clear is that Joe Biden will not create a lot of uncertainty, which the markets hate.

The other development on the global front is the agreement between the UK Government and the European Union on the Brexit deal, which has eliminated concerns that Britain will experience a hard landing. The British government has at least five years to prepare for its post-Brexit economic transformation. A healthy UK economy will have a positive impact on Europe and global economies.


Other than the vaccine and positive global development, we still have other reasons to remain optimistic about Indonesia’s economy in 2021. Among them are rising commodity prices on the global market and the implementation of the Job Creation Law.

Global economic rebound will increase demand for Indonesia’s top export commodities such as coal, nickel and CPO, expected to last through 2021. Amid the efforts to revive the manufacturing industry which has been hit by the pandemic, rising commodity prices can be relied upon to drive up exports.

This will enable Indonesia to maintain its fairly large trade balance surplus in 2020, which will help support the current account. Furthermore, the performance of the trade balance and current account will help stabilize the Rupiah exchange rate.

Indonesia’s economic recovery in 2021 will also attract inflows of foreign capital, in the form of FDI and portfolio investment. The abundant global liquidity as a result of super-expansionary monetary policies in developed countries to overcome the Covid-19 pandemic requires a channel for investment. Indonesia is an attractive investment destination, with a fairly high rate of return at a time when interest rates in advanced countries are near zero.

But this will only happen if the Job Creation Law can be implemented immediately. Although there was wide opposition by various groups of people to the passage of the law, it is actually a quite comprehensive reform intended to remove investment barriers, providing a much needed boost to economic growth and job creation.

Through the omnibus law “shotgun approach”, the government has bypassed thousands of articles and dozens of overlapping laws that hinder investment in Indonesia. The product is the Job Creation Law, hailed as a landmark in legislative reform, which offers investors various facilities and incentives, from licensing, land acquisition, labour, to the environment. Large inflows of investment will create a snowball effect, accelerating the recovery of the national economy, stimulating economic growth, and ultimately attracting even more foreign investment.

The implementation of the Job Creation Law is awaiting various technical regulations that are still being finalized by relevant ministries and agencies. In order to accelerate national economic recovery and capitalize on post-pandemic momentum, the government should complete the technical regulations in the first quarter of 2021.


Although many people predicted that it will not exert a major impact on the national economic recovery, President Jokowi’s move to reshuffle his cabinet makeup at the end of 2020 was still very much welcomed. It must be admitted that since the beginning of the formation of the “Indonesia Onward” cabinet, his choice of “political” ministers has disappointed many people, especially the economic players. The reshuffle has, to some extent, ameliorated the disappointment.

While it can be said that Covid-19 took away the spotlight from Jokowi’s cabinet performance in 2020, he was criticized from the start for choosing ministers whose abilities were in doubt and was later proven unable to come up with breakthrough policies. This was even implied by the President himself in several of his speeches, which clearly showed his disappointment with the performance of several ministries and institutions. The climax was double corruption cases, involving the Minister of Maritime Affairs & Fisheries and the Minister of Social Affairs.

The newly-appointed ministers have not fully placated business players, but the reshuffle itself has given new hope. At least they no longer put their political ambition above performance. Several ministers such as Sandiaga Uno, M. Luthfi, Wahyu Sakti Trenggono, and Budi Gunadi Sadikin clearly have commendable track records for the job.

Budi Gunadi Sadikin, who many doubted is the right man to lead the Health Ministry, quickly reversed the public perception. His explanation regarding the vaccine procurement plan some time ago emphasized that a health minister doesn’t necessarily have to be a medical doctor, but more importantly a good manager. And Budi Gunadi Sadikin clearly possesses that ability.

After Budi Gunadi Sadikin, we hope that the other ministers can immediately prove that they are indeed worthy of holding ministerial positions in the Indonesia Onward Cabinet. The Cabinet reshuffle gave more reasons to be optimistic about the recovery of Indonesia’s economy in 2021.


Optimism for the recovery of the national economy in 2021 is not unwarranted. There are many arguments which we can be confident will yield economic recovery this year. But in the end the success of economic recovery is still dependent on a triumph over the Covid-19 pandemic. As long as the pandemic is still raging, economic recovery will never materialize.

Vaccines are believed to be a game changer. Although they cannot cure Covid-19, it can help achieve herd immunity, so that the spread of the Covid-19 virus can be limited or stopped. The availability of vaccines is enough to make people euphoric that the pandemic will soon end and the economy revived.

However, amid the newfound enthusiasm from the successful discovery of a vaccine, Covid-19 cases in various countries have continued to rise dramatically. The new wave was believed to be triggered by the emergence of a new, more contagious variant of the coronavirus. The increase in Covid-19 cases has forced several countries to return to lockdown.

A surge in Covid-19 cases has also occurred in Indonesia, not caused by the new variant of the virus but rather due to the low level of public discipline in observing health protocols. Mask wearing, hand washing and social distancing have not yet become ingrained habits of the new normal.

The resurgence can potentially reduce the efficacy of the vaccine, and can become a drag on national economic recovery. Thus, despite vaccine availability, the public still has to comply with health protocols at all times.

Vaccinations and health protocols are critical to our success in overcoming the Covid-19 pandemic. By doing both, we will see Indonesia’s economy recover in 2021. (Dr. Piter Abdullah Redjalam, SE, MA)

Dr. Piter Abdullah Redjalam, SE, MA graduated from Universitas Gadjah Mada (UGM) majoring in management. He built his career at Bank Indonesia (1994-2017) with his latest position as Deputy Director for Monetary Policy. He later joined the macroeconomic working group at the National Economic and Industry Committee (KEIN) and as research advisor at the Deposit Insurance Corporation (LPS). He is also active as Research Director of Center of Reform on Economics (CORE) as well as a enured lecturer at Perbanas Institute.