IO – Government keeps avoiding the admission that we are facing an economic crisis. Is it too risky for government to tell the truth to the public and investors in the money markets? However, Finance Minister Sri Mulyani’s statement was crystal clear: 2020 is more complex than either the 1998 or the 2008 crisis. In fact we are now facing a “three-dimensional crisis”: an economic crisis has hit Indonesia for sure, even before Covid-19 erupted in Wuhan. This being followed by a Public Health crisis, and now we see a Leadership crisis.
Three dimensional crisis
Covid-19 just triggered a fallout in Indonesia with a not-so-resilient economy, dominated by commodity exports rather than industry. Exports have plunged, and imports have declined. We are counting the number of people infected by Covid-19, while business owners are counting their losses over several weeks. The Informal workers suffer because they rely on daily wages. On a global perspective, never forget the simmering trade war between US and China, with a massive impact on the global supply chain. This economic crisis turns out not only more complex than the crisis of 1998, but far more dangerous. Let’s admit it.
An IMF statement in G-20 already announced that “the outlook for global growth for 2020 is negative—a recession at least as bad as during the global financial crisis or worse”. Their term of “worse” is actually far worse than imagined. An economic apocalypse may be expected (think of the 1918 Spanish Flu, or the Great Depression of the 1930s). It is not just a virus that is life threatening, but a death toll including worker suicides and hungry children crying. We are not prepared for the worst: since 2015 the Government has stoutly denied it, saying the economy is stable, with estimated growth of 7% on average – but actually it is the beginning of a national catastrophe.
If only the Government were prepared and honest, there would be no need of a Perpu to drastically alter the budget and bailouts for banks. State-owned enterprises (SOEs) are now on the brink of colapse, as debts swell and profits plummet. The other worry is the rising debt, triggered by corporate defaults, including SOEs. The banking sector is also vulnerable, as credit growth in February 2020 was only 5.5%. Non-performing loans may jump in the second semester, as debtors are uncertain about how to pay down installments. Moody’s predicts banking could fall to negative growth, triggering a run by customers. This is the most widely-addressed issue in the financial sector.
Bank Indonesia’s power to intervene on behalf of the Rupiah is limited. Foreign currency reserves plunged from 130.4 billion USD to 120.9 billion USD in just one month. According to CEIC data (last updated in 2019), Indonesia’s foreign currency reserves, compared to GDP, were only 10.9%. Compare this to other countries in ASEAN: Thailand stood at 39.4%, Malaysia 27.2%, and Phillipines 21.7%. Some countries have apparently learned their lesson from the Asian Financial Crisis in 1998, and have begun to adopt a monetary policy; therefore, they are ready to intervene with such higher reserves. Indonesia, on the other hand, has yet to learn from past crises: there is no breakthrough in terms of monetary policy. Yes, the name of policy may change, as the Governor of Bank Indonesia changes, but a hangover of a legacy concept means we still face the 2020 crisis with a “business as usual” attitude.
Apart from this economic crisis, we are now facing a public health crisis. Statistics from WHO suggest that Indonesia is not ready to face the pandemic, compared to other countries in the region. Data shows only 36 Covid-19 tests for every million inhabitants. Worldometers reveals Indonesia is the fourth-worst in term of Covid-19 testing. Indonesia’s position is down with that of Ethiopia, Bangladesh and Nigeria. Our number of physicians is only 0.4 per 1,000 citizens, and the number of ICU beds only 2.7 per 100,000 people. Malaysia has 1.5 doctors and 3.4 ICU rooms per 100,000 – their readiness to contain the viral pandemioc is much better. The Indonesian death toll per 7 April was 209 while Malaysia reported 62 fatalities.
A presentation from London Business School suggests that developing economies face higher risks, on account of several factors: much lower health system capacity, more exposure to world trade cycles, far less access to the internet and working from home entail more disruptions and unprecendeted economic costs. A public health crisis in Indonesia can cost not only more lives, but also a further crisis as Covid-19 is not our only health problem. Dengue fever in the eastern part of Indonesia, non-communicable diseases such as heart attacks, kidney failure and even mental health crisis from too much exposure to Covid-19. This cost will directly affect either the Ministry of Health budget or the national health insurance (BPJS Kesehatan).
A leadership crisis must also be recognized as a crucial factor. Communication and coordination factors central to Covid-19 crisis management are very poor. Denial by the Minister of Health, followed by miscommunication among Jokowi’s inner circle has resulted in open confusion. It is not surprising that on the 2 April 2020, Moody’s Investor Services has downgraded Indonesia’s banking outlook from “stable” to “negative”, stating that “Uncertainty about the Indonesian government’s ability to manage the health crisis is triggering capital outflows, leading to tighter domestic dollar liquidity and Rupiah depreciation.”. Moody’s is not alone: various international organizations have pointed to a fatal absence of management during the Covid-19 crisis. Do we see strong leadership here?
If Mr. Jokowi does not reshuffle his economic team. It will be too late to restore confidence. How can you talk about economic policy correctly, if the leader of economic team is a political party operative? Politics always takes the first priority– not the economy, while Sri Mulyani struggles to cut the budget and raise the level of debt. It seems the head of the team is going nowhere. I may not agree with many of Sri Mulyani’s policies, but she is in fact far better than the rest of the current economic team.
Omnibus Law using Perpu
The three-dimensional crisis just triggered another regulation to stimulate the economy. As a result of a panicky, delayed response, the President recently released Perpu (emergency regulation) No.1 Year 2020, which includes both a fiscal and monetary stimulus for the current emergency. Perpu are only a decree in emergencies, not as a matter of course.
We are not surprised to see an article slip into the Perpu confirming an adoption of the Omnibus Law Taxation. For example, related to article 5 of the Perpu that provides a reduction in corporate tax rates to 22% in 2020, 20% in 2022, and 17% for domestic taxpayers listed on the Stock Exchange. In the draft Omnibus Law, codicils related to corporate income tax rate incentives are in Article 3. Different articles but the content is exactly the same. Why did the Government do that? Are the conditions for reducing the corporate income tax an emergency? There are strong suspicions that there is a group of elite who are exploiting the corona crisis and the economic crisis to subtly slip past an agenda before it can be discussed at length in Parliament. These elite oligarchs are interested in pushing through the Omnibus Law under a Perpu cover.
Another strange point of the Perpu is the digital taxation enacted during the pandemic. The situation to apply for digital taxation is not appropriate. The Government is not only targeting the biggies like Netflix, Zoom, Google or other social media platforms, but also domestic e-commerce transactions. This policy will hurt small & medium enterprises, forcing them to pay 10% of VAT. What is the emergency status of our economy, that the Government feels impelled to collect a digital tax?
The call to accelerate ratification of the Omnibus Law in the context of the economic crisis and the corona crisis is not first time such a political move has been seen. In the presentation of Bappenas of 11 February 2020, related to anticipating the impact of the global economy, the Government offered a short-term solution: to accelerate ratification of the Omnibus Law Cipta Kerja (Employment Creation). So it is not impossible that after the Perpu sense of Omnibus Law Taxation, next will be the Perpu Cipta Kerja. This is how policy makers expedite problematic articles and secretly ratify them without any interruption by members of Parliament.
Omnibus law taxation is considered problematic because there is no guarantee that any reduction in corporate income tax will directly stimulate the economy; moreover, there is no guarantee that companies will not lay off workers. Profits from government incentives provided by the Government to corporations can be misused. Bambang Brodjonegoro, ex-Minister of Finance, said that Indonesia has suffered tax evasion on a large scale, as the State lost IDR 500 trillion over a period of 10 years.
According to a 2016 Ministry of Finance source, there is a practice of evading existing income tax by accumulating high capital goods purchases, then depreciating them. A company records financial losses that continue to grow, not to mention manipulation through transfer pricing and other ways of tax avoidance as reported by the Panama and Paradise Papers.
For the state budget, generosity of corporate income tax incentives will erode the tax ratio. The stimulus is not necessarily effective, but the tax ratio can easily slide below 7-8%. The state budget that bears the loss is supplemented by a Perpu related to widening the budget deficit beyond 3%. Only in the third year will it return to a deficit of 3%. This means that within 3 years tax revenue is ready to decline, and there is no guarantee whatsoever from the third year onward fiscal discipline can be carried out.
Missing the Middle Class
The Perpu has created new problems, because the middle class does not seem to be involved in the existing stimulus. Tax incentives are given massively to corporations, while poor people also receive expansion of subsidies. The problem is that the situation of the rapidly deteriorating economy also creates pressure on the middle class.
World Bank data shows that there are 115 million people who are categorized as “vulnerable poor” or “aspiring middle class”. This poor vulnerable category is a group that can fall below the poverty line if there is economic pressure or disaster. Aspiring middle class does not seem to be a stimulus priority and this is a big mistake of the government.
Even if there is assistance for the middle class, for example in the form of deferral of credit installments, it is felt to be ineffective. OJK handed over credit restructuring to each bank, thus arousing conflicts between banks, leasing and debtors. Arguments in leasing offices because debtors claim their rights cannot be avoided.
The speed of President Jokowi’s populist speech firmly declared that debt collectors cannot charge online drivers when the covid-19 situation is not in accord with the readiness of OJK. Poor coordination between OJK and financial services has aroused confusion among debtors as to who has the right to get a credit suspension. The President’s spokesperson even said that the target of receiving credit restructuring is not just a business that has been affected, but it must be proven to be corona positive. Really things that are beyond reason.
Therefore, to reach the middle class exposed to the impact of corona, the main step is to set a Universal Basic Income. The purpose of universal basic income is to keep the purchasing power of the middle class from collapsing. As noted in BPS data, the middle class in Indonesia accounts for 37% of total national expenditures. The significance of the contribution of the middle class will be drastically reduced if the Government does not help with universal basic income. In practice in European countries, universal basic income is an unconditional form of cash transfer for each head of population, not calculated by households.
Under Covid-19 conditions, the government can set a basic income by encouraging cash transfers for laid-off workers, day-to-day workers and the informal sector, for example 80% of the UMP (minimum wage) equivalent. If the UMP in Bali reaches IDR 2.5 million, workers must get IDR 2 million. This money will be used directly to survive and fulfill basic needs such as renting a house. Basic income is very effective in the midst of crisis conditions, because the impact is instant compared to tax cuts given to corporations. Even companies that receive tax incentives do not have guarantees that they will not be laid off or that they will begin to abide by labor regulations.
Liquidity injection, sounds familiar?
In addition to tracing the Omnibus Law, one by one the articles in the Perpu indeed make sense shrink away. For example, related to changes in the Bank Indonesia Law which previously only allowed BI (Central Bank) to buy Government Securities (SUN) on the secondary market. Article 19 changes regulations by allowing BI to buy SUN on the primary market. Forcing BI to buy SUN indicates two things. First, financial market conditions make it difficult for the Government to conduct SUN auctions normally. Second, BI is ready to be behind the Government to fill a widening budget deficit.
Then, in article 16, BI is given the option to provide funding access to corporations by way of SUN repo. The implication is that BI will provide massive liquidity under the pretext of saving banks / companies during a crisis. This clearly has the potential to return the BLBI scenario during the 1998 crisis which became a mega scandal with a total state loss of IDR 4.58 trillion according to the BPK (Badan Pengawas Keuangan) version.
Article 17 in the Perpu talks relates to the evaluation of short-term liquidity loan facilities, where the great responsibility lies with OJK. The problem is, there is a crisis of trust that is affecting the financial services oversight body. OJK lost its legitimacy after the failed Jiwasraya policy scandal, AJB Bumiputera adorning media headlines. To restore confidence in the governance of such a large flow of funds seems quite difficult. How could the Jiwasraya problem alone reduce the Rp16.8 trillion loss to an end, then move to the supervision of financial institutions that would be injected with massive funds?
The gap for the emergence of collusion, moral hazard, fraud and corruption is wide open in Perpu No.1 Tahun 2020. So Mr. President, please strongly read the Perpu that you signed, the economic-political consequences are not only for your generation to bear, but also for young children going forward.
The magic articles add to the arrogance of the Perpu. Article 27 Paragraph 1 states that the rescue policy related to the crisis will incur no loss for the State. How could the budget from the state budget, from the SUN then when there was a problem, then the government said it was not a state loss. Does BPK mean that it cannot audit?
You cannot sue the government
The action of the invulnerable official is displayed in Article 27 Paragraph 2, policy makers cannot be prosecuted by criminal or civil law if carrying out their duties is based on good faith and in accordance with the law.
This article appeared because it was feared that the distribution of funds in the Perpu would later lead to financial disasters. If there is a change of regime, policy-making officials cannot be brought to court. An authoritarian character emerges, even though we live in a democratic climate where the people have the right to hold the government accountable.
Therefore, the Government’s partisanship is increasingly clear to the interests of oligarchs who pound on the door of power so that their interests are quickly accommodated. Perpu is more dangerous for the economy, for democracy when compared to the contents of the Omnibus Law Taxation and the Omnibus Law Cipta Karya, because in essence there is an insidious connection between the Perpu and Omnibus Law.
Debt, Debt, Hell of Debt
After releasing Perpu 1/2020, soon afterward the Government releases new regulation, Perpres (Peraturan Presiden: President Regualtion) 54/2020. This Perpres which increases budget deficit to 5.07% will entail many consequences even after Covid-19 crisis recovery. First, the budget deficit will be IDR852 trillion, revised from previously figures IDR 307.2 trillion. Second, as the budget deficit increases, Government is ready to issue IDR 1,006 trillion in new debt. This is a new historic record of highest Government debt issuance in any single fiscal year. Increasing debt may trigger what we called a “crowding-out effect”: bank liquidity tightens, because bank deposits fly to Government bonds in search of a higher rate of return. Banks hurt, businesses hurt and people find less liquidity in the market.
Debt is also a serious business in term of crisis: creditors can virtually force the Government to issue higher-coupon bonds. This condition is fueled by a downgraded forecast of credit ratings because of the economic crisis. Higher interest rates: bad for future fiscal discipline. It is strange that in Perpu Government promises to go back to level of deficit below 3% in the next three years. How can you go back to 3% deficit if the future budget should bear the burden of higher payment of interest rate? This policy is very ridiculous and only benefits the foreign creditors.
Therefore, the rejection movement against Perpu No. 1 of 2020 is as important as the movement against the Omnibus of Cipta Kerja and Omnibus Law of Taxation. Without any disrespect, we implore the President to going over the points in the Perpu agian before ratifying. It is not too late to revoke the Perpu again. There is a historical price that will be very expensive for the Indonesian economy to pay, if a large amount of budget misuse occurs. The international world is paying close attention. (Bhima Yudhistira Adhinegara)
Bhima Yudhistira Adhinegara, is a researcher at INDEF (Institute for Development of Economics and Finance). He received a Bachelors degree from the faculty of Business and Economics, University of Gajah Mada and later on continued his education at Bradford Univesity, England, where he received his Masters degree.