Indonesia’s struggle against COVID-19 has pit its economy and policymakers to their greatest challenge yet. In response to the outbreak, the Indonesian government has announced a comprehensive stimulus package amounting to IDR 405.1 trillion (USD 26 billion) targeting the underprivileged bottom 40 and sectors of the economy that are at highest risk from the recession.
The country’s manufacturing industry is at the center of various tax breaks and incentives; the industry contributes to 20.5% of Indonesia’s GDP, and the fact that up to 50% of its raw materials are imported from China has put it at a risky position. Cash transfers and other non-cash initiatives such as providing free electricity to the disadvantaged and giving out staple goods are also aplenty. But will these be enough to get the country back on its feet and inspire confidence in the markets?
If investors were impressed, then market was not reflecting it; one week after the announcement of the package, the Rupiah reached levels that were last seen in 1998. The Jakarta Stock Index (JKSE) also saw 37% of its value wiped out since the beginning of the year. These were spurred by massive foreign capital outflow that amounted to at least USD 4 billion in rupiah denominated bonds, and USD 600 million in Indonesian equities. The Ministry of Finance has also mentioned that they are anticipating the currency to drop to as low as IDR 20,000 per USD, a level unseen in the nation’s history.
Global institutions seem to share a similar sentiment, as evident from their revisions of the country’s GDP expectations for 2020: The World Bank’s revision places it at 2.1% from 5.1%, and the IMF recently posted a somber revision of only 0.5% from 5%. Indeed, Indonesia’s own Ministry of Finance is anticipating a worst-case scenario of a 0.4% contraction. These estimates present the archipelago’s worst GDP growth since the Asian Financial Crisis (AFC) – is the specter of the 1998 crisis hanging over Indonesia once more?
Our view is otherwise; though it is indeed true that economic activity has slowed down to a crawl, the country’s fiscal posture is healthy, and fundamentals are solid – nothing like it was during the AFC. The years before the crisis, Indonesia’s short-term external debts amounted to almost 90% of the Central Bank’s reserve levels at the time – as the currency went into freefall, the debts overwhelmed corporations and sent the economy over the edge. This time around, Indonesia is much more conservative with short-term debt, and is armed to the teeth with foreign currency reserves.
The capital flight and JKSE crash can arguably be attributed towards portfolio reallocations, rather than due to a real shift in fundamentals. Although foreign ownership of rupiah bonds dropped by 7%, Indonesia is still the Asian country with the highest foreign proportion of bond ownership. Furthermore, the government’s very recent issuance of “Pandemic Bonds” was met with abundant demand – the bond issuance was two times oversubscribed in the Singapore and Frankfurt Stock Exchanges, indicating positive market sentiment.
The government is also taking steps to make sure they can continue their support if the outbreak persists for a long period. President Joko Widodo recently signed an executive order to overturn a budget deficit cap, giving the government more breathing room for outlaying continued stimulus. The Indonesian Central Bank was also one of the few that was able to secure a repo facility with The Fed worth USD 60 billion, ensuring dollar denominated liquidity when and where needed.
The trauma from the AFC has taught policymakers the best way to deal with crisis. The 2008 Global Financial Crisis barely left a dent on Indonesia due to astute fiscal policy and post-AFC policy reform; the country’s current Covid-19 response appears to be taking pages from that playbook, and – if history serves us right – could see the archipelago emerging victorious from the virus outbreak.