If one wants to find a case study for a proactive response from government bodies to the coronavirus crisis this year, they need look no further than Indonesia.
Soon after the country reported its first confirmed case on March 2, 2020, the government quickly announced a host of measures to contain the pandemic, including banning domestic and international travel and large public events, and closing schools.
On the fiscal policy front, Indonesia’s finance minister Sri Mulyani Indrawati initially unveiled two fiscal packages worth Rph33.2tr, before announcing additional support worth Rph405tr on March 31. It boosted that to about Rph695tr ($49.15bn) in early June, equal to roughly 4.2% of the country’s GDP.
These are big numbers but they didn’t come in isolation. Bank Indonesia announced multiple rate cuts over the year, with the last coming in November, pushing rates down to 3.75%. This came hand in hand with a number of other measures to prop up the financial sector, including lowering banks’ reserve requirement ratios, easing liquidity conditions, and allowing the central bank to buy government bonds this year.
The moves are starting to pay off. Indonesia’s growth improved in the 2020 third quarter to negative 3.5% from negative 5.3% in the previous quarter, which had been its first economic contraction in more than two decades.
The World Bank expects Indonesia’s real GDP growth to be negative 1.6% this year, but is forecasting growth of 4.4% in 2021 and 5.1% in 2022.
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“Indonesia has done a very good job of minimising public health risks while also mitigating the risks to the economy,” says Sean Henderson, co-head of debt capital markets for Asia Pacific at HSBC. “They have been cautious and used selective lockdowns where required, and have been proactive in coordinating between all the different state agencies to provide a systemic response to the pandemic.” Which of the measures have been successful, and what more does Indonesia need to do?
Short, medium and long
Indonesia’s fiscal and monetary policy response can be split into three broad groups, depending on whether the main intended impact is near term, medium term or long term.
Most economists agree that fiscal stimulus has been stronger than some large Asian economies, such as India, although they say it has still been behind the bazooka response of some developed countries. But Indonesia has made bold changes: the removal of the fiscal deficit ceiling of 3% for three years until 2022, which would help the government keep a relatively looser fiscal stance in the near term, is a clear example.
Indonesia was also the first sovereign from Asia to tap capital markets for funding support after the scale of the pandemic became clear. Under the stewardship of Luky Alfirman, director general of budget financing and risk management, Indonesia raised $4.3bn in April from an international bond, some of which was earmarked for Covid-19 related relief efforts.
Monetary stimulus has been a mixed bag, with Bank Indonesia cutting rates multiple time this year. As Indonesia relies on foreign bond inflows into its market, it has propelled the central bank to set its sights firmly on maintaining exchange rate stability and offer yield opportunities for global investors.
While some say rate cuts have not been much help in spurring credit growth, the central bank’s overall response has hit the mark.
“Indonesia’s monetary policy response has been their shining light,” says Tim Uy, an economist at Moody’s. “They started with rate cuts early to boost the economy right when the pandemic was peaking in Asia, and they are now in a better place because regional recovery has also started taking hold.”
By mid-December, Covid cases surpassed 617,000, while the death tool stood at around 18,800. Since the first cases emerged, Indonesia’s case count has only kept rising, unlike many other Asian countries where infections peaked, before getting well under control.
The archipelago, home to nearly 275m people spread over more than 17,000 islands, has also faced huge logistical challenges around distributing Covid relief money to its citizens. Uy estimates that of the fiscal stimulus offered by the government, more than 75% remained undisbursed as of November.
“There's no point in having huge stimulus measures that eventually just end up sitting there and not taken by the constituents that need them the most,” Uy adds. “That’s a huge issue that still needs to be tackled to have the necessary near-term impact.”
RCEP, labour law in focus
From a medium and long term perspective, Indonesian authorities have put in place some key initiatives.
One big game-changer will be the Omnibus Law, which was signed in early November. The law is designed to attract investment by simplifying the licensing process for businesses, as well as laws and regulations around job creation.
The hope is this will spur foreign investment into Indonesia, while allowing the central government to make policy decisions faster.
In reality, though, implementing the law is expected to be an arduous task given it requires the involvement and agreement of a number a stakeholders — meaning any benefits will also take time to come to fruition.
“Broadly speaking, this reform is a step in the right direction in terms of easing regulations, but it could be five to seven years before we really start to see positive gains from this,” says Vishrut Rana, a Singapore-based economist at S&P Global Ratings. “Firms won’t be able to immediately take advantage of this, given it has been passed during a time of economic downturn.”
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Sung Eun Jung, an economist at Oxford Economics in Singapore, adds that Indonesia has sent a “good message” to foreign investors with the Omnibus Law, and is showing it is trying to boost investment and growth. But she also reckons the effects will only be seen in the longer term. She adds that while Indonesia is reforming its labour market, many international investors may still find the regulations “rigid” when compared to other Asian countries, offering Vietnam as a clear example.
“International investors see great potential in Indonesia’s domestic market,” she says. “There’s young population, rising middle income class and a lot of start-ups that are appealing. But the ease of doing business is still not completely there. The Omnibus Law will help enhance medium term growth, but its short-term growth boost is likely to be limited.”
Another longer-term fillip will also come from the Regional Comprehensive Economic Partnership (RCEP) free trade agreement, signed in November among the 10 Asean countries, plus the more developed markets of Australia, China, Japan, New Zealand and South Korea.
The combination of free trade and tariff reductions could make Indonesia more attractive to foreign investors. But some market leaders warn it could also pose a new set of challenges to the southeast Asian island nation.
Kunal Kundu, an India-based economist at Société Générale, reckons the trade agreement could be a “double-edged sword” for Indonesia.
“Unless you are really competitive on the production front, you may end up becoming a destination of products rather than a source of products,” he says. “Indonesia could end up seeing more imports coming in rather than exports going out. There is possibility of the agreement misfiring for Indonesia. So they need to move really fast to take advantage of it, so their manufacturing business is not challenged.”
But the consensus is that the longer-term efforts won’t be as effective unless Indonesia beefs up its fiscal support measures further amid the pandemic.
“You can have as much liquidity in the system as you want, but at the end of the day, it's all about consumer confidence and business confidence, which are needed to spur investment,” adds Kundu. “Fiscal policy has to be paramount and Indonesia needs to spend more, even if that means borrowing more.”