Commissioner in a publicly listed oil and gas service company
Economic crises in the past were caused by the folly of government policies. They happened when public and private debts were allowed to grow uncontrolled, creating credit booms and economic bubbles, or when governments allowed parts of the financial system to go unregulated, or when they tried to hang on to a fixed-exchange rate when capital outflows mounted, or simply when the government tried to live beyond its means.
The impending economic crisis is different. It is a byproduct of efforts by governments to save human lives from a brutal attack of a virus whose name, until a few months ago, nobody knew. The economy has been deliberately stopped. As millions of people are ordered to stay home and not work or work remotely, consumption and production – the wheels of the economy – have slowed significantly across the globe. As jobs and income disappear, unemployment and poverty soar.
Past economic crises were largely regional, inflicting the most serious damage in certain region, such as the Mexican debt crises (1982 and 1984), the Italian debt crisis (2018) and the Asian financial crisis (1997 to 1998). And despite its name, the subprime mortgage bubble in the United States that triggered the global financial crisis in 2009 was actually a North American crisis with little impact on the economy in Asia.
The current economic crisis is unprecedented because its disastrous economic impact will spread around the world. Faced with an economic crisis on an unprecedented scale, many countries have realized that they have to counter the devastating economic impact with unprecedented, overwhelming force.
They have to do whatever it takes. Governments could deploy their strength too forcefully and too early, but it is better than too little, too late.
The memories of past crises have not been lost. Ben Bernanke, the former chairman of the US Federal Reserve, showed in a research paper that timid action by the Fed made the Great Depression of 1930s great. He also discussed how central bank reluctance to provide enough liquidity during the Latin American debt crisis worsened the crisis.
US President Donald Trump has signed a fiscal stimulus bill of US$2.2 trillion, or 10 percent of
US gross domestic product (GDP). This is twice the amount spent during the 2009 global financial crisis. Germany will spend $810 billion, 20 percent of its GDP, and Spain is set to spend 15 percent of its GDP for the fiscal stimulus.
In Asia, Malaysia and Singapore will spend 16 percent of GDP and 11 percent of GDP respectively for fiscal stimulus, and Japan has just announced a fiscal stimulus package worth $1 trillion, 20 percent of GDP, a huge amount for the size of Japanese economy.
In Indonesia, the government will gain the “overwhelming force” to deal with the economic crisis through the issuance of Regulation in Lieu of Law (Perppu) No. 1/2020. This regulation gives extraordinary powers to crisis managers: the Finance Ministry, Bank Indonesia (BI), the Financial Services Authority (OJK) and the Deposit Insurance Corporation (LPS).
The power is so wide that LPS, for instance, has the authority to save or liquidate any bank that has been declared a failed bank. BI will be able to conduct openended quantitative easing to pour liquidity into the market while the liquidity crunch persists. The crisis managers will have enough firepower to defend the real economy from cascading and to prevent the financial system from melting down.
Bernanke also reminded us that the reason past crises were so damaging was because the government lacked the tools needed to attack it with overwhelming force from the start.
President Joko “Jokowi” Widodo has proposed a fiscal stimulus worth Rp 405.1 trillion ($24.6 billion) – 2.4 percent of GDP (based on the projected nominal GDP in the 2020 revised state budget). As a comparison, in 1999, amid the Asian financial crisis, Indonesia spent $1.1 billion, 7.4 percent of its GDP, on fiscal stimulus. The funds were mostly used for the social safety net.
So as a percentage of GDP, the government response in 1999 was much larger and more powerful than the amount currently proposed by Jokowi. The result was a quick recovery. Economic growth rebounded sharply to 0.8 percent in 1999 after a deep contraction of 13.1 percent in 1998. But it took five years – until 2004 – for growth to recover to the pre-crisis level. The Asian crisis showed that a rise in consumption – made possible by massive social safety net spending – could be a main driver for economic recovery.
Government debt will rise significantly, although it will likely remain below the ceiling of 60 percent of GDP. Debt financing, including the issuance of pandemic bonds will amount to Rp 1 quadrillion, nearly three times the amount in the original 2020 budget. Although government debt has been increasing over the past years, interest payments have remained stable at about 1.6 to 1.7 percent of GDP.
But this time, a huge increase in debt will need more sophisticated and innovative debt management by the government. It has to carefully balance its cost and risk and achieve better debt diversification by taking into account the choice of debt instrument with underlying interest rates, currencies and tenor.
A higher debt level has downside risks. It will erode macroeconomic fundamentals, triggering perceptions among investors that Indonesia is a more risky country. They will, in return, demand a higher return on their investments, pushing government bond yields higher.
But at a time when human lives are in peril from the spread of COVID-19, it is acceptable for the government to focus on urgent social and human problems rather than on the debt and deficit.
Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.