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Economic outlook 2021: Beware of prolonged recession

Economic outlook 2021: Beware of prolonged recession Set for shipment: Multipurpose vehicles are parked at Tanjung Priok Port’s car terminal prior to being exported on April 8. Association of Indonesian Automotive Manufacturers (Gaikindo) data shows that Indonesia exported 104,158 built-up cars in the first half of 2020. (Antara/Aditya Pradana Putra)
Lili Yan Ing
Jakarta   ●   Tue, January 5, 2021 2021-01-05 21:57 129 99d7d57c053835b58634634621070bd3 3 Opinion economy,Indonesia,outlook,recession,recovery,debt,COVID-19,ASEAN,RCEP,WTO Free

The year 2020 has been very challenging, but 2021 is not going to get better anytime soon.

In 2020, global economic growth was projected to contract by 4.9 percent with the United States suffering negative growth of 8 percent, Europe minus 10.2 percent, Japan minus six percent and Indonesia minus two percent. China is probably the only country that will record positive growth, projected at 1.2 percent.

The invention of vaccines may help one-third of the population to return to their normal activities but only at the rate of 60 to 70 percent compared to before the pandemic. In addition, the incoming Joe Biden administration may embrace the multilateral system. But these will not necessarily solve all the problems. The world is facing one year of a serious economic downturn, and it will take at least three years for the world to recover.

COVID-19 has brought the worst economic impacts in the modern era, hitting the world from both the demand and supply sides simultaneously. As of the end of 2020, COVID-19 has infected more than 1.2 million people in Southeast Asia, with a mortality rate of 2.43 percent. Indonesia recorded a mortality rate of 3 percent – among the highest in the world.  

It has caused more than 30 million people in ASEAN to become unemployed, pushing about 18 million people into poverty, of which 3 million are in extreme poverty. COVID-19 has hit the ASEAN economy from at least from three channels: lower global demand has decreased ASEAN’s exports; dry capital markets have reduced foreign direct investment (FDI) into ASEAN; and sluggish tourism has hit the services sector and many small and medium enterprises (SMEs).

Most ASEAN countries have experienced recession in 2020. In the best scenario, the ASEAN economy would contract by 2.7 percent in 2020, and will only grow by 3 to 4 percent in 2021 when global growth is expected to be about 3 percent.

Although Indonesia recorded a slight pickup in the third quarter of 2020 as it decreased the negative growth to 3.5 percent from minus 5.3 percent in the second quarter, this should not make us complacent for three reasons.

First, nonperforming loans have been increasing, reaching the highest level since the global financial crisis. The nonperformance rate went from 2.6 percent of total loans in 2010 to 3.2 percent in September 2020.

Second, FDI has not improved. FDI totaled only US$20 billion in 2017 and 2018, and up slightly to $23 billion in 2019. Domestic investment is still struggling.

Last, it is true that Indonesia recorded a trade surplus of $13.5 billion between January and September last year, but the surplus was driven by a sharp decline in imports instead of an increase in exports. Imports declined by 18 percent and exports declined by 5.8 percent. What concerns us is that the decrease in imports was largely driven by decreases in imports of machinery and raw materials, which will be translated into decreased industrial production this year and may cause a significant number of workers to be laid off.

The Biden administration may help bring the US back onto the right track of multilateralism, but this does not mean that world trade will be back to the levels seen prior to the crisis anytime soon.

President-elect Biden could take immediate action to restore the multilateral trading system including: (i) removing Section 232 of the national security measures including health measures imposed by Donald Trump, which will facilitate trade in goods, and (ii) vetoing a new judge in order to give life to the currently not-functioning Dispute Settlement Body as well as appointing Ngozi Okonjo-Iweala as the director general of the World Trade Organization (WTO). However, the key principle embodied in the WTO of “a single undertaking –nothing is agreed, until everything is agreed” has resulted in slow progress in all WTO decisions, which will not help the rapid recovery of world trade.

In the meantime, while 15 East Asian countries just sealed the biggest regional trading block with the signing of the Regional Comprehensive Economic Partnership (RCEP), the US seems unlikely to join Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). While there may be a strong willingness from Japan, Australia, Singapore and Vietnam to bring back the United States into the CPTPP, US domestic pressures may be strongly against it.

Given Indonesia’s domestic issues of rising NPLs, stagnant FDI and domestic investment, declining imports of machinery and raw materials, as well as a global economic slowdown and the fact that world trade is not going to be better soon, the Indonesian government should not do business as usual, but should conduct a massive transformation.

First is stimulus. It is crucial to improve the implementation of stimulus to revive domestic consumption and thus trigger a return of business back to normal. Stimulus is key to boost domestic consumption until next year.

It is vital to target the right beneficiaries. If we fail to make good corrections, we will be trapped in a prolonged recession. We should ensure COVID-19 social safety nets work effectively and efficiently, but only temporarily. We should allocate tax incentives to productive activities, not consumption goods. It is a must to ensure fiscal and monetary stimulus is well targeted and well disbursed.

Indonesia should also prepare to provide another significant fiscal stimulus in 2021 given the fact that unemployment will remain the same and business will not be not back to normal; and we have to increase the disbursement rates of fiscal and monetary stimulus, and ensure the programs are “purely social and not political”. 

Second, Indonesia needs to improve its trade and investment climate by streamlining export-import and investment procedures. We should also optimize the use of the Preferential Trade Agreements (PTA).

Japanese, Korean, and Taiwanese have been looking for FDI relocation and have considered Indonesia as a good alternative. However, we have not seen any success stories of these reallocations so far. Indonesia should make massive reforms, not only online procedures and obtaining certificates of origins, but also the automatic licensing systems in place.

Lastly, at national and regional levels, we need to work on streamlining Non-Tariff Measures (NTMS). In the 10 ASEAN countries, applied tariff rates have declined from 9 percent in 2010 to 4.3 percent in 2020, but the number of NTMs increased from 1,635 to 9,502 measures over the same period.

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The writer is lead advisor for Southeast Asia region, Economic Research Institute for ASEAN and East Asia (ERIA). These views are personal.

 

Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.