The Jakarta Post
Indonesia is bracing for the spillover effect of a global recession as policymakers roll out crisis protocols for the worst-case scenarios concerning GDP and the rupiah exchange rate while COVID-19 is hitting businesses and households hard.
A government regulation in lieu of law (Perppu) issued on Tuesday covers a range of crisis protocols that include allowing Bank Indonesia (BI) to throw a lifeline to the state budget through direct government bond purchases and to banks via liquidity support.
Indonesia’s economy is expected to grow by 2.3 percent this year under the baseline scenario, which would be the lowest rate since 1999, or contract by 0.4 percent in the worst-case scenario, in the face of higher global recession risks, according to Finance Minister Sri Muyani Indrawati. The rupiah may hover between Rp 17,500 and Rp 20,000 per US dollar under the worst-case scenario, a historic low even weaker than after the 1998 financial crisis.
President Joko “Jokowi” Widodo has announced plans to spend Rp 405.1 trillion on health care, social safety nets and business recovery programs. The new regulation, Perppu No. 1/2020, allows the budget deficit to widen beyond the previous legal limit of 3 percent of the gross domestic product (GDP).
“No actions, including decisions made based on this Perppu, may be subject to lawsuits that could be filed at a state administrative court,” reads the Perppu on state finance and financial system stability to contain the COVID-19 pandemic.
Sri Mulyani said the stipulation was necessary so that authorities were legally protected to take “extraordinary measures in protecting the economy”. The Perppu was issued as Indonesia declared a public health emergency that involves imposing large-scale social restrictions.
“We are very aware that we must be very careful to avoid moral hazard,” said Sri Mulyani, who was among decision makers in a controversial 2008 bailout on failed Bank Century. “We will formulate a safeguard, so that policymakers that are taking measures to improve public health and the economy cannot be criminalized because of the acts of others.”
The COVID-19 crisis playbook bears eerie resemblance to the 1998 crisis, during which the central bank provided massive liquidity support to commercial banks to survive the monetary crisis, but most of the money was eventually embezzled.
The government’s economic recession scenario would mean the first GDP contraction since the 1998 crisis, which saw the domestic economy contract by 13.1 percent.
However, three economists contacted by The Jakarta Post agreed that Indonesia’s current state was “very different” from that in 1998. The common denominator among the economists is that existing Indonesian companies have stronger fundamentals than those in the aftermath of the Asian financial crisis.
Center for Reform on Economics (Core) Indonesia research director Piter Abdullah explained that many Indonesian companies in the 1990s had relied heavily on foreign loans to finance operations. Those loans had made such companies inherently vulnerable to the rupiah exchange rate slump that began in July 1997.
“The companies today have not collapsed. They have been shaken, yes, but not collapsed,” he said.
Public sentiment over the 1998 crisis – a violent period in Indonesian history – was stirred after the Indonesian rupiah hit Rp 16,000 to the US dollar on March 20, the weakest since the crisis, as the COVID-19 pandemic prompted an Indonesian asset sell-off.
Indonesia has responded by announcing tax breaks to support companies, increasing healthcare spending and allowing the central bank to buy tradable government bonds to stabilize the rupiah, among other measures, in line with policies carried out by authorities worldwide to protect the economy.
University of Indonesia economics professor Ari Kuncoro commended the government for mobilizing aid for the country’s micro, small and medium enterprises (MSMEs). Such enterprises had played a critical role in getting Indonesia out of the 1998 financial crisis by stimulating the business ecosystem from the bottom up.
“That habitat has to be saved. And that habitat right now, like in 1998, is largely MSMEs, the people, middle- and low-income citizens,” he said.
MSMEs will receive extensions on loan payment deadlines for up to one year if the loan is less than Rp 10 billion, Jokowi said. They will also get bailout funds from the government if they commit to keeping 90 percent of their employees on the same salary as before the COVID-19 crisis, said Susiwijono Moegiarso, the secretary of the Office of the Coordinating Economic Minister.
Economist Josua Pardede of Pertama Bank added that Indonesia’s credit rating had greatly improved since the 1998 financial crisis “which shows international institution’s confidence in the performance of Indonesia’s economy.”
Major credit rating agencies S&P, Moody’s and Fitch rate Indonesia’s sovereign credit as investment grade, which allows a broad range of investors to invest in Indonesian financial assets.