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Jakarta Post

Shuttered factories, plummeting demand cause Indonesian manufacturing to collapse in April

  • Adrian Wail Akhlas

    The Jakarta Post

Jakarta   /   Mon, May 4, 2020   /   06:59 pm
Shuttered factories, plummeting demand cause Indonesian manufacturing to collapse in April Workers sew personal protective equipment (PPE) at a PT Kasih Karunia Sejati factory in Malang, East Java, on April 20. (JP/ Aman Rochman)

Indonesia’s manufacturing output and new orders collapsed in April as the COVID-19 pandemic forced factories to close and crushed demand for manufactured goods, a new survey has shown.

IHS Markit announced on Monday that Indonesia’s Purchasing Managers Index (PMI), a gauge of the nation’s manufacturing activities, fell to 27.5 from 45.3 recorded in March, the worst decline in the survey's nine-year history. A number above 50 reflects expansion, while one below 50 indicates contraction.

"April saw Indonesian manufacturing suffer the most severe deterioration of operating conditions ever recorded as a result of stricter measures imposed to contain the COVID-19 outbreak,” HIS Markit principal economist Bernard Aw said in a statement on Monday.

As of Monday, four provinces and 22 regencies and cities had implemented large scale social restrictions (PSBB), including the manufacturing centers of Jakarta, West Java, Surabaya, Gresik and Sidoarjo. The measures have forced factories and retail shops to close as would-be workers and customers are required to stay home.

Read also: Only one third of manufacturers still operating: Govt

"Factory closures and tighter social distancing rules led to collapses in production and demand. Both output and new orders fell at record rates,” Aw said. “Consequently, factory layoffs were also widely reported, and firms also faced greater cost burdens as a combination of material shortages and inflation fueled by the weaker rupiah.”

More than 2.8 million people had lost their jobs as of mid-April, according to the Manpower Ministry and the Workers Social Security Agency (BPJS Ketenagakerjaan). The government predicts that 2.9 million to 5.2 million workers could lose their jobs during the outbreak, which would erase last year’s gains of 2.5 million new jobs.

Manufacturing contributed about 19 percent of Indonesia’s gross domestic product (GDP), the largest contributor after household consumption.

With factory closures and dwindling sales, companies scaled back purchasing activity and instead tapped into existing stock, the survey said. Input buying fell the furthest in the survey's history. This contributed to a record decline in input inventory. Stocks of finished goods fell for a second straight month, albeit marginally.

“The survey underscores the unprecedented damage to the Indonesian economy from emergency public health measures to curb the spread of the virus, which has contributed to slumping global demand and shortages of input materials,” Aw added.

“Despite the severe deterioration of factory conditions, long-term prospects remain positive, with optimism linked to higher sales projections ahead of the Idul Fitri holiday, as well as hopes that businesses will be able to operate as normal once the global pandemic situation improves,” the survey projected.

Read also: Pandemic slams Asia's factories, activity hits financial-crisis lows

The country usually sees a spike in consumption during Idul Fitri, which will fall in late May this year.

The steep decline in Indonesia's PMI could also be caused by the rupiah's depreciation. It fell 17.6 percent against the United States dollar in the first quarter, the worst decline in Asia, Bahana Sekuritas said.

“The latest PMI data shows foreign exchange depreciation has pushed up input costs for food items, fabric, base metals, chemicals and paper products,” Bahana researchers wrote on Monday.  

Indonesia’s April PMI was far lower than that of South Korea (41.6), Taiwan (42.2), Vietnam (32.7), Malaysia (31.3) and the Philippines (31.6).

“We really need to be more careful because it dropped significantly within a month,” Finance Minister Sri Mulyani Indrawati said on Monday.

“No one knows when [manufacturing] activity will return to normal. Thus, we need a fast response to create a buffer in economic and financial sectors," she said, citing Government Regulation in Lieu of Law No. 1/2020, which allows the government to increase its budget deficit beyond the previous ceiling of 3 percent, among other measures, to cushion the stumbling economy.

The government has prepared a Rp 22.9 trillion (US$1.5 billion) stimulus package in the form of tax incentives for the manufacturing sector, including cutting corporate income tax by 30 percent, deferring import tax payments and exempting manufacturing workers with income of less than Rp 200 million a year from income taxes for six months. 

Read also: Indonesia’s factory activity in deepest-ever contraction as pandemic disrupts supply, demand

Indonesian Chamber of Commerce and Industry (Kadin) deputy chairwoman Shinta W. Kamdani said manufacturers were complaining about disrupted supply chains.

“This needs to be solved so that manufacturers can have a sense of certainty to continue their activities going forward,” Shinta told The Jakarta Post. “If the government does not provide such certainty, the country’s PMI will continue to plummet.”

“In addition to that, the outbreak must be controlled effectively in the near-term so we can have a fixed timeline to relax restriction measures, especially in the manufacturing sector,” she added.