A study by Boston Consulting Group (BCG), in partnership with the Financial Services Authority (OJK), found that the COVID-19 pandemic had triggered an unprecedented crisis for MSMEs, with over 75 percent of the 3,136 enterprises surveyed noting that COVID-19 was worse than any crisis they had experienced to date. Social distancing rules, changing customer behavior and fears of the virus have created a perfect storm of challenges, which MSMEs need support to overcome.

Supporting Indonesia’s MSMEs

The BCG study found that 80 percent of MSMEs had experienced a decrease in revenue during the pandemic, regardless of enterprise size, sector of operation or level of digitalization.

MSMEs often rely on face-to-face contact, requiring rapid transformation to new ways of working. Consumers are transitioning online, with 50 percent of survey respondents noting a plan to increase online spending in the month ahead. This explains why 41 percent of MSMEs surveyed expected a significant increase in digital sales in future.

Yanti, a food business owner, has spent nine years selling beef rendang from her stalls in Jakarta’s Central Business District. The report reveals how COVID-19 transformed life for her and her 12 employees. Yanti was forced to close her stores temporarily, paying employees out of her savings. She embraced a well-known food delivery platform to continue generating much-needed revenue.

Alongside digital uptake, access to appropriate lending is another concern. Financial institutions are acting conservatively in offering loans to MSMEs, largely influenced by the instability of MSME revenue, creating new hurdles for financial access.

Survival

Access to quick liquidity relief is key for MSMEs whose ability to generate revenue has been significantly impacted during the crisis.

The National Economic Recovery Plan (PEN) offers several support initiatives, but just 55 percent of MSMEs are aware of these programs, and less than 30 percent are utilizing them. Lack of information and time-consuming processes are the biggest hurdles.

This lack of engagement is a persistent problem. According to Kemenkop, less than 20 million MSMEs have engaged with the Productive Presidential Assistance (Banpres Produktif) program – a direct grant scheme of Rp 2.4 million (US$168.32) – significantly lower than the estimated 64 million Indonesian MSMEs.

Short-term business enablement should be delivered through a close partnership between regional and local administrations. This can leverage local insight for direct outreach, building on grassroots experience. It is also important that MSMEs that engage with financial aid then progress along a seamless process.

MSMEs should be taught methods of building business resilience, with 95 percent of MSMEs keen to attain support in developing these skills. A central organization to steer initiatives would improve success, boost cost efficiencies and enhance MSME participation. It is equally important that these initiatives are expanded to future-ready skills such as digital training, alongside traditional vocational training and financial literacy.

Sustaining business

Digitization support to improve business efficiency is vital, with the COVID-19 pandemic driving a significant shift towards digital channels. Responding to these shifts will require an innovative approach to business evolution in a sector where just 13 percent of enterprises operate in some form of digital environment.

This will require efforts to push transformation, with the government providing direct and targeted financial and non-financial support to transform MSMEs. Singapore’s SMEs Go Digital Program offers an example of a successful program that provides comprehensive support.

An indirect pull approach to transform MSMEs’ digital opportunities could be helpful, working with digital ecosystem partners in private industry. The Chinese government’s Spark program leverages tech giant JD to build end-to-end digital support for MSMEs.

Indonesia should consider an approach that provides direct grants for IT equipment and technologies, alongside cash bonuses for successful digital transformation.

Broader access to financing is another key area of intervention, potentially with government support to incentivize institutions lending to MSMEs. This government backing could boost access to loans. Indonesia has had success with similar initiatives, with credit guarantee schemes as part of PEN covering an amount of roughly Rp 5 trillion, distributed through state-owned credit insurers to guarantee working capital loans.

Expanding on the existing People’s Business Loan (KUR) microcredit program offers real potential, enhancing this existing offering to cover MSME loans from banks and other lenders.

Purwa, owner of a transportation and logistics business, works with B2B customers across Indonesia. While his business has maintained normal operations during the pandemic, fears of future slowdowns inspired him to reach out to his bank. Much to his surprise, they highlighted government loan restructuring schemes to him, offering welcome support for his business.

Banks will be a pivotal part of broadening financial access, leveraging existing networks and experience. Encouraging MSMEs to adopt digital solutions through new digital functionalities is one potential avenue. Long-term efforts to accelerate digital distribution channel capabilities will also be key.

Future-proof

Full visibility of MSMEs to government and lenders is critical to building stronger foundations for the future. Consolidating data to provide informed and targeted solutions will be vital, with a lack of robust data creating a major hurdle for government.

Such data should be consolidated to provide better tracking and monitoring, increased effectiveness of targeted help and the ability to accurately estimate and identify all MSMEs. A better understanding of MSMEs will not only mean more informed intervention for the government but will help boost the confidence of lenders.

The availability of crisis and business insurance is also an important step to sustainable survival. COVID-19 is a wake-up call that disruptions can emerge at any moment. Appropriate crisis or business insurance can help MSMEs rebound in the case of such eventualities. Insurance schemes through state-owned-enterprises such as the Deposit Insurance Corporation (LPS) or private-public partnerships to develop an appropriate insurance market both offer the chance to develop such measures.

Building MSMEs’ long-term resilience

While the COVID-19 pandemic might be unique, periods of economic crisis are not. MSMEs are particularly vulnerable to these periods, with a reduced ability to ride out economic shocks. They lack the resources to rapidly adapt, with limited skills and knowledge compared to larger companies. MSMEs find it difficult to embrace opportunities outside local markets and lack economies of scale to compete.

Despite these challenges, Indonesia’s MSMEs remain optimistic, with 78 percent of MSMEs expressing an intention to expand or diversify their business in the future.

The government, industry stakeholders and financial decision makers will play an important part in ensuring these enterprises can thrive.

The OJK-BCG study notes that to enable MSMEs, stakeholders need to jointly support them across three stages: Bertahan – surviving the current crisis; Berkelanjutan – sustaining themselves in the new reality; and Bermasa Depan – preparing for new crises tomorrow.

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Tushar Agarwal is a partner at the Boston Consulting Group, Jakarta.

Yustian Hartono is a project leader at the Boston Consulting Group, Jakarta.