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Omicron variant casts shadow over RI’s economic recovery
The "very high" risk variant of COVID-19 has rekindled concerns of fresh lockdowns and higher emergency relief spending.
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overnment officials are on high alert over the more transmissible Omicron variant of COVID-19, which has rekindled concerns of fresh mobility restrictions and greater relief spending, possibly spoiling Indonesia's economic recovery plans for next year.
So far, officials and economists do not expect the Omicron variant to have a major impact on the Indonesian economy and state budget, citing the country's limited room for emergency response measures and its preparedness after dealing with two COVID-19 waves.
Economists specifically expect the economic impact to be nowhere as bad as 2020, but they also say things could go south, depending on what medical experts learn about the new variant and how other governments respond over the coming months.
President Joko “Jokowi” Widodo instructed his Cabinet on Monday to be on alert over the Omicron variant and to design the 2022 state budget to be "responsive, adaptive and flexible in the face of uncertainty ahead".
“We must be more vigilant with the new Omicron variant present. Mitigations should be prepared as early as possible so it will not disrupt the structural reform and national economic recovery that we are doing,” he said.
The President last month broached a prolonged pandemic as one of several key macroeconomic risks that the government was anticipating in 2022. Other risks included the United States Federal Reserve's tapering, slowing Chinese economic growth and falling commodity prices.
Read also: Lower budget deficit to help Indonesia face global risks in 2022
The World Health Organization recently classified the Omicron variant as “very high risk” with a high chance of spreading across borders and estimated it would take another two weeks to fully understand it. Many countries, including Indonesia, have imposed travel bans to try to keep out the new variant.
Finance Minister Sri Mulyani Indrawati reaffirmed on Tuesday that the government was confident about achieving economic recovery in 2022 because business activity had largely resumed following the successful handling of the Delta wave, but regulators would nevertheless be "very vigilant" over the spread of COVID-19, including the Omicron variant.
“Despite facing the dynamics of uncertainty, the Indonesian economy in 2022 is projected to continue its recovery to become stronger,” she said.
Indonesia expects its economy to largely return to pre-pandemic conditions by 2022 as indicated by a gross domestic product (GDP) growth target of 5.5 percent outlined in the state budget, compared to the 4.5 percent expected this year and negative 2.07 percent recorded last year, during the height of the pandemic.
The Finance Ministry plans to be more prudent over government spending next year by tightening aid recipients and by timing bonds issuance according to global market dynamics.
Fikri C. Permana, a senior economist at Samuel Sekuritas, expects the government to reimpose some degree of activity restrictions to mitigate infection risks, but the effect on the economy would not be as severe as the impact of the Delta variant outbreak, as the public has adapted to living under such curbs.
Indonesia's GDP grew 3.51 percent in the third quarter, below the government expectation of 4.5 percent.
GDP will be bolstered by exports, which is expected to remain strong next year due to high commodity prices, also allowing the country to bank on foreign exchange reserves to shield the economy from the Fed taper, said Fikri.
However, the Constitutional Court's recent ruling against the Job Creation Law was expected to create legal uncertainty that would negatively impact investors' appetite, hampering investment inflows, especially foreign direct investments, for the next two years, he said.
Read also: Business uncertainty likely result of jobs law ruling
“The risk from new variants, including Omicron, will be minimal. There will be a downside risk but it won't be as big as last July or August,” Fikri told The Jakarta Post on Tuesday.
Similarly, Fitch Ratings said on Monday that "another large, synchronized global downturn, such as that seen in the first half of last year, is highly unlikely".
The credit rating agency said it was unlikely for governments to impose stringent lockdowns due to the higher political bars over them and the rollout of vaccination programs, which reduced countries' reliance on non-pharmaceutical interventions (NPIs) to contain the pandemic.
Fitch Ratings also noted that rising inflation around the world would make it difficult for central banks to loosen their monetary policy.
In Indonesia, where inflation remains below target, Bank Indonesia (BI) can afford to hold its benchmark seven-day reverse repo rate (7DRRR) at 3.5 percent this month, the lowest level since the rate was introduced in 2016.
Read also: BI to stay dovish until late 2022, but no more rate cuts
Private lender Bank Permata economist Josua Pardede said on Tuesday that a spread of the Omicron variant would pinch the government as it would have to raise relief spending, especially in health care and social aid, but prevailing regulations required returning the budget deficit to below 3 percent of GDP by 2023.
Furthermore, bond issuance costs were expected to rise next year due to the Fed’s taper, making it more expensive to finance higher spending through debt.
“We hope the government can be more preventive [in containing COVID-19], so it won't have to resort to economic activity restrictions or widen the deficit because of increased spending for pandemic response,” Josua told the Post.
