Update COVID-19 in Indonesia: 927,380 confirmed infections, 26,590 deaths (19 January 2021)
19 January 2021 (closed)
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The past year has been hectic. The global COVID-19 pandemic arrived, a worldwide recession followed; US-China turmoil continued, while geopolitical and geo-economic tensions are rising across the world. And all these matters seem interrelated. So, how is Indonesia doing amid these developments? And, how do they exactly impact on Indonesia's economy and society? It is time to sit down with Indonesia Investments' Managing Director Richard van der Schaar to hear his thoughts on these matters.
What are your expectations of Indonesia's economic growth in 2020 and 2021?
Well, you could say I'm one of the most pessimistic out there, especially regarding Indonesia's 2021 growth. At this moment I can only see modest economic growth for Indonesia in 2021, around 1-2 percent year-on-year (y/y). This is in stark contrast to all outlooks I've seen so far. For instance, the International Monetary Fund (IMF) or the World Bank expect to see a significant economic rebound for Indonesia in 2021, back above 5 percent (y/y). My problem is that these optimistic outlooks are based on the availability of a COVID-19 vaccine in early 2021. However, based on what I read on medical or pharmaceutical websites on Internet, it takes years to develop a safe and effective vaccine. So, chances are quite slim that a vaccine has been developed before 2022, let alone have everyone immunized. Without vaccine, I'm sure that consumption, investment and trade are all bound to remain subdued, worldwide, and therefore there is limited room for economic growth. But, at least, growth should be better than the lows we've seen in Q2-2020 and Q3-2020, also in the case of Indonesia.
Regarding Indonesia's 2020 economic growth, I have held my forecast at -2.5 percent (y/y) for the last couple of months, which should be a much better performance compared to most advanced economies or even Indonesia's regional peers (with the notable exception of Vietnam). The reason why the Indonesian economy is less affected by the COVID-19 crisis than most other economies is that Indonesia's trade-to-GDP ratio is quite low. This basically means that international trade is not that important for the Indonesian economy. This is convenient in times of disruptions to global trade but it also implies that Indonesia is poorly integrated into the global supply and value chains, hence in good global economic times Indonesia is a bit left behind.
Indonesia is in fact much more dependent on domestic household consumption with its enormous 270 million population. But obviously household consumption has also taken a blow amid the COVID-19 crisis, because of the social and business restrictions that made it impossible to consume as usual, but also simply because people have become more careful, hence abstain from going to the mall to do some shopping. Domestic consumption in Indonesia is expected to remain subdued in the foreseeable future, hence narrowing room for economic expansion. And considering most of what is produced in Indonesia is absorbed by the domestic market, production will also remain lacklustre.
In fact, coming back to trade, what is interesting is that Indonesia has been recording big trade surpluses in recent months. This is something we had not seen since 2011 when the 2000s commodities boom ended. The reason behind these recent trade surpluses is that Indonesia's imports have been nosediving at a much faster rate than the country's exports. This is partly because imports of consumer goods have plunged, although obviously imports of raw materials and capital goods have also dropped incredibly amid the sudden collapse of investment and production. Considering the big trade surpluses are caused by the massive decline in imports we actually have plenty of reason to be concerned. The problem is that Indonesia's export products contain a very high import-content. So, lower imports of raw materials now essentially means lower exports in the future.
GDP Growth Forecasts for Indonesia (annual % change):
|Indonesia Investments||-2.5%||+1.0 - +2.0%|
|International Monetary Fund (IMF)||-0.3%||+6.1%|
|Asian Development Bank (ADB)||-1.0%||+5.3%|
How is Indonesia's central government handling the COVID-19 crisis?
I think quite decent, overall. Obviously, regional administrations too have a say as they can impose a local lockdown as we have seen in Jakarta and parts of West Java. In these unprecedented times of uncertainty I'm fortunate not to be a policymaker because they are facing a very tough dilemma: saving the lives of vulnerable people (the majority being elderly or those with weakened immune systems because of a serious underlying illness) or have millions of people be fired, lose their businesses and income, and be pushed in full-blown poverty. The natural instinct is of course to save the lives of those who are violently ill, here and now. But I am becoming increasingly concerned that the cure is becoming worse than the disease in the long run, not only in Indonesia but around the world. The problem is that lockdowns or social and business restrictions do not kill the virus, it only limits the spread. The trick is to find the right balance between protecting the vulnerable one percent but allow life and business to continue for the 99 percent who do not - or only mildly - become ill because of the virus. And, of course, in such a way that the healthcare sector (especially hospitals) don't become overloaded. In Jakarta, the epicenter of the COVID-19 pandemic in Indonesia, several hospitals that treat COVID-19 patients have reportedly become overloaded. Hopefully it is possible for them to re-distribute COVID-19 patients to hospitals in cities where there are relatively few COVID-19 patients in a safe manner.
Are you concerned about COVID-19?
Of course, the impact of governments' restrictions and lockdowns on the global economy and life is huge and quite devastating. Moreover, it can be fatal for those with weakened immune systems. But if you mean whether I'm concerned about contracting COVID-19 myself; well, I would prefer not to, but chances are quite big that we have already had it but simply didn't notice it. The fatality rate of COVID-19 is falling further and further to a rate similar to that of influenza, which is a quite positive development, actually. So, I guess the main problem with COVID-19 is that it is a new disease meaning, unlike influenza, no-one had built any resistance or immunity, making more people ill and causing more deaths. Although it is important to emphasize that I am not a medical expert or virologist, I do expect that people have started to built resistance against the virus since the start of the year, or late last year, in a natural manner. So, future peaks or waves should not be as high as the first wave. However, currently it is still uncertain what percentage of the world population has built resistance. If currently only 10 percent of the population has built resistance, then COVID-19 peaks can still be quite high in the near future. I would not be surprised though that by the time we have a safe and effective vaccine, most people have built resistance to COVID-19. So, the vaccine would then only be useful for vulnerable groups. Just like in the West where the elderly often choose to take a flu vaccine ahead of the winter.
Back to the economy; Indonesia's public debt will rise significantly. Is that a threat?
The government indeed has to spend a lot to relieve the pain of those who have lost their jobs, fall into poverty but also has to offer incentives to business-owners who are at the brink of bankruptcy. Saving businesses is very important because if a business can survive it also means that some jobs survive. The central government set aside around IDR 695 trillion (approx. USD $47 billion) for the National Economic Recovery (PEN) budget this year which could make the government's budget deficit soar to 6.34 percent of GDP in 2020. In terms of politics it is no problem because the 3 percent cap was lifted earlier this year in response to the crisis.
Meanwhile, Indonesia's public debt may approach 40 percent of GDP by the end of 2020, up from 30 percent at the end of 2019. It is a significant jump but there is certainly room for it. A public debt rate of 40 percent of GDP is actually quite healthy when you compare it to other countries. What is more worrying to me is that tax revenue, which is already quite low in Indonesia with a tax-to-GDP ratio of 10-11 percent, is bound to drop heavily in 2020 due to the COVID-19 crisis.
There is also some concern about how the government is financing a big chunk of the debt, specifically the burden-sharing scheme between the central government and the central bank (Bank Indonesia). Under this scheme Bank Indonesia buys government debt, up to USD $40 billion, with zero return. It is an attractive strategy for the government but I see some risks. It is a scheme that can become an addiction for the government, and can obviously lead to inflationary pressures. Moreover, the legislation body of the House of Representatives (DPR), where President Widodo controls a big majority-coalition, came with a controversial bill in September 2020 that seems to aim at allowing a high degree of government influence on monetary policy-making. So, there is serious concern over the independence of Bank Indonesia.
What is your opinion on the recently passed Omnibus Job Creation Law? Will it make a difference?
Well, it should be applauded that the central government continues to focus on improving the investment and business environment of Indonesia, including trying to push those many millions of informal enterprises and informal sector workers into the formal sector, thereby giving them some basic health and legal protection. But the reason why I prefer to wait and see first is because I have seen the Indonesian government designing big, ambitious and groundbreaking programs or policies over the past decade but they all failed, essentially. Does anyone remember the Masterplan for Acceleration and Expansion of Indonesia's Economic Development (MP3EI) that was launched in 2011? Did the 16 or 17 economic policy packages launched by Widodo's administration make a difference? Did the Online Single Submission (OSS) system make a difference in terms of foreign direct investment? The answers are all 'no'. In fact, they may even have added a layer of confusion.
The reasons why they failed is because there is something structurally wrong underneath it all that obstructs the development of a conducive business and investment environment. Just like when the foundations of a house or building are tilted, then the more floors you put on top of it, the more tilted it gets.
But the positive thing about the Omnibus Law is that it tries to straighten, well, at least an important part of those tilted foundations, namely the country's legal and regulatory framework including relations between the central and regional administrations. Still, it will all depend on actual implementation in the field.
Can you understand some of the criticism on this Omnibus Law?
Sure, this Omnibus Law does relax some environmental regulations, and it does cut some protections for workers. So, it makes perfect sense that environmental groups and labor unions are concerned.
However, I would like to point out here that while preceding regulations had tougher environmental rules, it did not stop deforestation and other major forms of damage to the environment in Indonesia. The rules were there but it has always been easy to violate the rules because of weak monitoring, while civil servants - and even judges - can be bribed to look the other way. So, what is crucial is monitoring and enforcement. If monitoring and enforcement can be improved under the Omnibus Law, then the situation should actually improve for the environment. However, if monitoring and enforcement do not improve, then few will change. In fact, it can become worse for the environment.
Similarly, Indonesia can have ‘pro-worker rules’ such as severance pay of 32 times the monthly wage under Law No. 13/2003 on Labor, but what does this mean when the majority of formal sector workers, who make little money per month, do not have the financial means to file a case to the Labor Court or Supreme Court when an employer refuses to pay out severance pay. And we should not forget that most workers in Indonesia are informal sector workers, hence basically lacking any protection. So, generally, the Omnibus Law would in fact also improve conditions for workers (including pushing informal sector workers into the formal domain), provided the law is executed faithfully and carefully, with specific emphasize on monitoring and law enforcement. That is key.
Would you advise foreigners to invest in Indonesia now? And what is your general advise about investing in Indonesia?
If you refer to direct investment, I would wait and see first if I were an investor. These are uncertain times, unprecedentedly uncertain. Obviously, a crisis not only does damage to some, but it also offers opportunities to others. However, risks are currently too high in my opinion. Only those who 'suffer' from having too much money should invest now. For example, the tourism industry has been affected badly by the COVID-19 crisis, so there must be hotel-owners out there who would gladly sell their property at relatively affordable prices now. For those who dare to take big risks it are interesting times. However, when will this investment become profitable? The tourist industry may not recover in the next couple of years. So, the investor needs to have big pockets and patience.
My general advise when investing in Indonesia, especially in case the investor is new to Indonesia, is that you need to find reliable sources of information, including people who can advise you or guide you through Indonesia's business 'jungle'. This is particularly important for Western investors because there are massive cultural differences between the West and East, and these differences also impact on business. That is why I feel quite fortunate I had extensive cultural training in the form of my bachelor's and master's degrees in Southeast Asian Studies and Indonesian Studies before I went into business consultancy.
So, one needs to get access to in-depth knowledge on the economy and markets, specific business sectors, laws and regulations, and cultural aspects as well as access to a good network. Indonesia Investments bridges that knowledge gap, and for matters outside of our expertise, for example in-depth knowledge on laws and regulations, we have reliable contacts in the form of experienced lawyers who have been in Jakarta since the 1990s.
Obtaining the right information when preparing a project is crucial because mistakes right at the start of the project jeopardize the success of the whole project, or, at least, will make the project much less profitable and efficient. I have witnessed that many times.
However, you have to be aware that there are many people, even a growing number of foreign charlatans, and business consultancies out there in Jakarta who see the investor purely as a source to get some quick money. However, when a project is guided by unprofessional or even deceitful people, then it obviously becomes much harder to achieve success.
Therefore, I would suggest an investor with little prior knowledge of - or limited experience in - Indonesia, to book a two-week holiday to Jakarta. In this 'pre-preparations phase' he should meet as many people as possible: firmly-established business consultants, tax experts, lawyers, and if possible even civil servants at institutions such as the BKPM in order to absorb as much information as possible. Although it remains difficult for a newcomer, it may help to separate professional from unprofessional services. In the new normal, meetings via zoom may also be a possibility.
This is the last question; you have been in Indonesia for about a decade now. What do you like most about Indonesia?
Yes, I have been living in Indonesia since the start of 2013, but I have been visiting Indonesia since 1998 when I first came as a tourists and fell in love with the scenery, cultures, histories, and weather. It is actually quite unfortunate that now I'm living in Indonesia, mainly Jakarta, I rarely have the time to travel and enjoy all that Indonesia has to offer. For example, I would love to visit West Sumatra again where I last was somewhere in the early 2000s, or Lombok or Raja Ampat where I've not been yet.
What I like most about Indonesia? Well, the first thing that comes to mind now is the food culture. Indonesia is very rich in culinary traditions and cuisine. There are many delicious, yet cheap, restaurants or warung. However, you cannot enjoy them too much because there is a lot of salty, fatty, sugary foods and drinks out there, which is what makes them delicious I guess.
Mr. Van der Schaar can be contacted through firstname.lastname@example.org or +628.788.410.6944 (including WhatsApp) for questions or media enquiries.