On Tuesday (05/05/2020) Indonesia Investments released the April 2020 edition of its monthly update. In this edition, titled 'Bracing for Impact', we focus on the impact of the novel coronavirus (COVID-19) crisis - and subsequent restrictions on social behavior and business - on the Indonesian economy and Indonesian society.
In April 2020, Indonesia (and the world) were still feeling the huge impact of the COVID-19 crisis. As the government prioritizes people's health by imposing far-reaching restrictions on people's movement and business, the impact on the economy and society is huge.
In the April 2020 edition we discuss the impact of COVID-19 on economic growth and a range of other macroeconomic indicators (such as inflation, manufacturing, and direct investment). We also discuss how Indonesia is handling the crisis (for example there have risen conflicting regulations that have confused the people) and whether companies can claim force majeure and fire their workers in these circumstances. Please take a look at the table of contents below to see all topics that are discussed.
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Take a Glance Inside the April 2020 Report:
Introduction – April 2020 Report
April 2020 was yet another remarkable month. Global crude oil prices even dropped into negative territory temporarily (which suggests that sellers were actually paying crude oil buyers to take deliveries in a bid to avoid incurring of storage costs), while the global economy and society remain captivated by the novel coronavirus (COVID-19) outbreak.
It has also become increasingly clear that the policy measures that have been taken by governments across the globe (in an effort to protect their populations’ health) come at huge economic costs (besides jeopardizing the existence of many companies these policy measures also prompt an increase in unemployment and poverty). And, the longer these COVID-19 measures last, the higher the damage becomes. It means governments need to come up with generous and effective stimuli.
Meanwhile, almost all analysts are now having big trouble setting accurate forecasts for economic growth in 2020 and 2021. The key reason for this is that the world is in uncharted waters. The huge drop in economic activity and limitations to people’s movement must resemble the situation of a world war (with hospitals having turned into modern battlefields). However, few of us, today, have experienced a world war, or world war-like conditions. In fact, the looming global recession is bound to be the worst recession since the Great Depression in the 1930s. But the COVID-19 crisis is unlike any other crisis we have seen in the past, including the Great Depression.
This has made it very confusing for analysts to set forecasts for economic growth. Without a precedent, analysts struggle to assess the extent to which damage has been done (and will be done) to both the global and national economies. Moreover, we are currently living in times of heavy globalized economies. Hence, a sudden and huge disruption to the flow of people and goods across international boundaries is bound to have far-reaching consequences on a wide range of industries, and in a big number of countries. Meanwhile, central governments are required to take swift and effective action by spending heavily on the national health sector, on companies, and on households. This implies that countries’ debt levels will rise significantly in 2020.
Poll Indonesia Investments:
According to you at what pace will the Indonesian economy grow in 2020?
Voting possible: -
- Lower than 0.0% (26.8%)
- Higher than 2.0% (17.9%)
- 0.5% - 1.0% (15.9%)
- 0.0% - 0.5% (15.8%)
- 1.0% - 1.5% (11.8%)
- 1.5% - 2.0% (11.8%)
Total amount of votes: 1025
As a consequence of being in uncharted waters, various analysts (including those at Indonesia Investments) have had to cut their economic growth forecasts on several occasions in recent months (and weeks). As awareness of the massive impact of the COVID-19 crisis on economies is rising among analysts, their outlook for economic growth becomes increasingly dim.
In April 2020, data from China showed just how severe the economic damages are as the country reported that its Q1-2020 gross domestic product (GDP) contracted by 6.8 percent (from the same quarter a year earlier). Meanwhile, the International Monetary Fund (IMF) released an interesting report in early April in which it stated that – under the assumption that the COVID-19 pandemic and required containment measures peak in the second quarter in most countries in the world, and then recede in the second half of 2020 – it projects global economic growth in 2020 at minus 3 percent year-on-year (y/y), a downgrade of 6.3 percentage points from the IMF’s global economic growth outlook in January 2020 (and thus an unprecedented huge revision, over a very short period of time).
Indonesia Bracing for Impact
While several countries in the West have now started (carefully) planning to reduce some policy measures, thereby allowing the return of some economic activity, as the peak in COVID-19 infections and fatalities seems to have passed, Indonesia in fact had to tighten social (and business) restrictions in April 2020. Tightening is needed because the COVID-19 peak in Indonesia is not in sight yet. Moreover, special caution is required as Ramadan (the holy fasting month in Islam) started on 24 April 2020, while Idul Fitri (the celebrations that mark the end of Ramadan) is just around the corner (on 22-25 May 2020).
In the context of the traditional Idul Fitri holiday, millions of city dwellers typically return to their places of origin (usually located in the rural or suburban areas) to spend a few days with their families (a tradition that is called mudik in Indonesian). This year, however, this traditional exodus could lead to a major health disaster as the larger cities (in particular Jakarta and Surabaya) are in fact the epicenters of the COVID-19 outbreak in Indonesia. Hence, if millions of city dwellers travel to the rural and suburban areas, it could lead to a deepening in the further spread of COVID-19 across Indonesia, thereby jeopardizing the health of the rural and suburban people (in particular elderly are vulnerable to the effects of COVID-19).
Indonesian virologists assume that the peak of the COVID-19 outbreak in Indonesia may arrive in late May, or, early June, roughly coinciding with the Idul Fitri holiday. This means that the Indonesian government needs to take measures to stop people from traveling, and thus avoid the worst-case scenario.
The Indonesian government therefore imposed heavy restrictions on all passenger travel (by air, sea, land or railway) in and out of “red zones” starting from late April 2020. This effectively means that people in Jakarta, Bandung, and Surabaya (all are red zones) cannot perform the mudik this year.
This mudik ban is necessary to limit the further spread of COVID-19 to the rural and suburban areas. But it also means that – in combination with the large-scale social restrictions in several cities and regencies across Indonesia – the Ramadan and Idul Fitri celebrations will be very sober this year. Typically, both Islamic festivities cause a huge rotation of money in Indonesia as people tend to spend heavily on food items and drinks as well as a wide range of other consumer goods (such as shoes, bags, and clothes). Moreover, when visiting the rural and suburban areas in the context of mudik, a huge wave of money goes from the urban centers to the rural and suburban areas, thereby stimulating the regional economies. This money rotation will sadly be missed this year.
Still, the IMF remains remarkably optimistic about Indonesia’s economic growth in 2020, setting its forecast at 0.5 percent (y/y). We would not be surprised, however, if this projection is too optimistic and needs revision in the weeks ahead.
Remarkable News from Indonesia
Lastly, two remarkable news stories from Indonesia to conclude this introduction. Firstly, in April 2020, more than 38,000 Indonesian inmates (primarily elderly and children) were prematurely released from prison as concern rose among authorities that COVID-19 may spread rapidly in the country’s overcrowded prisons. It is worth mentioning that while the combined total of all Indonesian prisons across the nation is designed to handle 130,000 inmates, at the start of April 2020 there were actually around 270,000 inmates serving their sentence in Indonesian prisons.
Secondly, April 2020 was also the month in which many people in Jakarta – for the first time – could see Mount Gede Pangrango in Bogor and Mount Salak in Sukabumi, both in West Java, from Jakarta.
The image below, which was made around 1810 when Batavia (present-day Jakarta) was still in the hands of the Dutch, shows these two mountains in the background. However, due to huge traffic congestion in the Greater Jakarta area, especially since the 2000s, it has become impossible to see both mountains from Jakarta as pollution blocks the view.
Hence, the advantage of having the large-scale social restrictions and work-from-home orders in Jakarta is that traffic has decreased massively. As a consequence, the air is currently much healthier; and with less pollution, vision improves.
Indonesia Investments’ April 2020 Report
In the remainder of this April 2020 report we focus on the Indonesian economy and society amid the ongoing COVID-19 crisis (except for one article that discusses the global economy). We present articles on the social restrictions in Jakarta (and take a look at examples of conflicting regulations made by central and local authorities), on whether Indonesia-based companies can successfully claim force majeure under present circumstances, the mudik and passenger travel restrictions, foreign direct investment in the first quarter of 2020, the impact of the COVID-19 crisis on various sectors and macroeconomic indicators of Indonesia, and more.
Delft (the Netherlands) & Jakarta (Indonesia)
02 May 2020