Economic Growth toward the End of the Pandemic
If Covid-19 can be overcome faster, economic growth will be higher. With Indonesia having started its vaccination program, which is running quite well, the prospect of overcoming the pandemic will improve.
Indonesia\'s economy fell 2.1 percent in 2020,a level not considered too bad when compared to other countries. According to estimates by various parties, the economic growth in 2021 is projected to reach 4.3 percent, good enough for the recovery period from the crisis.
Of course we want a higher growth rate. How fast and strong economic recovery is will be depend on our ability to overcome the Covid-19 pandemic. If Covid-19 can be overcome faster, economic growth will be higher. With Indonesia having started its vaccination program, which is running quite well, the prospect of overcoming the pandemic will improve.
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In developed countries, the government has introduced economic stimulus programs by pouring out up to trillions of US dollars, but the handling of Covid-19 depends on the success of vaccinations. The US will spend up to US$1.9 trillion for the economic stimulus plan. Developing countries, including Indonesia, have also allocated tens of billions of dollars to finance large economic recovery programs. Indonesia will, for example, spend up to Rp 695 trillion (about $48.16 billion) on its economic recovery program and the handling of Covid-19.
Developing countries that have done this are practically only Indonesia and the Philippines.
The economic recovery plans, both in developed and developing countries, are mainly financed with debt, such as through the issuance of government bonds. The bonds are even bought by the central bank in the primary market so that the interest cost is cheaper or even borne by the central bank. Developing countries that have done this are practically only Indonesia and the Philippines.
Influx of funds
With the influx of funds and debts, while Covid-19 control depends on successful vaccination programs, the economic recovery programs and the handling of Covid-19 are closely related.
The superposition between health and economy is getting stronger with vaccination. This superposition will become stronger with the implementation of the self-funded vaccination through private participation that can reach a larger population and help reduce the burden on the state budget.
Meanwhile, concerns over inflation have begun to emerge amid the influx of funds on the market and indications of rising food and commodity prices, particularly oil. The central bank will likely respond the inflation concerns by raising its benchmark interest rates, which will result in an additional burden on debt payments.
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The influx of funds due to the economic stimulus programs, in addition to the fact that many consumers still withhold their spending, while economic activities are still in the early stages of recovery, has caused the funds to flow to the stock and bond markets. Stock and bond prices have increased significantly. Even the price of the digital currency such as Bitcoin has also experienced a sharp increase in anticipation of the weakness of the currency as a means of storing value (store of value).
Optimistically, there are signs that the economic recovery is getting stronger, with positive economic growth in China which is expected to be able to encourage global economic recovery. The increase in commodity prices signifies a strong economic recovery and provides benefits for commodity exporting countries, such as Indonesia.
In Indonesia, the manufacturing sector indicator Purchasing Manager Index (PMI) has improved significantly to 56, while the stock exchange index has also increased, and the rupiah exchange rate has been relatively more stable . Consumers’ confidence has also improved even though it is still below 100.
For Indonesia, liquidity is also abundant, but it has not been channeled to the real sector sufficiently. The low policy interest rate which is currently at its lowest level of 3.5 percent, the large amount of undisbursed third party funds in banks, coupled with the influx of funds from economic stimulus plans, have caused excessive money supply in the market.
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However, the liquidity has not been channeled significantly as credit to the real sector. The credit growth is still low after the 2020 slump. Banks still see a high risk in providing new loans, while good borrowers are still uncertain aboubt the economic outlooks. The entanglement between banks and the real sector is still weak. An improvement in the cash flow of companies will strengthen this link.
The monetary policy with low policy rates and fiscal policy through tax incentives can help the economy in reducing recession burdens so that the economic contraction will not be too deep, but it is not yet strong enough to stimulate a significant economic recovery.
As in developed countries, the abundant liquidity still flows into the financial sector, namely the capital market and government bonds.
Concerns about Covid-19 still overshadow economic actors and households. The vaccination program is expected to be able to significantly cope with Covid-19 and increase the confidence of economic actors. As in developed countries, the abundant liquidity still flows into the financial sector, namely the capital market and government bonds. It has not yet entered the real sector.
The incentive to exempt Sales Tax on Luxury Goods (PPnBM) on purchases of new vehicles can increase car sales. However, the impact of the zero down payment incentive for vehicle and home ownership loans will not too big and could, instead, cause moral hazard (abuse).
Tax incentives on consumers are actually more effective. If similar tax incentives are provided for housing purchases, the impact on the economic recovery would be even greater. It not only benefits consumers but also producers and developers alike, because it can improve their cash flow. The viewpoint of the policy makers to focus on economic recovery by encouraging public consumption is correct as long as it is in line with efforts to overcome Covid-19, not those which can make it worse.
Facilitating investment
Along with efforts to encourage public consumption, the government should also facilitate investment. A policy approach facilitating people\'s consumption and investment is the right way to restore the economy. The Job Creation Law with its 49 implementing regulations has opened up great opportunities for investment. The challenge is at its implementation, where bureaucratic and structural barriers, relating to land and workers, are generally not easy to overcome, even if the law and regulations support it.
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Facilitating investment that can promote the development of the global supply chain is a synergy for domestic and global economic recovery. This approach synergizes the investment and exports that Indonesia urgently needs in its recovery period.
The commodity super cycle
During the last six months, the prices of oil, gas, nickel and copper have increased by 25-40 percent. Many predict that the increase in commodity prices will continue. Even some well-known financial institutions call it a commodity super cycle. The increase in commodity prices provides benefits for producing countries, such as Indonesia. Unfortunately, Indonesia\'s oil production continues to decline while the gas production has not increased significantly due to lack of new investment in exploration activities.
Therefore, practically only Chinese investors are interested in investing in mining and mineral processing.
Mining investment is also limited to investors who are willing to divest after 10 years of operation and building a smelter. Therefore, practically only Chinese investors are interested in investing in mining and mineral processing. The increase in the prices of Indonesia\'s main commodities, such as CPO and coal, of course gave great benefits even though the prices have begun to undergo correction and the requirements for environmental sustainability are getting tighter.
Financing the deficit
The economic recovery program, including health and social assistance, has caused an increase in the state budget to 6.3 percent of GDP in 2020 and 5.7 percent in 2021. The deficit is covered by debts through the sales of Government Securities (SBN), both to private investors as well as to Bank Indonesia which has been allowed to buy on the primary market.
Even though the increase in debt is quite high, the debt-to-GDP ratio is still well maintained at a level of around 40 percent. The challenge is to maintain good debt management so that debt securities are not clogged in government books and in BI, as unyielding assets.
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For B, the low policy interest rates and high SBN ownership, around 2 percent of GDP is a heavy burden and can affect the effectiveness of the monetary policy, including macroprudential and the effectiveness of bond buying (quantitative easing) itself. The government debt capacity is still adequate. However, the larger the SBN issued, the greater the cost, with a higher yield or lower price. Especially with the prospect of higher inflation rates, the challenges of debt management are getting heavier.
A relatively large deficit is still needed in order to help support the economic recovery and finance health programs related to efforts to overcome Covid-19, social assistance, and job creation programs. Therefore, good government debt management is the key to the sustainability and success of economic recovery efforts.
Umar Juoro, the Senior Fellow at The Habibie Center
(This article was translated by Hendarsyah Tarmizi)