Spring Comes to Economic Recovery

A few days ago, Statistics Indonesia (BPS) released the latest data on Indonesia\'s economic growth in the first quarter of 2021, which showed a 0.74 percent year-on-year yoy contraction. On a quarterly basis, however, our economy has improved from contracting 2.19 percent in Q4 2020 to 0.96 percent in Q1 2021.

The data indicates significant improvement, even though our economy is still in a recession. At the same time, this positive trend proves that signs of Indonesia’s recovery are becoming clearer over time.

This condition indicates that spring has arrived for national recovery, after the economy contracted 2.07 percent yoy in 2020. The economic improvements show that national economic recovery is on the right track amid the threat of the Covid-19 pandemic, which still shows no signs of ending soon.

Also read: Stimulus to Lift the Economy

With its positive growth, Indonesia follows Singapore and Vietnam, both of which experienced growth in Q1 2021 of 0.2 percent and 4.48 percent respectively. The developments towards Indonesia’s economic recovery are supported by various policies and a number of fundamental and external factors that are pillars of the country’s growth.

Countercyclical policy

From the outset of the Covid-19 pandemic in early March 2020, the government has issued a number of countercyclical policies; policies intended to mitigate the economic impacts of the pandemic. These policies were expected to minimize the pandemic’s impacts on the economic sector as much as possible.

Learning from previous crises, the macroeconomic policies the government adopted at the beginning of the pandemic were very precise and fulfilled the “3Ts” of timely, targeted and temporary. This means that the government issued these policies at the right time, with clear targets, and were temporary in nature.

Such policies have a dual purpose to overcome the humanitarian crisis while safeguarding the economic condition at the same time so it will not sink further.

An expansionary monetary policy has also been implemented through quantitative easing and interest rate cuts to a maximum 3.5 percent, the lowest interest rate in Indonesia\'s modern history.

The government has also issued a number of fiscal stimulus packages to maintain growth in household spending as well as in the activities of micro, small and medium enterprises (MSMEs). An expansionary monetary policy has also been implemented through quantitative easing and interest rate cuts to a maximum 3.5 percent, the lowest interest rate in Indonesia\'s modern history.

Also read: Recovery Program Should Target the People

The credit restructuring policy has saved millions of debtors from liquidity disruptions, so they could maintain their business activities. The amount of restructured loans has declined from Rp 830 trillion to Rp 808 trillion.

KOMPAS/TOTOK WIJAYANTO

President Joko “Jokowi” Widodo delivers his speech virtually during the commemoration of 2021 National Press Day in Ancol, North Jakarta, on Tuesday (9/2/2021. In his address at the event themed “Rising from the Pandemic, Jakarta as the Gateway to Economic Recovery with the Press as the Accelerator of Change”, the President expressed appreciation for all members of the press who had helped the government in educating the public to be disciplined in adhering to health protocols to prevent the spread of the novel coronavirus.

Finally, the macroeconomic policy mix of tax cuts, easing down payment requirements, and relaxing credit risk weight that were implemented in the property and automotive sectors has succeeded in lifting demand for housing and cars.

Rise in the global economy

China, where the first case of Covid-19 transmission originated, has actually been able to revive its economy quickly. China\'s economy grew 2.3 percent in 2020, with the country’s economic growth rate even reaching 18.3 percent in Q1 2021 to bring a significant impact on regional economic growth.

The United States economy also grew faster than was forecast. It grew 4 percent in Q4 2020, with the growth rate even reaching 6.4 percent in Q1 2021. Recovery in the two economic giants of the world is certain to have a positive impact on imports of raw materials and commodities from Indonesia.

Other Asian tigers such as Hong Kong and Taiwan also recorded high economic growth of 7.8 percent and 8.16 percent, respectively.

Also read: Banking Challenges in 2021

The revival of the global economy is also reflected in the increased prices of several commodities. Crude oil prices, for example, reached a 22-month high at a range of between US$63 and $67 per barrel in mid-April. The increase in oil prices indicates that demand has begun to rise amid the increase in industrial activities in many parts of the world, including Indonesia.

The prices of iron ore, a raw material in steel production, also recorded a sharp yoy increase in April 2021 to $193 per metric ton, compared to $83 per metric ton in April 2020.

KOMPAS/FERGANATA INDRA RIATMOKO

A vendor checks a list of COVID-19 vaccine recipients at Beringharjo Market in Yogyakarta on Monday (1/3/2021). Some 3,200 people in the informal sector in Yogyakarta received the shots on Monday. Yogyakarta hopes to vaccinate 19,900 people at three locations around Malioboro over six days in an effort to speed up the economic recovery.

The prices of crude palm oil (CPO) also increased from $870 per ton in December 2020 to $1,031 per ton April 2021.

Manufacturing performance

Another factor supporting Indonesia’s economic recovery is improvements in the manufacturing sector, as reflected in the Purchasing Manager’s Index (PMI) increasing to a record high of 53.2 in March from 50.9 in February this year.

One of the factors that triggered the PMI increase was the provision of a fiscal incentive that reduced the luxury goods sales tax (PPnBM) for automotive sales. The tax incentive has contributed to an increase in vehicle production to 187,021 cars in Q1 2021, an increase of 16.63 percent compared to the previous quarter.

The increase in the index also indicates that Indonesia’s manufacturing industry has begun to expand as the result of increased demand.

The PMI recorded in March 2021 is the highest in the last decade. The increase in the index also indicates that Indonesia’s manufacturing industry has begun to expand as the result of increased demand.

Import and export performance

Signs of economic recovery are also seen in export and import growth over the last few months.

The latest BPS data show that exports totaled $18.35 billion in March 2021, a month-to-month (mtm) increase of 20.31 percent compared to the figure recorded in February 2021 and a yoy increase of 30.47 percent compared to March 2020.

In fact, exports in March 2021 are the highest since August 2011, when exports totaled $18.54 billion. The growth in exports was mainly due to improvements in the global economy, particularly in the world’s economic giants, which increased demand for consumer and capital goods.

Also read: Analyzing Recession

In addition, BPS data also show that imports totaled $16.79 billion in March 2021, an increase of 26.55 percent mtm from April. Annually, imports grew 25.73 percent. The double-digit growth in imports indicates that activities in the manufacturing and investment industries have started to recover. At the same time, the improvements in manufacturing and investments are a sign that demand for various products has also increased.

Payment transactions

Signs of national economic recovery are also evident in the nationwide increase in payment transactions. This can be seen from the amount of money in circulation in March 2021, which reached Rp 782.7 trillion, a yoy increase of 7.61 percent.

Kompas/AGUS SUSANTO

Multi-storey building project in the Cempaka Putih area, Central Jakarta, Sunday (6/28/2020). Bank Indonesia projects that the process of economic recovery will strengthen in the third quarter of 2020 along with the relaxation of large-scale social restrictions since mid-June 2020 and the policy stimulus launched

Retail transactions by debit card reached Rp 647 trillion, an increase of 10.44 percent yoy. Meanwhile, online banking transactions reached Rp 3.025 quadrillion, an increase of 26.44 percent yoy. The increase in both cash and cashless transactions shows that economic activities are increasing in the real sector.

Restored consumer confidence

The Consumer Confidence Index (IKK) increased from 85.8 in February 2021 to 93.4 in March 2021. The national vaccination program is considered to have strengthened public confidence in future improvements in economic prospects, and that the national economy will recover soon. Even though the IKK is still in the pessimistic zone, the figure is continuing to increase gradually. Therefore, it is no exaggeration to expect that the IKK will enter the optimistic zone of above 100 in the coming months.

Also read: Hopes for the Covid-19 Committee

As for future expectations and challenges, economic growth of minus 0.74 percent yoy and minus 0.96 percent qtq in Q1 2021 should be appreciated, even though it is yet to reach annual growth of an average 5 percent that was recorded before the pandemic.

We hope that, in the short term, Indonesia will see positive economic growth in Q2 2021 towards a gradual return to the 5 percent level by the end of the year.

KOMPAS/TOTOK WIJAYANTO

A worker carries trays of freshly made tofu to the packaging section of a small tofu producer on Thursday (23/7/2020) in Pancoran, South Jakarta. As of July 21, the government has disbursed Rp 11.84 trillion in working capital for cooperatives and micro, small and medium enterprises (MSMEs) through national economic recovery program. The figure is 9.59 percent of the Rp 123.46 trillion fund for cooperatives and MSMEs.

Several challenges remain in realizing this target. First, it is probable that fiscal stimulus will still be needed in the next few years to boost consumer spending and investment. However, as fiscal space is increasingly limited in terms of capacity, the government needs to raise more debt to finance the necessary stimulus.

With interest rates at a historic low and reduced credit risk, there is no reason for banks to hold back in lending.

Second, banks must be encouraged to disburse more loans to the real and financial sectors in order to boost household spending and investment, the main engines of national economic growth. With interest rates at a historic low and reduced credit risk, there is no reason for banks to hold back in lending.

Third, a new strategy is needed to encourage middle and upper class households to spend more of their money currently in savings accounts at banks.

Fourth, the national vaccination program needs to be accelerated whenever possible, but this must be accompanied by strict implementation of the health protocols, which the public is beginning to ignore. Failure to control the spread of Covid-19 will affect all efforts that have been taken to push for recovery.

Agus Sugiarto, head of the Institute of the Financial Services Authority (OJK Institute)

(This article was translated by Hendarsyah Tarmizi).