Resilience of MSMEs

Many say that micro, small and medium enterprises, or MSMEs, are resilient in facing various economic crises.

There is some truth to this view, if we look at the experience of the economic, monetary and political crisis in Indonesia in 1998. MSMEs proved to be quite resilient at that time and became the savior of the Indonesian economy.

Large companies collapsed due to the rupiah weakening by almost 208 percent, which resulted in layoffs in many business sectors. The Indonesian economy reached its lowest point at that time. The economy contracted very deeply to minus 13.1 percent in 1998 from positive growth of 4.7 percent in 1997.

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However, there was a unique phenomenon that when the formal sector was down, the informal sector and micro enterprises mushroomed and led the Indonesian economy to a rebound. It was noted that the informal sector saw a significant increase in labor absorption, growing 8.7 percent in 1998 so it was able to accommodate most workers who had been laid off.

You can imagine how important and crucial the informal sector was as a reflection of micro enterprises, when growth in formal workers fell significantly by 6.6 percent.

The 1998 economic recession was certainly very different in many aspects from the recession we experienced in 2020. Under the conditions in 1997-1998, the MSMEs sector was still able to carry on with normal activities and there were no large-scale social restrictions (PSBB), so MSMEs were not depressed. MSMEs were not prohibited from operating and doing business/selling activities. There was no recommendation to work from home.

During the 1998 economic and political crisis, the ones that felt the greatest impact were the elite businesses, the conglomerates. On the other hand, during the 2020 economic recession, businesses of all types saw a slump, including MSMEs.

However, MSMEs must in fact be helped, supported, and given special attention and assistance from the government, regulators and banks.

The MSMEs that were said to be resilient during the 1998 economic recession were left paralyzed by the Covid-19 pandemic. If MSMEs were resilient in facing the 2020 economic crisis, MSMEs will again be the savior of the economy. However, MSMEs must in fact be helped, supported, and given special attention and assistance from the government, regulators and banks.

The difficulties MSMEs have faced forced the government to intervene through a very large National Economic Recovery (PEN) fund. Likewise, the Financial Services Authority (OJK) relaxed its policy on restructuring bank loans until March 2023. Banks were willing to forego accepting principal and interest payments from debtors who had been previously healthy, but due to Covid-19, whose businesses had collapsed because of a lack of buyers.

KOMPAS/ABDULLAH FIKRI ASHRI

Signs still hang in front of a closed salted egg shop on Wednesday (13/6/2018) along the northern coastal road (Pantura) in Brebes regency, Central Java. The shops started closing last year when part of the Trans-Java toll road opened. Micro, small and medium enterprises (MSMEs) along Pantura, such as the salted egg businesses, went bankrupt when motorists switched to the toll road.

The MSMEs’ resilience disappeared instantly due to the tight social and economic restrictions in the second quarter of 2020 and a very deep economic contraction of 5.3 percent. To overcome the downturn in MSMEs, the government took aggressive measures in 2020 to disburse Rp 112.4 trillion in PEN funds. The Rp 335 trillion loan restructuring program for MSME debtors affected by Covid-19 was also enjoyed by 4.6 million MSMEs in 2020.

Resilient, adaptive

Based on a study conducted by the BRI Research Institute in the third quarter of 2020, MSMEs suffered greatly. Covid-19 had a negative impact on 84.7 percent of MSMEs. Their average income fell

significantly by 53 percent. Of the MSMEs that experienced this average decline in income, which was quite sad, around 72 percent said their income had fallen more than 40 percent.

At this lowest point, there were interesting things about the MSMEs that proved to be a plus point.

From the results of the BRI Research Institute study, by the second quarter of 2021 it was evident that MSMEs look frail and about to close their businesses, especially in the micro segment, but quickly got up to restart their business. In the micro segment, 74 percent of respondents said their business returned to normal in just six months. Furthermore, around 85 percent of respondents said they could afford to pay the principal installments once the pandemic ended. I think this short recovery time proves that MSMEs are resilient, adaptive and can easily recover from adversity.

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This situation is reinforced by OJK data. The positive trend in MSME recovery can be seen from the number of restructuring debtors, which fell significantly from 4.6 million in December 2020 to 3.1 million in November 2021. This indicates a reduction of 1.5 million debtors, or 33 percent.

This was a result of the government’s PEN funding program, the OJK’s Covid-19 debt restructuring program, and banks’ willingness to help debtors who were unable to pay their installments and interest because of the pandemic, a combined approach that has continuously proven its success in helping MSMEs to improve their business conditions.

It can also be seen from the results of the BRI Research Institute’s study that the MSME Business Index increased significantly to reach an optimistic 104.1 in the fourth quarter of 2021, from 95.3 in the third quarter of 2021. This was already in the optimistic zone because the index reached above 100.

Continuing improvement

Very good and optimistic conditions occurred not only in the fourth quarter of 2021. Entering the first quarter of 2022, MSMEs look even more optimistic with a score of 129.6 in the MSME Business Expectations Index, although there was pressure from the increase in daily Covid-19 cases due to the Omicron variant in early 2022.

In addition to the very promising Business Index and Business Expectations Index, the liquidity and profitability of MSMEs are also seeing a positive trend.

Only 14.5 percent said their liquidity was better while 39.9 percent said they remained the same, with a diffusion index of 68.9, down significantly from 129.7 in the fourth quarter of 2019.

First is the condition of liquidity, in this case defined as a company's ability to pay off short-term obligations (less than one year). At the beginning of the pandemic (first quarter of 2020) as many as 45.6 percent of respondents said their business’ liquidity was worse than in the fourth quarter of 2019. Only 14.5 percent said their liquidity was better while 39.9 percent said they remained the same, with a diffusion index of 68.9, down significantly from 129.7 in the fourth quarter of 2019.

On the other hand, by the fourth quarter of 2021, the percentage of respondents who said their liquidity was worse than the previous quarter had decreased significantly to 20.5 percent. Around 28.2 percent said they were better and 51.3 percent said their condition remained the same, with a diffusion index of 107.7 in the fourth quarter of 2021. The liquidity of MSMEs has been on an improving trend since the fourth quarter of 2020 in line with the recovering economy.

KOMPAS/HENDRA A SETYAWAN

Yanto arranges plastic bags of aquarium fish on Thursday (2/4/2020) at an ornamental fish farm near Mount Sindur in Bogor regency, West Java. The Covid-19 outbreak in Indonesia has disrupted the activities of thousands of micro, small and medium enterprises (MSMEs), including the ornamental fish trade. Sales of ornamental fish have fallen more than 50 percent since the outbreak began in early March, primarily due to the closure of Jatinegara Market, the center of the ornamental fish trade in Jakarta. The “stay at home” policy has also contributed to the decline in sales, as students are key customers of ornamental fish traders.

Second, what about rentability? Rentability is a company's ability to generate profit within a certain period. At the beginning of the pandemic (Q1 2020), the majority of MSME players (52.2 percent) said their business’ rentability was worse than the fourth quarter of 2019.

Only 15.3 percent said they were better and 31.5 percent said they remained the same, with a diffusion index of 62.1, a significant decrease from 133.5 in the fourth quarter of 2019.

On the other hand, by the fourth quarter of 2021, respondents who said their business’ rentability was worse than the previous quarter had fallen to 24.1 percent. Around 34.1 percent said they were better and

41.8 percent said their condition remained unchanged, with a diffusion index of 110.0 in the fourth quarter of 2021.

Confidence in MSME recovery can be seen in the data on businesses’ plans to increase capital. As many as 49 percent of respondents planned to increase their business capital in the next three months. If additional working capital is obtained, the majority of respondents will use it for productive purposes, namely: (1) buying input goods, operational goods, spare parts (57 percent) and (2) buying and repairing equipment (16 percent).

The assistance that the government, the financial regulator and banks provided to MSMEs during the pandemic-induced economic crisis proved to be sweet.

The positive aura from MSMEs, which are increasingly recovering and growing optimistic, will spread through the Indonesian economy as a whole, because MSMEs have a very large role in the national economy. Indonesian MSMEs are unique; at times they are helpers, sometimes they need help. The assistance that the government, the financial regulator and banks provided to MSMEs during the pandemic-induced economic crisis proved to be sweet.

This is because of the characteristics of MSMEs, which emerge rapidly and are adaptive, and can resume their business more easily once the economy is recovering and improving.

Learning from the MSMEs slump during the Covid-19 pandemic, strengthening the sector is needed by: (1) providing comprehensive assistance to MSMEs from the upstream to the downstream for financial management, production and marketing, so they are able to compete with products from large companies or imports; and (2) providing constant guidance to MSMEs to improve their skills in financial and digital literacy so they can up with the rapidly advancing digital economy.

DOKUMENTASI ANTON HENDRANATA

Anton Hendranata

Anton Hendranata, President director, BRI Research Institute; chief economist, PT Bank Rakyat Indonesia (Persero) Tbk

(This article was translated by Kurniawan Siswo)