Experts Calculate Economic Risks If Government Remains Slow In Handling COVID-19

Indonesia Stock Exchange Building (Angga Nugraha / VOI)

JAKARTA - The outbreak of the corona virus or COVID-19 has a great opportunity to bring about a global recession this year. In the source country, China, the spread of COVID-19 has decreased sharply. The domestic economic recovery process has begun. However, outside China, the spread of the plague is actually escalating.

The COVID-19 outbreak has also raised investor concerns about economic uncertainty. This is reflected in the sharp decline in the capital market index in various parts of the world. Not only that, the prices of a number of commodities have also decreased in response to weakening global demand. Among them, the price of crude oil has fallen below 25 US dollars.

The Indonesian government has also issued an economic stimulus to deal with economic pressure from the drop in world oil prices and the impact of the COVID-19 pandemic. So, what can save the domestic economy in the midst of this viral pandemic?

Executive Director of the Center of Reform on Economics (CORE) Indonesia, Mohammad Faisal, said that Indonesia's economic growth this year will also be greatly influenced by how much impact will be caused by the spread of the COVID-19 outbreak and how fast the response is to overcome it.

Private consumption, said Faisal, which accounts for nearly 60 percent of the national economic movement, is certain to experience a contraction. Retail sales, both in traditional and modern markets, are certain to decline. In fact, before the COVID-19 case was identified in Indonesia, the Real Sales Index data released by Bank Indonesia had shown a contraction of 0.3 percent in January 2020.

Faisal said car sales during January and February also fell 2.4 percent years on years (YOY). Indications of a decline in private consumption are also shown by a drop in tourist travel, both domestic and foreign.

BPS noted that the number of foreign tourist arrivals fell 7.62 percent in January 2020 compared to December 2019. Meanwhile, domestic tourists fell 3.1 percent in the same period. This pressure on private consumption is certain to deepen in March as well as the following months.

According to Faisal, the decline in global economic growth, especially in export destination countries and weakening commodity prices will put pressure on Indonesian exports. The same is true of service exports, particularly travel or tourism services. Moreover, countries that are Indonesia's main export destinations, such as the United States and the European Union, have become the epicenter of a pandemic that has surpassed the cases that occurred in China.

On the other hand, as a result of the decline in domestic economic activity, import activity, particularly raw materials and capital, also contracted compared to last year. Thus, the decline in exports will also be accompanied by a decrease in imports, so that the effect of net-exports on domestic economic growth this year is relatively small, as last year it contributed -0.5 percent to GDP.

"The only thing that has the potential to sustain the domestic economy this year is government spending. Handling COVID-19 requires the government to work all out to provide various policy packages both to treat COVID-19 patients (curative) and prevent the escalation of the spread of the virus (preventive)," he said, through a written statement received by VOI, in Jakarta, Sunday, March 29.

Faisal explained that fiscal stimulus is also the main key in reducing the negative impact on the economy, especially for business actors and community groups who are the most affected. As is well known, Bank Indonesia has issued several policies to reduce the impact of public panic, especially investors, on the COVID-19 pandemic.

This is done by lowering the interest rate (BI 7-Day Reserve Repo Rate) by 50 BPS during 2020 to 4.5 percent, loosening the statutory reserve requirement, and intervening in the foreign exchange market to ease the depreciation of the rupiah. However, Faisal said, investor panic in the capital market which triggered an increase in foreign net selling caused the rupiah to depreciate by up to 16 percent (YTD) on March 27. The rupiah has even become the currency that has depreciated the most among the currencies of ASEAN countries.

Predictions

CORE, said Faisal, confirmed that the prospects for economic growth this year will be much lower than last year. If the government takes more 'stricter' steps to suppress the spread of this outbreak, as did the Chinese Government, then the peak of economic pressure is expected to occur in the second quarter. After that, in the third and fourth quarters will enter a period of recovery.

"With the most optimistic scenario, CORE Indonesia predicts the Indonesian economy will cumulatively grow in the range of -2 percent to 2 percent," he said.

However, according to Faisal, worse conditions could occur if the spread of COVID-19 in Indonesia lasted more than two quarters and countries that were Indonesia's main export partners also experienced the same thing. Under these conditions, domestic and global demand pressures will be longer, so there is very little chance for the economy to grow positively.

"In addition to weakening economic growth, this pandemic also has the potential to increase unemployment and poverty. This is very possible given the very high population around the poverty line, although the percentage of people below the poverty line has decreased in recent years," he explained.

Faisal said, as of March 2019, the population of vulnerable groups to the poor and near-poor in Indonesia reached 66.7 million people, or nearly three times the number of people below the poverty line (the poor and very poor). Most of these groups work in the informal sector, including those who rely on daily wages.

If the handling of the pandemic lasts a long time, said Faisal, the period of limitation and reduction in mobility of people will be even longer. "As a result, vulnerable groups of poor and near poor who work in the informal sector and rely on daily wages will very easily lose their livelihoods and fall below the poverty line," he said.