A Stronger Response

Indonesia’s President, Joko Widodo, joined the ranks of statesmen around the world who have grudgingly sharpened their response to the COVID-19 threat. Although the confirmed cases are still below 2,000, Indonesia has now become fully engaged in an effort to mitigate the effects of the pandemic based on recent grim projections.  Whereas for several months it could hope that it would be spared, with wild theories that prayer or a tropical climate would be a protection, the Indonesian government has fully stepped on the battlefield with an arsenal of defenses.  The President has now brought more and more of the military leadership forward to assist the health ministry and the nation’s hospitals.  This is in keeping with the history of the institution which brought independence to the nation in the 1940’s and then stability in the late 1960’s. Also of maximum importance was a legislative change that now allows Indonesia to go past its borrowing limit of 3% of GDP.  This gives the government more flexibility to provide economic relief, especially given the current low interest rate environment worldwide.  The current situation has some similarity to the Asian Financial Crisis of 1998 but with many differences.  Indonesia is a much more transparent country now, its major companies are in better financial shape and less leveraged with foreign loans, more circuit breakers are in place, and the nation’s sovereign rating is now investment grade.  The biggest concerns from a health standpoint are the availability of protective equipment for medical workers, drugs and ventilators, as well as the enforcement of social distancing as the fasting month approaches.  As articles in this issue demonstrate, Indonesia is moving on all of these fronts. Given the lack of early testing, the number of reported cases is likely much higher and will soon grow exponentially.  Not dissimilar to the US and other countries, Indonesia has some tough weeks ahead.

During a teleconference with the press on Tuesday, March 31, Jokowi said he had signed a government regulation in lieu of law (Perppu) on state financial policy and financial system stability.  Finance Minister Sri Mulyani also made statements on the new measures and their effect on the economy. She specifically indicated the regulation includes a provision that the actions of officials cannot be subject to lawsuits.  This had to be done, presumably, to allow officials to act without fear of reprisals, something that marred the 2008 Bank Century bailout she presided over as Finance Minister.

Summary of the COVID-19 Regulation:

  • Additional $24.8 billion added to the State Budget. Deficit anticipated to widen to 5% of GDP.  $4.5 billion for the health sector, $6.6 billion for the social safety net, $4.2 billion for tax incentives and credit stimulus, and $9.1 billion for national economic recovery programs, including credit restructuring and guarantees as well as financing for small and medium businesses.
  • The economy will grow 2.3% in 2020 under the baseline scenario, which would be the lowest rate since 1999, or contract by 0.4% in the worst-case.
  • Small and medium enterprises will receive extensions on loan payment deadlines for up to one year if the loan is less than 10 billion rupiah ($605,000). They will also get bailout funds from the government if they commit to keeping 90 percent of their employees on the same salary as before the COVID-19 crisis.
  • First spending priority is medical/health: equipment, bonuses for doctors and nurses, death benefits for families of deceased medical workers.
  • 20 million grocery cards with 9 months of cash benefits, work cards covering job training for 5.6 million informal workers, electricity subsidies for lower income customers, 6 month postponement of principal and interest for small loans, tax exemptions for workers in manufacturing
  • Corporate tax reduced to 22% for 2020 and 2021, 20% in 2020
  • VAT payment acceleration for 19 sectors, import/export duty exemptions
  • Bank Indonesia is allowing lower reserve requirements, liberal loan restructurings
  • Budget deficit can rise above the normal limit of 3% of GDP for 3 years.

BI is authorized to issue “recovery” bonds to fund special COVID-19 mitigation efforts