Indonesia鈥檚 economy is already on track to recover in 2021 thanks to the eventual availability of COVID-19 vaccines. Questions remain however on the smoothness of the vaccines鈥� distribution, effectiveness, as well as on a few other key policy issues - the answers to which could hamper the country鈥檚 ability to boost its economy back to pre-pandemic levels.
Indonesia鈥檚 economy is recovering. The slow easing of the country鈥檚 lockdown policies compared to what was implemented on the onset of the pandemic, as well as the government鈥檚 aggressive fiscal push towards health and social protection policies, have at least prevented the currently ongoing recession from deepening.
Despite these efforts, Indonesia seems unable to bring its economy back from the recession, with Indonesian Coordinating Minister of Economic Affairs Airlangga Hartarto projecting only a between -2 to 1.6% economic growth by the end of the fourth quarter of 2020 from -3.49% in the third quarter and -5.32% in the second quarter of the year.
Major financial institutions have echoed Mr. Hartarto鈥檚 projection. The latest World Bank report expects a -2.2% contraction for the full year. London-based think tank Economist Intelligence Unit (EIU) put out a similar estimate at -2.2% as well.
It should be noted however that these projected contractions are still a testament to the strength and stability of the Indonesian economy, with various countries expecting contractions of over 5% - some are up to the double-digit range - due to the economic impact of the pandemic. It should also be said that these same reports expect Indonesia to recover along with the rest of the world following the arrival of the COVID-19 vaccine. The World Bank forecast a 4.4% GDP growth in 2021, while the EIU sees a 3.3% growth.
Those numbers are still below the country鈥檚 pre-pandemic level growth of around 5% because of the lingering doubt as to whether Indonesia will be able to implement its vaccination program, not to mention the effectiveness of the vaccine itself. More than 56 vaccines are in clinical development according to data from the WHO, out which three vaccines (Pfizer 鈥� BioNTech, Moderna and Sinovac) for which certain national regulatory authorities have authorized the use. None have yet received the WHO鈥檚 authorization 鈥� though an assessment on the Pfizer vaccine is expected by the end of December.
As widely reported in the local media, Indonesia has received 1.2 million dosages of the Sinovac vaccine and is preparing to distribute them to a select group, including essential healthcare worker, prior to its national mass vaccination program for which the country has ordered hundreds of millions of vaccines not just from Sinovac, but also from Pfizer. Indonesian President Joko Widodo himself said that he would be the first person to take the SinoVac vaccine to ensure its effectiveness as well as to allay the public鈥檚 concern over its safety.
Putting aside the effectiveness of the vaccine itself, the Indonesian government continues to advocate for social distancing and work-from-home policies instead of putting the country under a complete strict lockdown. Considering that the former approach has already been widely accepted as the so- called new normal by many Indonesians, it can be expected that this situation will remain unchanged for at least the greater part of the first half of 2021.
While the COVID-19 vaccine will continue to dominate headlines for the near foreseeable future, a number of key policy questions still remain following the country鈥檚 fiscal handling of the COVID-19 pandemic.
Not long after COVID-19 began spreading in Indonesia, President Joko Widodo raised the public debt ceiling above its historical and legal threshold of 3%. The government has since set aside IDR 695 trillion (roughly US$47 billion) for its National Economic Recovery program. This could in turn make the government budget deficit rise above 6.34% of GDP in 2020. Furthermore, public debt may approach 40% of GDP in the same period.
Comparatively speaking, Indonesia has always had room to increase public debt. Therefore, these increases should not burden the economy too much, especially as the country has made a number of fiscal breakthroughs. These include the $60 billion repo agreement made between Indonesia鈥檚 Central Bank BI and the US Fed back in April, which has had the effect of stabilizing the rupiah, as well as the establishment of a sovereign wealth fund for which a number of countries have expressed interest towards investing in.
One worrying trend is the big trade surpluses that the country has experienced over the past few months as it is caused more by plummeting imports rather than increased exports. The logistical challenges caused by the COVID-19 pandemic understandably contributed to the surplus, not to mention the heightened ambivalence among Indonesians to leave their home and shop or spend on various consumptions. However, Indonesia鈥檚 goods also contain a high number of imported raw materials, which means that, due to a lack of locally-sourced alternatives, there could be lower exports in the future.
Which brings us to the final major question of for 2021: the Omnibus Law on Job Creation. Passed through the Indonesian Parliament on October 5, the Omnibus Law amends dozens of laws and more than 1,200 articles that nearly runs the whole spectrum of doing business in Indonesia, from spatial layout to government administration. The aim of the law is to improve the Ease of Doing Business in Indonesia and boost the national investment climate by amending overlapping laws and/or regulations deemed to be obstructive towards foreign investments.
At face value, the Omnibus Law appears to be a step towards the right direction in Indonesia鈥檚 economic reform effort by making the country more competitive as an investment destination. However, the country has made similar attempts towards economic reform that ended up being lackluster. Thus, many are understandably cautious about the country鈥檚 ability to realize the intent of the omnibus law. For its part, the government must still deliver on 34 implementing Government Regulations and 5 Presidential Regulations that will further specify how the amendments are to be put into force.
Fortunately, businesses and Investors will not have to wait long to find out whether the law can truly provide the economic boon Indonesia desperately needs to hasten its post-COVID-19 economic recovery. Some of the regulations, such as the one on Indonesia鈥檚 Sovereign Wealth Fund, locally known as LPI, have been issued. A recent online legal roundtable held by EKONID in cooperation with the Ministry of Manpower also revealed that at least three out of the four implementing regulations on the topic of Manpower should be ready before the end of the year, the contents of which seemed consistent with the intent of the Omnibus Law.
Throughout 2020, Indonesia has shown that it is able to at least contend with the one of the worst public health crises the world has ever seen. If the year is anything to go by, businesses and investors can at least be certain that Indonesia鈥檚 economy will remain resilient in 2021.