Economy’s Survival at Stake
Yopie Hidayat (Contributor)
THE Covid-19 outbreak has wreaked havoc upon the world for the past two months. Now the most important question in the market is: where are we? Is the pandemic past its peak in Indonesia and on its way to decline? Or is it still ramping up to an unknown climax?
It is a difficult question. From the early stages of the outbreak in Indonesia, reliable data has been scarce. Consequently, there is nothing that the market can use as a benchmark to gauge how badly the pandemic will hurt Indonesia’s economy.
What we can do is to look at other available projections. The International Monetary Fund (IMF) came up with very pessimistic predictions: this year, the Indonesian economy is predicted to grow by merely half a percent. This is far lower than the three percent predicted by global ratings agency Moody’s, and the two and a half percent predicted by Asian Development Bank.
Meanwhile, S&P Global Rating predicted that Indonesia will only grow 1.9 percent this year and simultaneously changed Indonesia’s outlook from stable to negative. This means that S&P sees a possibility that Indonesia’s financial prospects will worsen in the next two years. If that happens, S&P will lower Indonesia’s sovereign rating, which sits at BBB for the short term and A-2 for the long term.
The main reason for the negative change in outlook is government debt, which is rapidly growing due to the outbreak. S&P deems the the government’s bold fiscal measure in response to the pandemic will help to stabilize the economy. There is no other option to save the economy from even further damage in the long term, especially if the effects of the outbreak spread to the banking and financial system. Consequently, however, it will weaken Indonesia’s external debt position.
At the same time, Indonesia must also face the risk of rupiah continuing depreciation. The threat of external shocks, causing massive ouflows of portfolio investment fund from the country, will not disappear in the coming year. In fact, that risk might come again and again as the global economy is also in tatters due to the outbreak.
Offshore investments fund are frantically exiting emerging markets in search of safety. This can potentially weaken the rupiah and make the burden of debt and interest payments much heavier. The government’s debt servicing is always exposed to currency risk, because 40 percent of it is denominated in foreign currencies.
Besides weighing down the budget, Indonesia’s debt servicing in the coming years, including those made by the private sector, will continue to raise the need for external financing. At the same time, export earnings is going down because the prices for Indonesia’s various export commodities are hit by the global economic slump. This is the deadly downward spiral that can pull the rupiah down into unknown depths.
On the positive side, Indonesia still has a good reputation in the market. This country will not be in difficulty to issue bonds in search for dollar liquidity, even in a turbulent situation. That was the reason of rupiah’s increase last week. The US$4.3 billion earned from government bond sales are flowing in. The rupiah appreciated to around Rp15,500 per US dollar last weekend, recovering after previously depreciating to over Rp16,400. However, Indonesia cannot keep filling holes by digging up new ones. The burden of interest payments can explode past the sustainable limit. Not only the rupiah’s value, our economy can be pulled into a downward spiral and completely drown.
One thing that can stop that deadly downward spiral is the end of the pandemic and a return to normal economic activity. So everyone who fight this outbreak, from the paramedics, health workers on the field to the highest level of decision makers, are not only fighting to save the lives of citizens. Early success of this fight will also determine Indonesia’s economy survival.