Not Quite a 1998 Deja vu
Yopie Hidayat (Contributor)
THE government has finally found the courage to say the bitter truth about Indonesia’s economic condition. Latest projections show growth figures that are much worse than initial forecasts. Instead of growing, in the second quarter of 2020 ending this June, the government has projected that Indonesia’s economy will contract by 3.8 percent.
The situation due to the Covid-19 pandemic is indeed dire. However, it is an exaggeration to say that it is worse than the 1998 crisis, as President Joko Widodo said in his meeting with police and army veterans at Bogor, on Friday, June 19. The economy today is still better off. Foreign reserves are relatively stable at over US$130 billion at the end of May 2020. Because of it, the rupiah exchange rate is also holding steady, even trending positively this June.
One reason for rupiah’s stability is the government’s success in attracting US dollars through selling sharia bonds totaling US$2.5 billion. Thus far, during the pandemic, the government has taken US$6.8 billion in additional debt. Previously in April, the government has also sold dollar-denominated bonds totaling US$4.3 billion. The abundant liquidity of US dollars because the Federal Reserve is printing dollars without limit is one contributing factor preventing the economy from completely breaking down like in the 1998 crisis.
Indonesia’s banking system is also relatively sound so far. Various ratios that measure the industry healthiness are still in the green, even though the credit restructuring program has yet to be implemented smoothly and its regulations were only finished last week. This is the biggest difference from the 1998 crisis, which started from the collapse of the banking system that destroyed trust in the Indonesian economy, sparked riots and ultimately led to the president stepping down.
Even so, the current economic decline cannot be underestimated. Just look at one of the most important indicators: exports and imports. Throughout May, Indonesia’s export earnings were only at US$10.53 billion, down 28.95 percent compared to May 2019. At the same time, import realization had an even bigger drop, falling by 42.2 percent. This is the steepest decline in both exports and imports since 2009.
The fall in imports must also be seen as a sign of lower activity in the manufacturing sector, because a large part of the raw materials in domestic industries are imported. That is reflected in the lower IHS Markit Indonesia Manufacturing PMI. This index measures industry activity by looking at various indicators of raw material purchases. In April, this index reached its all-time low of 27.5, and in May there was a slight increase to 28.6. As a note, an index of 50 is the dividing line between contraction and expansion. In other words, in April and May, there were deep contractions of activity in Indonesia’s manufacturing sector.
The decline in car production, which involves a very extensive supply chain, can also be an example of an industry-wide slump. Throughout May, the automotive industry only produced 2,627 vehicle units, down 88 percent from April’s production of 21,434 units.
But the worst victim of the pandemic is the central government’s fiscals. Expenditures are soaring extraordinarily while earnings are falling sharply because of encumbered economic activity. To fund it all, the government has to take on more than Rp1,600 trillion in debt throughout 2020.
So, President Jokowi might intentionally brought up the 1998 crisis to emphasize how dire the current situation is, and to build a sense of crisis among all government officials. Without extraordinary steps, it is not impossible for Indonesia’s economy to decline even further. Simply resuming economic activity to a new normal seems to be insufficient in preventing a repeat of the 1998 crisis.