Flight to Safety in a Prolong Pandemic
Yopie Hidayat (Contributor)
PUNDITS grim predictions in the early days of Covid-19 pandemic has seemingly been proven. This pandemic will be a long one. Many countries, such as Britain, have been caught off-guard by a second wave. Meanwhile in emerging markets such as India and Indonesia, the pandemic did not even have the chance to subside; instead, it consistently intensified and continued to gnaw the economy.
The government must accept reality. Seeing the economy slow down at the end of the third quarter, the ministry of finance has revised growth projections for this year. The Indonesian economy is predicted to contract by 1.7 percent in 2020, going worse from the previous prediction of 1.1 percent.
Government growth projection is now even lower than the Asian Development Bank’s prediction of minus one percent. But there is a far bleaker scenario. In June, the Organization for Economic Cooperation and Development (OECD) has calculated that the Indonesian economy can shrink by 3.9 percent if the pandemic does not subside.
It is not easy to tell which prediction will be closer to the mark. And there is one more consideration that adds to the pessimism in Indonesia’s economic projections: its track record. For more than the past decade, the economic output in this country in the fourth quarter of the year, from October to December, has always been lower compared to the previous quarters. This is the seasonal factor that always comes with long holidays at the end of the year. In the pinch of the Covid-19 pandemic, it is almost impossible for Indonesia’s economic habits to change completely. That would only be possible if the government can give away massive spending.
The problem is, in Q4 2020, the pandemic is intensifying. The tighter version of Large-Scale Social Restrictions (PSBB) policy is back in effect. Retail, restaurants and entertainment businesses are hit hard. The tourism industry, which normally enjoys a windfall at the holiday season, must continue their dry streak. So even if the government does spend massively, the effects on the economy may not be optimal. Limited mobility and human interaction will hamper the wheels of the economy.
And the government cannot just force looser restrictions. When the pandemic is not over, less social restrictions can be very dangerous for public as well as economic health. That has been proven everywhere, for Indonesia is not the only one facing this dilemma. From Europe to America, the tug-of-war between policies to allow or restrict activities in response to the pandemic has always been heated. The United States Federal Reserve Chair Jerome Powell has bitterly conveyed the situation in his report to the US Congress on September 22. Powell reminded that the road to economic recovery is long and uncertain.
As always, when Powell speaks, the market listens. The signal from Powell that the situation is uncertain will certainly push investors to take a flight to safety. Investment funds are moving back to their safe haven: the US dollar. On Friday, September 25, the Dollar Index, which reflects the exchange rate of the US dollar against the six main global currencies, is recorded at 94.62, rising 2.56 percent in the last month. The signal from the Fed that interest for US dollars will be low to minimal for the next two years has not diminished investors’ desire for safety.
It is not a surprise if the rupiah continues to be under pressure. The rupiah exchange rate is still hovering to the psychological threshold of Rp15,000 per US dollar. Demand for government bonds is growing weaker. Global investors are back to net sale territory. According to data from the ministry of finance, as of September 23, foreign investors own 28.1 percent of all government marketable bonds. This portion of foreign ownership is much lower compared to the pre-pandemic position of 38 percent.
It is not impossible for this situation to continue until next year. The pundits only predicted that the pandemic will be long. For exactly how long, no one has dared to ascertain.