Worst Case Scenario: COVID-19 and Indonesia’s Economy

Daftarsbmptn.com – Coronavirus or COVID-19 has only been spreading since the beginning of March in Indonesia. But the impact has hit various economic angles. The stock market index fell, the rupiah fell, and actors in the real sector? They cried. Hard. World financial institutions, economists, and government authorities make numerous predictions. The Indonesian economy could enter into the worst case scenario if it did not properly handle this pandemic.

In trading on Tuesday (3/24), the composite share price index closed down 1.3% at 3,937. Throughout this week, CSPI has touched its lowest position for the past eight years. JCI had fallen at the level of 3,000, namely on June 24, 2012 at 3,955.58

To stem the widespread impact of COVID-19  in the capital market, the Financial Services Authority (OJK) released several policies. Among other things, halt trading  or freezing for 30 minutes if the CSPI fell 5%. Halt trading for the  first time in the history of the Indonesian capital market took place on Thursday (12/3) and has happened five times since then.

Then, the FSA asked PT Indonesia Stock Exchange, PT Indonesia Clearing and Guarantee Corporation, and PT Indonesian Central Securities Depository to cut operational time. This step is an adaptation of Bank Indonesia’s policy which shortens the operational hours of the BI Real Time Gross Settlement (BI-RTGS)

Starting March 30, 2020, trading time on the stock exchange is divided into two sessions. The first trading transaction starts at 09.00 until 11.30 and the second session starts at 13.30 until 15.00. While the working day remains from Monday to Friday.

Not only crashed the capital market, coronavirus also dropped the rupiah exchange rate. On Monday (3/23), the selling price of the US dollar in five major banks broke through Rp 17 thousand. While the Jakarta Interbank Spot Dollar Rate or JISDOR reference rate places the rupiah at 16,608 per US dollar.

Quoting Bloomberg, the weakening of the rupiah is the deepest in Asia. That figure is also the lowest since the crisis in July 1998. The following day, the rupiah only strengthened 0.45% to as low as 16,500 per US dollar.

Bank Indonesia noted, the flow of foreign capital out of Indonesia since the beginning of the year reached Rp 125.2 trillion amid fears of a coronavirus pandemic.

“This month there was an  outflow of Rp 104.7 trillion of a total of Rp 125.2 trillion,” BI Governor Perry Warjiyo said in Jakarta on Tuesday (3/24).

This decline does not seem to be stopped because the COVID-19 outbreak in Indonesia is getting wider. Cases and victims of corona continue to fall in various regions.

Different Economic Scenarios dan Potential Recession Due to COVID-19

In a research entitled  “The Global Macroeconomic Impacts of Covid-19”, economists at the Australian National University, Warwick McKibbin and Roshen Fernando predicted extraordinary emergency. Both mentioned the coronavirus’ impact was far worse than the Spanish Flu which in 1918-1919 became the deadliest pandemic in history by taking 40 million lives.

The economic impact of COVID-19 is estimated to reach US $ 2.4 trillion or around Rp 39,304 trillion. Much greater than acute respiratory disease SARS which in 2003 cut the world economy by US $ 40 billion or Rp. 656.72 trillion.

The two economists made seven scenarios based on the distribution of the coronavirus, cases and the number of deaths. Scenarios one to three if COVID-19 only occurs in China and are temporary. Scenarios four to six if coronavirus spreads throughout the world and is temporary. Whereas in scenario seven, when the coronavirus outbreak extends worldwide and on a mild scale, it recurs in the coming years. They make a prognosis based on five factors shock.

The first is equity risk premium or capital market shocks. Then there is labor supply, production costs, consumption demand, and government spending. Broadly speaking, Indonesia faces the risk of an increase in equity risk premium, a decrease in labor supply, an increase in production costs, a decline in demand, and an increase in the budget. Based on the simulation, both of them estimate that Indonesia’s economic growth in 2020 will be corrected by 1.3% in scenario four; 2.8% in scenario five; 4.7% in scenario six, and 1.3% in scenario seven.

Previously, in the 2020 State Budget and Expenditure, the government targeted economic growth of 5.3%. With a four scenario only, Indonesia’s gross domestic income (GDP) will fall in the range of 4%. As of Tuesday (3/24), the number of positive COVID-19 patients in Indonesia was 686, 55 of whom died. Although it is still far from the number of 647 victims in scenario four, the government must try hard to suppress the victims.

McKibbin and Fernando said the impact of the disease outbreak on labor supply was not limited to death. Because, in addition to sufferers being unproductive, the performance of family members who care for them will be affected. Moreover, around 70% of female workers are also responsible for household survival, including the health of family members.

In the case of COVID-19, the recommended quarantine period is 14 days, more than the employee’s annual leave. The more workers infected, the higher the production costs borne by the company. This condition was exacerbated by the constraints on imports of raw materials and capital goods from China which became a pandemic epicenter.

In the end, the price of goods goes up. An increase in the price of goods, plus a decrease in income due to illness (if not laid off) is a fatal combination of purchasing power beaters. The government must anticipate the decline in consumption which has been supporting Indonesia’s economic growth. So, the key is budget reallocation.

The government needs to accelerate the submission of the draft 2020 State Budget and encourage local governments to do the same. If that is not done, the government can practically only use an emergency response fund of 5 trillion rupiah.

Seeing these various scenarios, Indonesia’s economy in 2020 and the coming years will be very dependent on handling the corona virus pandemic. The worse the treatment, the victims will continue to fall and it is difficult to stem the economic impact.

Gloomy Projection of Minister Sri Mulyani

The government does not understand the magnitude of the impact of the corona virus on the economy. President Joko Widodo has ordered budget relocation.

Finance Minister Sri Mulyani Indrawati also explained several scenarios. According to her, the most moderate scenario is when the COVID-19 pandemic can be dealt with immediately so that the Indonesian economy can still grow above 4%.

However, she is also preparing to face worse conditions if the duration of the pandemic reaches 3-6 months. According to her, restrictions on flights and disrupted international trade activities will have a major impact on the Indonesian economy.

If that happens, “Economic growth can be in the range of 2.5%, even 0%,” Sri Mulyani said when giving a press statement on the results of the Financial System Stability Committee (KSSK) meeting via  video conference  in Jakarta last Friday (20/3).

The government also discussed changes in the state budget through a video conference with the leader of the Supreme Audit Agency (BPK).

“We discussed the revision in the implementation of the National Budget related to health management,  social safety nets , aka social safety net, and economic incentives for MSMEs due to the impact of the corona virus,” said BPK I Member Hendra Susanto, Monday (3/23).

In the conference, there were President Jokowi, Minister of Finance Sri Mulyani, Minister of State Secretariat Pratikno, and Cabinet Secretary Pramono Agung.

A day later, Bank Indonesia Governor Perry Warjiyo stated, Sri Mulyani was preparing to immediately make the revised State Budget. The government is preparing a major change due to the corona pandemic.

“Both regarding macro assumptions and budget implications, and of course how to communicate with the Parliament,” said Perry.

Global Burnout

Indonesia is not alone. In February, the Asian Development Bank or ADB warned of a potential global economic loss of US $ 347 billion or Rp5,697 trillion due to the corona virus.

ADB Chief Economist Yasuyuki Sawada explained, there was a lot of uncertainty regarding the spread of the corona virus including its economic impact. This requires several scenarios to provide a clearer picture of the consequences of co-19.

ADB makes a number of scenarios related to losses that can arise due to the corona virus. In the basic scenario, the virus is estimated to cause a loss of US $ 77 billion and cut global economic growth by 0.1%.

In a moderate scenario, economic losses are estimated at US $ 156 billion and erode world economic growth by 0.2%. While in the worst case scenario, economic losses could reach US $ 347 billion and cut world economic growth by 0.4%.

“We hope this analysis can support the government as they prepare a clear and decisive response to reduce the human and economic impact of this outbreak,” Sawada said in an official statement, Friday (6/3).

Likewise, The Organization for Economic Co-Operation and Development (OECD) lowered the projected global economic growth. The OECD cut its economic growth forecast this year by 0.5% to 2.4%. The growth slowed from 2019 which was 2.9%.

Meanwhile, the S&P Global Rating Agency projects a corona virus pandemic that is spreading rapidly around the world causing economic losses of US $ 211 billion or around Rp 3,463 trillion. The economies of Japan, Hong Kong, Singapore and Australia are said to be the most affected.

S&P cut its growth forecast for China this year to 4.8% from the previous estimate of 5.7%. Australia’s growth is forecast to slow to only 1.2% from 2.2% last year. While Japan and South Korea will be affected by slowing economic growth, respectively 0.5 and 1%.

“The risk balance remains a downside because local transmissions, including in countries with low reported cases, secondary transmissions in China when people return to work and financial conditions are getting tighter,” S&P was quoted as written by Reuters.

12 tanggapan pada “Worst Case Scenario: COVID-19 and Indonesia’s Economy”

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  3. How has the COVID-19 pandemic impacted various economic aspects in Indonesia, such as the stock market, currency value, and the real sector, and what predictions or assessments have been made by financial institutions and government authorities regarding the potential consequences for the Indonesian economy?
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