Corporate Indonesia headed for dark 12 months as demand dries up

Jakarta

WITH the Covid-19 pandemic showing no signs of abating, Corporate Indonesia is facing a bleak 12 months as consumer spending slows significantly and demand dries up on the back of large-scale social distancing measures imposed by the government.

Indonesia has recorded over 311,000 confirmed cases of Covid 19 with nearly 11,400 deaths as of Wednesday evening, the highest in South-east Asia. The majority of the cases - more than 80,000 - are in the capital Jakarta.

The country is expected to see a deeper economic contraction in the third quarter after it recorded a decline in GDP growth for three consecutive months for the first time since the 1998 Asian financial crisis.

The Consumer Price Index (CPI) fell 0.05 per cent in September from a month earlier driven by lower food prices and airline fares, according to the Central Statistics Agency (BPS).

"The supply side is strong but unfortunately purchasing power remains weak," BPS head Suhariyanto told reporters at a virtual press conference on Sept 30. "When we observe the developments in commodity prices in September, in general they declined across the board."

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As consumer spending falls sharply, the impact on corporations is already reverberating in terms of profitability and lower earnings outlook going forward.

Covid-19 has hit even the most resilient businesses such as food producers, said Harry Su, the vice-president of Samuel Securities.

"Most businesses will not emerge unscathed from the pandemic," he told The Business Times. "Consumer spending is down sharply and even the top businesses are bracing for slower earnings and even losses."

He added that listed companies are looking at a 40 per cent fall in earnings on 2020 with a slight recovery in 2021 but that would be dependent on the discovery of a vaccine.

"According to my banking analyst, even BRI (Bank Rakyat Indonesia), which is one of the most resilient banks in the country, booked a minus 44 per cent in earnings this year."

Recent data from IHS Markit, which tracks manufacturing activity, showed Indonesia's manufacturing PMI also worsened in September due to the large-scale social distancing measures.

The index fell by nearly four points from 50.8 in August to 47.2. This marked the index's first drop since April, at a time when the global pandemic was peaking.

A PMI below the neutral threshold of 50 points indicate a contraction and reflects deterioration in the gains achieved by the PMI in recent months.

IHS Markit chief economist Bernard Aw said the latest PMI data indicated a new deterioration in factory conditions in September with sales and production declining solidly at the end of Q3 following an increase in August.

The index also showed a decrease in demand, which caused production to fall back down.

Additionally, job creation has fallen for seven consecutive months with the rate of layoffs accelerating over the same period. Companies have also reduced purchasing and inventory activities as part of an effort to control expenses.

As the number of Covid-19 cases continues to rise exponentially, President Joko Widodo and his government are struggling to meet the twin challenges of mitigating the health pandemic and preventing an economic collapse.

By most estimates, the Indonesian economy will contract by 5 per cent this year and the absence of social security means that millions of Indonesians face unemployment and hunger.

Large-scale social distancing measures have robbed many lower middle income workers of their economic livelihood as they depend on economic activity for their daily survival.

Shinta Widjaja Kamdani, the CEO of Sintesa Group and deputy chairman of the Indonesia Chamber of Commerce and Industry, said that the re-imposition of large-scale social distancing has forced employers into survival mode and many businesses are struggling to keep afloat.

"Many of us are now in survival mode and we need to be resilient. The most important thing is to preserve cash, have better cash flow management, control or balance the supply and demand, and undertake business transformation either through digital adoption or resetting the existing business model and operations," she said.

"The government has to balance between imposing a total lockdown and keeping the economy running," noted Fauzi Ichsan, an economist and former chief executive officer of the Indonesia Deposit Insurance Corporation from 2015-2020. "The challenge is preventing death rates from shooting up and the economy from sinking too low."

To keep the rate of new infections in check, public discipline in following health protocols is critical.

But as noted by the head of Public Communications of the National Police, Jaya Yusri Yunus, many Jakartans continue to flout the rule and break health protocols.

To date, the police have handed out fines and sanctions to over 82,000 people during the recent Operation Yustisi in the national capital to monitor public discipline following the implementation of strict health protocols.

"We have closed many food and beverage outlets as well as restaurants that flouted the health protocols," said Mr Yunus. "Many restaurants are still offering dine-in services which is forbidden."

The current large-scale social distancing protocols are scheduled to end on Oct 11 but could be further extended by Jakarta governor Anies Baswedan if infections rates do not come down.