Indonesia poised for strong economic rebound in 2021

Jakarta

OF all the countries in South-east Asia, Indonesia - the region's largest economy - has been the hardest hit by the novel coronavirus pandemic, with over 623,000 cases as at Monday and the death toll fast approaching the 20,000 mark.

On the economic front, however, there is some good news, with Indonesia poised to be the fastest-rising economy in Asean in 2021 and the second-fastest in the world after China.

This is according to a recent report put out by the Organization for Economic Co-operation and Development (OECD), which noted that - with the US and Europe battling fresh waves of Covid-19 infections - the global economy will grow by 4.2 per cent in 2021, having contracted by the same degree this year.

"The recovery will be uneven across countries and sectors and could lead to lasting changes in the world economy," the Paris-based OECD said.

"Countries with effective testing, tracking and isolation programmes and where effective vaccinations can be distributed rapidly should perform relatively well, but a high degree of uncertainty persists."

The OECD said that Indonesia's GDP will soar by 7.9 per cent in 2021, just a shade behind China's projected growth of 8 per cent. The third-fastest rising economy next year is predicted to be France, with 6 per cent growth.

Indonesian business leaders and policymakers will be glad to see the back of 2020 given the huge economic and social pain the country has had to endure through nine long months of lockdowns and harsh movement restrictions.

To ease the burden on businesses and households, the government in June unveiled a US$47.6 billion stimulus package to boost the virus-battered economy.

The extra spending was directed at strengthening the healthcare system, spending on social protection to boost consumption and providing incentives to rescue businesses from bankruptcy and workers from layoffs.

Finance Minister Sri Mulyani Indrawati said that GDP growth for 2020 would contract by 0.4 per cent in the worst-case scenario, with the International Monetary Fund projecting a contraction of 1.5 per cent.

The country, however, seems to have weathered the storm better than many other developing and even developed countries.

Although the government's budget deficit will exceed 3 per cent of GDP this year and the debt to GDP ratio is likely to be around 35 per cent, President Joko Widodo and his government have responded to the crisis with prudent macro-economic policies.

Part of Indonesia's better than expected mitigation of the negative impact of the pandemic is its traditional resilience, especially among small and medium-sized enterprises (SMEs), the historical backbone of the economy.

The government's stimulus package helped many of these thousands of SMEs stay afloat.

Another factor that worked in Indonesia's favour, according to George Iwan Marantika, chairman of the Indonesia-Australia Business Council, was the president's ability to maintain political and social stability

"From a political standpoint, the current government is solidly in power. There is no real opposition despite the pandemic but the government must address the morale of the medical community which is low due to the longevity of the crisis and its impact on doctors," he said.

With the passing of the new Omnibus Law on Job Creation, investors and business owners have also been buoyed by the opening of new sectors to foreign direct investments and regulatory reforms outlined in the legislation.

Amounting to more than 1,000 pages, the legislation is the most far-reaching attempt at structural reforms attempted by the country in more than 50 years.

"We are seeing Indonesia move quickly in new sectors that are not overly regulated and not dominated by state-owned enterprises," said James Castle, founder and chairman of Castle Asia.

"This is not a coincidence as the services sector, especially education, healthcare and tech offer huge opportunities."

He added, however, that Indonesia should not be afraid to attract talent and welcome experts to work in these key sectors.

"I hope that we can stay away from the emotional rhetoric of foreigners taking over Indonesian jobs."

Mr Castle, an American business consultant who has been in Indonesia for over 40 years, is optimistic on Indonesia's economic outlook for 2021.

He reckons the economy will expand by between 4 and 5 per cent - much lower than the OECD's forecast of 7.9 per cent - although he added the potential to hit 7 per cent is there.

"I am very impressed by this government which says we have to compete; that our healthcare and education sectors are sub-standard and we have to improve," said Mr Castle.

Analysts say the one area where the government needs improvement is in communications, especially with the international investor community.

Wijayanto Samirin, a former economic adviser to the vice-president, shared Mr Castle's view that the economy is likely to rebound and grow by 5 per cent in 2021.

He warned, however, that post Covid-19, household, corporate and government debt will need to be carefully watched and that the cost of servicing the debt will dampen GDP growth.

"Covid-19 will last longer in Indonesia as we have not reached the peak with the number of infections still rising daily," he noted. "This will delay and slow down the economic recovery."

Touching on the Omnibus Law, Mr Samirin said that many of the provisions were included in the 16 economic packages announced by the government over the past five years but lacked proper implementation.

"The law provides new opportunities, but implementation is the most crucial challenge. Strong vertical and horizontal silos exist in the Indonesian bureaucracy," he said.

"Without the ability to eliminate those silos, the Omnibus Law will not create positive impact but could promote regulatory uncertainty."

With pent-up consumption likely to only fuel a short-term economic growth spurt, investors and businesses alike are betting on a longer-term sustainable growth trajectory once again for Indonesia after a number of false starts.