Testing times for corporate Indonesia

Jakarta

THE last time Indonesia faced such a deepening economic and social crisis was 22 years ago in 1998 when the country convulsed into chaos following the fall of President Suharto's New Order government.

Then as now, the rupiah plunged below 16,000 level to the US dollar; businesses shut down, and the streets of Jakarta became eerily quiet. The difference of course is this time round, there was no violent upheaval or riots; no transfer of political power and no students demonstrating on their campuses.

The sense of crisis, however, is just as real as President Joko Widodo and his Cabinet grapple with the twin threats of the Covid-19 public health crisis and a possible economic recession. Indonesia's economy is expected to grow by just 2.3 per cent this year under a baseline scenario, which would be the lowest since 1999.

The country's investment board reported Monday that incoming foreign direct investment (FDI) in the first quarter shrank 9.2 per cent from a year earlier in rupiah terms, as investors delayed business decisions due to the coronavirus pandemic.

The board's FDI data, which exclude investment in banking and oil and gas sectors, showed 98 trillion rupiah (S$9.1 billion) in investment for the January-March period.

According to Finance Minister Sri Mulyani Indrawati, the economy could contract by 0.4 per cent under the worst-case scenario if the economic lockdown drags on for a few months.

Under such a scenario, the rupiah may hover between 17,500 and 20,000 per US dollar - which would be a new historic low for the Indonesian currency, and surpass the level it reached after the 1998 financial crisis.

To forestall such a worst-case scenario, the government has announced a 405.1 trillion rupiah package to spend on health care, social safety nets and business recovery programmes. Under new regulations, the government has also been given the authority to raise its budget deficit beyond the previous limit of 5 per cent of gross domestic product (GDP).

Despite these measures, economists and market players are bracing for the worst in terms of corporate revenues and the ability of companies to ride out the storm, given a prolonged shutdown of the economy.

"The economic impact from the coronavirus will be much worse than in 2008 financial crisis," noted Harry Su, senior vice-president and head of Equity and Capital Markets at Samuel Sekuritas. "This time, apart from exports being hit and the rupiah also depreciating, domestic demand - which is the pillar of the economy - is also being hit."

As a result, he expects a severe downward revision of the growth forecast for 2020, and corporate earnings could fall by as much as 25-30 per cent on average this year.

Among the sectors that will be particularly hard hit are retail, food and beverage (F&B), tourism and aviation as domestic demand falls off the cliff. But even companies such as Unilever and Kalbe Farma will be affected by the depreciation in the rupiah as they face higher raw material costs.

"We will see bankruptcies as almost everyone is impacted in some way or another," Mr Su noted. "Companies will not be able to pass on higher costs to consumers, which means their margins will be hit."

Golden Truly Mall, a middle class department store and shopping mall in north Jakarta felt the brunt of the slowdown in consumer spending amid the city-wide shutdown almost immediately. According to Kenny Wirya, whose family owns Golden Truly Mall, business dropped by 70 per cent a week after Mr Joko issued stay at home orders.

"We closed the mall on March 23 as our business dropped sharply and some employees from our tenants did not want to come to work," Mr Wirya said. "In our mall, business has not even touched 5 per cent of normal sales because people are scared and the middle class is staying home." (see amendment note)

He added that the retail sector in Jakarta will have to will change the way business is conducted post Covid-19. "In the future, spending power will be impacted and people will stay away from malls," he said.

Unlike 1998, however, there is no mass panic within the banking system or among large corporations this time, noted Sumit Dutta, president director of PT HSBC Indonesia. Corporate lending remains robust while companies continue to maintain operations.

"We have not seen the kind of panic behaviour among companies such as pulling cash out of banks that we saw in the past," Mr Dutta said. "This points to the fact that companies are taking a more pragmatic view of the situation, and that there is confidence in the government."

Jaspal Sidhu, chairman and founder, SIS Group of Schools, a K-12 education enterprise with footprints in Indonesia and the region, has faced numerous challenges in his 30 years of working in Indonesia. The Singaporean entrepreneur has seen his education company grow from a single campus to multiple locations across Indonesia over that period but acknowledges that this time, the challenges are multifaceted.

"We are in unchartered waters, and companies that do not have a strong revenue model will be in trouble," he noted. "This crisis has brought back into vogue the fundamental business concepts of profit and loss, and I fear that startups that depend on valuation models will be in real trouble."

With his business based in Indonesia, both his income and expenses are denominated in rupiah which saves the group from currency exposure. "But my loans from the International Finance Corporation and World Bank are in US dollars so I have been on the phone with them every day to explore many options."

Having lived through many ups and downs of doing business in Indonesia, Mr Sidhu is confident the country and its economy will bounce back strongly once the public heath crisis subsides. All his campuses have moved to online learning but investors are still keen to explore possible tie-ups with his education group.

"Investors have not cancelled transactions. (We are) waiting and watching closely but this is a moment for the country to rise. I am optimistic. My projects have been delayed for a year but none of my projects have been cancelled," he noted.

As he noted, online learning and teaching is only a temporary solution and cannot replace the experience that young children gain from going to school.

Amendment note: An earlier version of this article stated that many of Golden Truly Mall's employees did not want to go to work. Mr Wirya has clarified that they were in fact employees of the mall's tenants.