Ari Kuncoro: Opportunity to Minimize the Impacts of Recession
Delli Asterina ~ FEB UI Public Relations Officer
DEPOK, Monday, 20/7/2020 – Kompas daily published an article written by Prof. Ari Kuncoro, Ph.D., Universitas Indonesia’s rector and professor at the Faculty of Economics and Business, Universitas Indonesia, entitled Opportunity to Minimize the Impacts of Recession. Below is the article.
Opportunity to Minimize the Impacts of Recession
The rise in early indicators may not be able to prevent negative growth in the second quarter of 2020, but is expected to be sufficient to build recovery momentum for the third and fourth quarters to minimize the impacts of recession.
Like an orchestra, several international institutions, such as the Organization for Economic Cooperation and Development (OECD), the World Bank and the International Monetary Fund (IMF), revised down world economic growth forecast for 2020, including for Indonesia. The revision was a departure from the optimistic tone when countries opted for a strict lockdown policy, that the economy would rebound quickly in a matter of one quarter.
Compared to other international institutions, the OECD is among the most pessimistic, predicting that the global economy will experience a negative growth of 7.6 percent.
Meanwhile, the US and OECD countries are expected to contract by 8.54 and 9.29 percent. In fact, countries that previously came under international media spotlight because they were considered successful in handling Covid-19 were not excluded from the pessimistic picture.
New Zealand, for example, is expected to pay for its successful handling of the pandemic with a minus growth of around 10 percent. Australia, its neighbor, has the potential for a negative growth of minus 6.33 percent.
Equilibrium of low growth
The OECD predicted that Indonesia will enter the equilibrium of low growth within the range of minus 3.86 to minus 2.0 in 2020. Interestingly, the World Bank is still more optimistic about the zero percent growth projection for Indonesia, compared to the OECD and the IMF, which predicted a growth of minus 0.3 percent for Indonesia.
The OECD also predicted that Indonesia will enter an equilibrium of low growth within the range of minus 3.86 to minus 2.0 in 2020.
However, the World Bank also notes that Indonesia may grow by minus 3.5 percent if the large-scale social restrictions (PSBB) last for four months. Meanwhile, the Asian Development Bank (ADB) is still more optimistic compared to the OECD, although it has revised down its projection for Indonesia from 2 percent to minus 1 percent.
This warning can be interpreted as a signal when it is the best time to relax regulations. This pessimistic picture is confirmed by other data describing the situation in the second quarter. On the public side, the consumer confidence index (CCI) is in the negative zone. Indonesia’s CCI in May published by Bank Indonesia (BI) showed that consumers were increasingly pessimistic.
CCI decreased to 77.8 from 84.8 in the previous month. The pessimism was caused by a decline in the desire to buy durable goods, travel long distances/holidays and leisure, which were mainly due to concerns about employment availability. As a result, the national fuel demand, for example, fell by 34.9 percent in April.
The Eid al-Fitr holiday failed to significantly boost economic activity. Fuel consumption dropped 18 percent compared to normal conditions before the pandemic. Car sales in May plunged by 95 percent year-on-year after a 90 percent decline year-on-year in April.
In mid-May, about two months after the PSBB were put in place, the Ministry of Manpower, LIPI, and the Demography Institute of FEB UI, conducted a survey on the impact of the corona virus on workers in Indonesia based on gender, age and education to determine the economic resilience of the people.
The survey results show that 40 percent of independent entrepreneurs who are also part of the informal sector, including small and micro enterprises, have quit their business and 52 percent experienced a decline in business. To meet their daily needs, 41 percent rely solely on odd jobs.
To meet their daily needs, 41 percent rely solely on odd jobs.
The survey predicted that self-employed individuals can only last a maximum of two months or until July, starting from the time the survey results were published. Meanwhile, 55 percent of independent workers were unemployed and 38 percent said job orders had decreased. Furthermore, 58 percent had lost their income and 38 percent said their income had decreased by more than 30 percent.
According to the 2019 National Labor Force Survey (Sakernas), there are 26 million self-employed and 26.5 million independent workers/people working for family business. As of May, if the pandemic persisted, 10 million people who run independent business will stop working.
This means the situation does require a different approach to pandemic handling.
Businessmen also bear the brunt of the pandemic. As many as 57.1 percent of respondents admitted that their business was still running, but income and production had decreased. The number of respondents who said their business had grounded to a halt was quite significant, 39.4 percent. Only 3.5 percent said their business was not affected or even fared better.
In order to survive, 13.9 percent of respondents were forced to lay off workers while 49.6 percent put employees on furlough. The majority (41 percent) said their business could only last up to three months from April/May, which means that in July/August there will be mass bankruptcies if the economy does not rebound.
The survey also revealed the situation faced by labors /workers. As many as 15.6 percent were laid off. Of the total, 13.8 percent did not receive severance pay. By sector, the construction sector laid off the largest number of workers (29.3 percent), followed by trade, hotels and restaurants (28.9 percent).
Minimizing the impacts of recession
To prevent an equilibrium of low growth, the government has made several efforts, ranging from social protection for the poor and vulnerable groups, protection for MSMEs, relaxation of the banking sector, to relaxation of the fiscal deficit and issuance of regulations on the supervision of the national economic rescue package.
As many as 57.1 percent of respondents admitted that their business was still running, but income and production had decreased.
However, in every crisis situation, relying solely on government stimulus policies will highly risky because decision making in an uncertainty is an uncertainty in itself. In economic theory, this is equated with stochastic processes starting from design, reconciliation, to legislative processes, which have the potential to delay policy implementation (Bayraktar and Egami [2019]).
This is indicated by the low budget absorption by several ministries, much to the exasperation of President Jokowi. It seems that the government has taken into account the delay in budget absorption by setting the growth target at minus 0.4 to 1 percent for 2020.
The weakening of the economic resilience of the public and the business world calls for complementary strategies to revive the economy before the effects of economic stimulus policies can be felt.
Prevention of the spread of the corona virus has deeply affected the pillars of the economy as it takes the form of restriction on the meeting between the demand and supply sides through lockdown policies from the most stringent to the most flexible, the requirement to work from home, study from home, the restriction of human mobility, and so on.
Even without those measures fear of catching the virus has prompted people to reduce their activities, thus further hurting the economy. Various government policies, including encouraging the use of information technology, are aimed at bringing together the supply and demand sides of the economy.
However, public fear needs to be minimized through new ways of interaction that prioritize clean and healthy living habits. In this context, the new normal is a way of reprogramming public behavior very much like Arnold Schwarzenegger in the movie Total Recall.
Of course, this is not without risks because many also feel that with the new normal, the virus will have disappeared or conquered so that the returns to old behavior has the potential to increase transmission. The growing popularity of biking reflects a shift in people’s lifestyle towards healthy and clean behavior that has also brought a breath of fresh air to the domestic bicycle industry that is preparing to conduct layoffs.
The growing popularity of biking reflects a shift in people’s lifestyle towards healthy and clean behavior that has also brought a breath of fresh air to the domestic bicycle industry that is preparing to conduct layoffs.
However, without rules and regulations, as evidenced by the large crowds on car free days, these new healthy habits have the potential to increase transmission. This calls for the possibility of reintroducing tightening measures, as is the case of Arizona, Texas, South Carolina and Florida in the US as well as Victoria in Australia.
The new normal was announced after a period of promotion in early June, which signaled that the PSBB would be relaxed. This is a signaling game strategy (Drazen [1998]). It is safe to say that Eid al-Fitr served as the starting point of the the new normal.
The impact of this new atmosphere can be seen in several early indicators. Although still in the pessimistic zone, public expectations are moving towards a positive direction.
The June CPI increased to 83.8, triggered by increased consumer optimism regarding economic conditions in the next six months as indicated by a sharp increase in the consumer expectations index (CEI) from 104.9 in May to 121.8 in June. However, there is still little interest in durable goods.
The purchasing managers index (PMI) for the manufacturing sector also rose from 28.6 in May to 39.1 in June. Although it is still below 50, bordering between pessimistic and optimistic, it is a significant improvement.
The business confidence index (BCI), despite a decline from 105.33 in April to 104.82 in May, remains in the optimistic zone. Thus, in general, the business world is ready if there is an increase in public demand.
The Financial Services Authority (OJK) announced that the realization of credit restructuring reached its peak in April and May as the effects of the relaxation of the PSBB began to be felt in June with economic and business activity picking up pace. Some customers see it as a new opportunity and opt to substitute credit restructuring with a restructuring with a shorter period and an additional working capital loan.
In terms of budget financing, BI will bear 53.9 percent of the interests of government securities for public goods and MSME financing.
The government and BI have also closed the loop to strengthen signals of new normal. In terms of budget financing, BI will bear 53.9 percent of the interests of government securities for public goods and MSME financing. The rise of these early indicators may not be able to prevent negative growth in the second quarter of 2020, but is expected to be sufficient to build a recovery momentum for the third and fourth quarters to minimize the impacts of recession.
Ari Kuncoro, Rector of Universitas Indonesia.
Source: Kompas daily, Tuesday, July 21st, 2020 edition.
(lem)