Navigating The Economy Through The Raging Delta Variant
By Kiki Verico, Industry and international trade adviser to the finance minister and a lecturer at the University of Indonesia School of Economics and Business. The views expressed here are personal
TheJakartaPost – (Wednesday, August 11 2021) Statistics Indonesia (BPS) released on Aug. 5 the country’s economic indicators for the second quarter of 2021, which saw the economy grow 7.07 percent year on year (yoy), a dramatic change from the first quarter contraction of minus 0.71 percent.
In addition, Bank Indonesia data showed that the inflation rate averaged 1.48 percent in the second quarter of the year, up from 1.43 percent in the first quarter.
The economic growth and the increase in the inflation rate confirm that Indonesia’s economy was on a remarkable recovery path in the first semester of 2021.
Other essential outcome indicators also underscored Indonesia’s substantial progress. The open unemployment rate declined from 7 percent in August 2020 to 6.02 percent in February 2021. The poverty rate dropped from 10.19 percent in September 2020 to 10.14 percent in March 2021, and over the same period, the Gini ratio measuring income inequality dipped from 0.385 to 0.384. At the village level, the Gini ratio stood at 0.317, better than the pre-pandemic level of0.320 in March 2020.
The combination of a decline in income inequality and a low inflation rate indicates that Indonesia’s countercyclical fiscal policy was effective in supporting and stimulating the economy amid the pandemic. The government’s budget refocusing and timely tax relief worked well to make this positive outcome happen.
Such progress was seen not only from empirical data but also survey findings. A survey on Japanese firms in Asia and Oceania and conducted by the Japan External Trade Organization (JETRO) in late 2020 found potential rises in 2021 business profit in Indonesia. This expectation influenced companies to increase, or at least maintain, their investments in Indonesia, with the three most attractive sectors being trade, automotive and iron and steel.
The two strongest reasons for investors to stay were Indonesia’s market size and its high economic growth potential in 2021. Aside from fellow ASEAN states Vietnam and Thailand, Indonesia was predicted to record high export value in 2021.
From the perspective of longterm investments, Indonesia was classified as a “fascinating” destination country after China and Thailand. As for investing in digitid economies, Indonesia was categorized along with Singapore and Vietnam as the most promising markets. Indonesia also followed South Korea as the most probable countries to achieve significant recovery in the second quarter of 2021.
Indonesia’s economic growth can also be seen in the increasing trend from April to June 2021. On the production side, Indonesia’s purchasing managers’ index (PMI) showed positive movement from 54.6 in April to 55.3 in May, and then slightly slowed down in June. On the consumption side, Indonesia’s consumer confidence index increased consistently from 101.5 in April to 104.4 in May and to 107.4 in June.
These achievements confirmed all positive expectations for the country’s economy, which had been anticipated since the end of 2020. However, the Delta variant that fueled the second wave of COVID19 in Indonesia has posed a challenge to all ot these improvements.
Prior to the arrival of the new strain, new daily infections increased 1.3 times in just over a week from 10,617 cases on Jan. 8 to 14,224 cases un Jan. 16. But within the same time span, the Delta variant caused the transmission rate to jump 1.5 times in June until it peaked on July 15 with more than 56,700 cases. The international media branded Indonesia as the pandemic’s new epicenter due to the spike.
This Delta variant has heen addingmore pressure on the third quarter than it did on the second quarter, but hopefully it will ease in the fourth quarter, just like we experienced last year. The notable economic achievements in the second quarter will surely become much-nedded valuable reserves to lessen the pressure in the third quarter.
Indonesia’s economy has a typical growth pattern in that anytime the pandemic is contained, economic growth increases even more on the three major essential sectors of manufacturing, construction and business services to lead an upsurge across value-added sectors.
In contrast, when the number of infections surges, Indonesia’s economy starts to depend on the lower value-added sectors of information and communications technology (ICT) as well as utilities, health and social services.
This pattern confirms that containing the pandemic is the necessary condition for economic activities and recovery to progress. In addition, Indonesia’s agriculture sector is the most resilient and agile in both situations, with transportation, trade, accommodation, food and beverage, and finance being the most compatible sectors in the digital economy.
The year-on-year data shows that the economy depended on government expenditure and net export in the first year of the pandemic. Net export requires strong manufacturing and service sectors, so vaccinating workers in the essen lial sectors is vital to reducing local transmission, supporting export performance and sustaining the global production network. These efforts must be done symmetrically across all countries because the global production network spans across national borders.
Given the Delta variant, at least three necessary conditions must be met to achieve better economic performance: first, acceleration of the national vaccination rollout; second, sufficient testing, tracing and treatment (3T); and third, stringent public compliance with the 5M health protocol of maskwearing, handwashing, physical distancing, avoiding crowd avoidance and reduced movement.
The factors vital to successfully containing the pandemic depend on persistent efforts from both the government and the people. The government is responsible for enhancing the vaccination and 3T rates, while the people are responsible for following the 5M protocol.
The government and the people must work together closely, since they are utterly complementary. During the mobility curbs, the government budget works more for those who need it the most. The budget allocation for the National Economic Recovery Program was increased from 2020 to 2021, with the highest budgetary increases in social security and public health. This priority shows how important pandemic containment is for the government and the people.
The quicker the Delta variant is contained, the faster the people can return to normal activities, the sooner the economy can recover and the lesser the dependency on the state budget.