Stimulus Aimed at Avoiding Recession as Covid-19 Hits Informal Sector Hard

Jakarta. Indonesia is bracing for a worst-case scenario from a prolonged coronavirus pandemic that's already hitting the country's usually resilient small businesses and informal sector hard and might bring the economy into a recession, Finance Minister Sri Mulyani Indrawati said.

"Based on our assessments, we predict Indonesia's economic growth would decline to 2.3 percent, even to minus 0.4 percent in the worst-case scenario," Sri Mulyani said in a teleconference on Wednesday.

Indonesia, the largest economy in Southeast Asia, expanded by 5 percent last year. 

The figures were based on studies conducted by the Financial System Stability Committee (KSSK), which includes Bank Indonesia – the central bank, the Finance Ministry, the Financial Services Authority (OJK) and the Deposit Insurance Corporation (LPS).

On the request of President Joko "Jokowi" Widodo, the team prepared two scenarios for the country's economic outlook: bad and worst-case.

The assessments concluded the impact of the pandemic on the Indonesian economy was still escalating, and that government stimulus packages might not be enough to help various sectors stay afloat.

"In January, we thought the pandemic would only impact the tourism sector. That was why we prepared a stimulus package for provinces that rely heavily on tourism for their income. Then we learned that was off target, so we released a second stimulus focusing on the manufacturing industry. But now we're seeing the impact of the pandemic is continuing to escalate," Sri Mulyani said.

Jokowi declared a health emergency on Tuesday and imposed large-scale social distancing, which includes closing schools and business premises, banning religious services and restricting travels.

The government, however, had stopped short from imposing a quarantine that would mean a complete lockdown of Covid-19 red zones such as Jakarta and West Java. 

The government's main reason for not imposing the lockdown was its impact on the informal sector and small businesses. 

Sri Mulyani said this is unprecedented since the sector has in the past shown resilience to weather economic crises and came out of the 1998 Asian financial crisis and the 2008 global financial crisis relatively unscathed. 

"[But now] small businesses are among the most severely hit, when usually it's people's safety net. This is because the pandemic has restricted all economic and social activities," Sri Mulyani said. 

The country's huge informal sector – not paying taxes nor regulated by the government – provided more than 55 million jobs last year, according to the Central Statistics Agency. 

A hit on this sector would undermine Indonesia's household consumption, which accounts for more than half of the country's economy.

In the government's bad case scenario, consumption growth could slow down to 3.2 percent, and to just 1.3 percent in the worst-case scenario, Sri Mulyani said. 

Investment would not save the day this time and could shrink by as much as 4.2 percent this year.

Export and import could also contract by 16 percent and 17 percent, respectively, as trading partners struggle to cope with the pandemic. 

Government spending could accelerate to 6.83 percent should the government see through its ambitious stimulus package.

In the worst-case scenario, the government would be less effective and see spending slow to 3.73 percent. 

President Jokowi on Tuesday announced a Rp 405 trillion ($25 billion) stimulus package for Covid-19 mitigation focusing on healthcare spending, social safety net, tax breaks and debt restructuring for corporations and small businesses. 

Coordinating Minister for Economic Affairs Airlangga Hartarto said the government hopes the stimulus would be enough to avoid both the bad and worst-case scenarios.

"We hope growth would turn out to be more moderate," he said. 

Sanny Iskandar, the deputy chairman for property and economic zones at the Indonesian Employers Association (Apindo), said businesses are pleased with the stimulus package, lauding it as comprehensive, focused and measured. 

"Of course the policy needs detailed derivative rules and consistent and effective implementation in the field," Sanny said. 

"Another important thing is the government's commitment to evaluate the incentives and expand them to other affected sectors outside the manufacturing industry, such as the tourism and property industries," he said.