Economic Threat Becomes More Apparent

KOMPAS/Lasti Kurnia

An employee works in front of monitors at the Indonesia Stock Exchange in Jakarta on Friday (28/2/2020). The Jakarta Composite Index dropped 1.5 percent, 82.99 points, to 5,452.70 at the closing. The index dropped on six consecutive days due to pressures from other stock exchanges amid Covid-19 fears.

BANDUNG, KOMPAS —The COVID-19 epidemic has seriously affected world trade, caused stock price indices in the world to plummet and discouraged people from traveling. As a result, world economic growth is set to decline.

That threat became even more apparent after the National Bureau of Statistics of China (NBS) released Purchasing Managers’ Index (PMI) last week. Data reported by Kompas on Sunday (1/3/2020) show that China\'s PMI fell from 50 in January 2020 to 35.7 in February 2020, which is lower than during the global financial crisis of 2008. According to Bloomberg data, the Chinese PMI was 38.8 in November 2008.

The PMI measures economic trends in the manufacturing sector. Index values above 50 signify an expansion of manufacturing activity while readings below 50 point to the opposite. The decline in China’s PMI affects the world because of the country’s large exports. Indonesia is also affected due to the high value of its trade with China, which increased sharply to US$72.826 billion in 2019 from $48.23 billion in 2014.

The new coronavirus outbreak also affects Indonesia’s manufacturing sector, because the country relies heavily on raw materials from China, especially machinery and mechanical equipment, electronic components and pharmaceutical ingredients.

The government must respond appropriately, so that the Indonesian economy is not dragged deeper into China\'s economic slowdown. The way to do this is by encouraging import substitution, fixing the manufacturing industry and finding new export markets.

KOMPAS/TOTOK WIJAYANTO

An employee counts banknotes at a money changer at PT Ayu Masagung in Jakarta on Feb. 10, 2020.

Statistics Indonesia (BPS) data show that China accounts for the lion’s share of Indonesian non-oil and gas exports and imports. Exports to China totaled $25.852 billion in 2019, followed by those to the United States with $17.681 billion. Meanwhile, Indonesia\'s non-oil and gas imports from China were worth $44.578 billion in the same year.

Bank Indonesia’s economic and monetary policy director, I Gusti Putu Wira Kusuma, said in Bandung on Saturday that the manufacturing or processing sector was the highest contributor to the trade balance. However, some portions of it continued to decrease as productivity was declining.

Quoting BPS data, non-oil and gas exports from the processing industry declined by 2.73 percent to $126.56 billion in 2019 from $130.11 billion in 2018.

The government has offered stimuli and incentives to boost household spending in sectors affected by the COVID-19 outbreak.

Wira said the current situation should be used to improve the manufacturing sector. Increasing the added value of Indonesian commodity products could boost the export performance. The government has offered stimuli and incentives to boost household spending in sectors affected by the COVID-19 outbreak. However, stimuli were also needed to encourage production. Transportation Minister Budi Karya Sumadi said the government offered incentives in the form of discounts on airplane tickets to 10 tourist destinations in Indonesia starting Sunday to revive domestic tourism.

Deficit

Bank Permata\'s chief economist Josua Pardede predicts that the current account deficit will widen due to stagnant production and sluggish exports. The government needs to find ways to encourage local industries to produce goods that could substitute raw materials imported from China.

KOMPAS/LASTI KURNIA

Workers and container trucks are seen at Terminal 3 of Tanjung Priok Port in Jakarta on Feb.20, 2020. Statistics Indonesia (BPS) recorded that the value of non-oil and gas trade with China decreased in January 2020. The BPS said the decrease was not entirely due to Covid-19 fears.

The current account deficit, BI data show, rose to $6.593 billion in the first quarter of 2019 from $4.937 billion in the same period 2018.Indonesia, said Josua, had to begin to expand its export market. At present, Indonesia’s main export markets are China, the US and Japan.

"Our policy must be not only defensive in the sense of limiting imports but also offensive by increasing openness and expanding export markets," he said.

In the capital market, the Financial Services Authority\'s plan to issue a ruling to allow publicly listed companies to buy back shares in the stock market has elicited a positive response. However, a senior CSA Research Institute analyst, Reza Priyambada, said that if the agency only issued incentives without restoring market confidence, market participants would only use it for profit-taking. (AGE/DIM)