Covid-19 and the Economic Stimulus

The world is facing a heavy test because of the COVID-19 pandemic, which may not be completed this year.

AFP

This combination of pictures created on April 26, 2020 during the COVID-19 coronavirus pandemic shows (starting from left top corner) Spanish Ramon Montesinos Roman, shepherd, posing for a picture in Ronda, Spain, on April 23, 2020.

The explosive power of COVID-19 is truly extraordinary and has devastated the world economy. The world is helpless and the threat of a global economic recession is in front of our eyes. Developed countries that we think are very capable of medical technology are also helpless. This is what makes people more afraid and worried. If the United States and Europe prove to be unprepared, what about developing and poor countries?

The world production chain has not only been disrupted but has been broken, because many countries are on territorial lockdown to curb the spread of COVID-19. Supply/production disruptions are now also spreading to the demand side, with spending having dropped significantly and investment tumbling, while world trade has been very sluggish. The decline in economic activity and limited mobility of goods and services, as well as restrictions on movement have eventually hit the incomes of companies and society. The termination of employment and layoffs have occurred everywhere.

Unemployment has skyrocketed in various parts of the world, reaching double digits. In the US, the figure rose from 3.7 percent last year to 10.4 percent at present, and is predicted to rise again to 15-20 percent, the worst in the world civilization. In Italy unemployment reached 12.7 percent and France around 10.4 percent.

There is a possibility that Indonesia will return to the 1998 economic and monetary crisis.

It is not surprising to see the fact that various predictions point in the same direction: worsening economic condition. The world economy is expected to be in recession this year after the Covid-19 outbreak spreads to more than 200 countries. JP Morgan estimates that global economic growth is minus 1.1 percent, The Economist Intelligence Unit minus 2.2 percent, and the IMF even worse with minus 3.0 percent. The only hope is the government\'s economic stimulus. According to the IMF, almost half of the countries in the world (more than 100 countries) have raised their hands and asked for assistance to inject funds (bailout) to the IMF.

Indonesia is well aware that this pandemic if not stopped immediately will damage the wheels of the national economy. The business world will die and lead to the collapse of the banking sector because customers are unable to pay their obligations, both their interest and principal. If this happens, there is a possibility that Indonesia will return to the 1998 economic and monetary crisis.

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KOMPAS/TOTOK WIJAYANTO

A store attendant arranges a mannequin on Monday (23/3/2020) at a shopping center in Kuningan, South Jakarta, where most shops have posted notices of temporary closure. The decline in economic activities in Jakarta is expected to prompt migrant workers in the informal sector to return to their places of origin.

Various stimuli

There are three priority focuses to help the economy and society: (1) providing funds for health care, (2) channeling social security assistance (addition of the Family Hope Program (PKH) distribution on food, additional work cards, free electricity tariffs for 450 KVA customers and discounts for 900 KVA , additional household incentives, etc.), and (3) no less important, providing the economic stimulus/support to the business world. Running all these programs is not easy. State Budget (APBN) expenditure must increase significantly when tax revenues come short because of weak business activities. The deficit (expenditure minus state revenues) certainly swells and means that the fiscal deficit limit is no longer sufficient at the maximum of 3 percent according to the State Finance Law.

The government has tried to anticipate the worst possibility by making a legal basis in the form of Perppu (government regulation in lieu of the law) No. 1 of 2020 replacing the State Finance Law so that the fiscal deficit in 2020 can be above 3 percent and is estimated to reach 5.07 percent of GDP. These are the forced and difficult choices to save the domestic economy. Monetary stimulus has also been implemented by BI by reducing the BI benchmark interest rate, reducing the minimum statutory reserve requirement, easing macroprudential intermediary ratio (RIM), increasing the intensity of intervention in the foreign exchange market, and buying government bonds when selling by foreign investors happens.

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The Financial Service Authority (OJK) has also launched a stimulus for the banking sector and finance companies through POJK No. 11/POJK. 03/2020 on National Economic Stimulus as a Countercyclical Policy on the Impact of the Coronavirus Outbreak 2019. There are two relaxations: (1) relaxation of asset quality assessment and (2) relaxation of credit/financing restructuring. This is an effort by the authority to maintain the stability of the financial and banking system from the impact of the coronavirus outbreak.

In the past four years, national economic growth has been relatively limited at around 5 percent. The pandemic further weakens the pulse of the economy this year. The Business Activity Survey (SKDU) shows that business activities are heavily disrupted and weak in the first quarter of 2020. Growth of Weighted Net Balance (WNB) dropped significantly from 7.8 percent in quarter IV-2019 to minus 5.6 percent in quarter I-2020. From the financial side of business actors, the condition is getting worse, both in terms of liquidity and profitability. Similarly the processing industry falls very deep and is in a contraction zone, with the prompt manufacturing index (PMI) being recorded at 45.6 percent in the first quarter of 2020, down from 51.5 percent the previous quarter. From the demand side it also looks very weak since the end of 2019. Retail sales grew negatively for four consecutive months since December 2019 and worsened (minus 5.4 percent in March 2020 from minus 0.8 percent in February) due to the pandemic.

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Therefore, Indonesia needs a super aggressive and fast fiscal and monetary stimulus like what is done by many countries in the world. Perppu and POJK that have been issued should be able to be a breath of fresh air and hope for the business and banking world. However, this policy must be implemented with extreme caution. The potential for commotion and abuse or moral hazard by certain irresponsible parties is wide open.

It is very rational that all customers want to be able to get reduction in debt and interest payments in the pandemic condition. Therefore, there must be a legal umbrella which is clear, straightforward, firm, and with no biased interpretation. Guidelines or operational guidelines governing debtors/customers and which sectors are entitled to priority relaxation or relief must be in details and easy to implement in the field.

Priority sectors

With the limited capacity of the state\'s finances, it is better to forget the economic sector which is highly exposed to external shocks, in terms of raw materials and export markets, except the sector that is closely related to the recovery of public health. Economic stimulus will be redundant to sectors that depend on the global condition. We must focus on sectors that truly rely on domestic strength. The government must give emphasis to: (1) sectors with high local raw material content, (2) their domestic market, and (3) high employment, such as agriculture and trade, although the added value is rather low. This is very important to show partiality in the lower levels of society.

The priority sector must also have high backward and forward linkage or high linkages with other sectors, both backward (raw material) and forward (sales). After that, we push it to sectors that can create high income (multiplier income) and encourage high output (multiplier output).

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KOMPAS/P RADITYA MAHENDRA YASA

A female farmer harvests rice in Salam District, Magelang District, Central Java, Friday (3/4/2020). Sustainability of planting and harvesting is part of food security amid the long-standing corona virus outbreak.

The selected customers must be validated to be those are really hit by the negative impact of Covid-19. There are measurable and clear criteria, namely for customers who have good intentions and are cooperative, and still have good prospects in the future. This is very important so that this stimulus is right on target so that the large costs incurred by the government are not wasteful.

In carrying out this government mission, there are three things that the banks will experience: (1) a decrease in interest income, (2) a decrease in liquidity due to delays in payments of principal and interest installments, and (3) leading to a decrease in the bank\'s ability to channel credit. Of these three things, it is better for us to focus first on point two, namely banking liquidity. The availability of liquidity can be likened to the heart in a bank. Without enough liquidity, banks will become sick and collapse.

To help customers who experience difficulties, there are three restructuring schemes: (1) reduction in interest rates, (2) extension of loan term, (3) postponement of interest and principal payments, up to temporary equity participation. When the debtors delay the principal and interest payments, the bank\'s cash inflows will decrease. On the other hand, banks are faced with the obligation to serve the withdrawal of customer deposits or other obligations that cannot be postponed. Here the potential liquidity risk appears. Thus, the support of the government and monetary authorities is needed to overcome this condition with sufficient liquidity bailout funds. The government, through the Perppu, has opened space through the participation of state capital (PMN), placement of funds, and guarantee activities. For the use of state funds there must have clear signs so that they do not cause problems later on. Do not let these good intentions be counterproductive. The ailing economy does not even heal due to the wrong medication. Do not let efforts to save the real sector fail miserably, and instead create new problems in banking.

Anton Hendranata, Lecturer at the School of Economics and Business, University of Indonesia.