The Long Road to Economic Recovery
We must be careful. If there is no second wave of the pandemic -- hopefully true -- our economy will touch its lowest point in the second quarter.
He opened his helmet. Sweat ran down his face. The online motorcycle taxi (ojol) driver later handed me the food package I ordered. "Thank you," I said. He nodded. I do not know what was on his mind. Maybe he was anxious, or hoped that economy would reopen soon, then recover.
Perhaps he was one of those whose voices were represented in a survey conducted by Saiful Mujani Research and Consulting (SMRC) on 18-20 June. The survey discloses that: more and more people are of the opinion that the economic situation will be better next year. There is hope even though the threat of the outbreak still haunts. Is that right? What is the trajectory of economic recovery? What should be done?
Source of recovery
There are several things that must be taken into consideration. First, where will the economic recovery come from in the next few years? The Organization for Economic Cooperation and Trade (OECD) writes in a gloomy tone: in the next two years, the global economy will not return to the situation like that seen at the end of 2019.
In the case of China, production indicators have indeed begun to improve -- after the economy reopened. However, demand is still weak. This is easy to understand. As a global player, the Chinese economy will be very dependent on the recovery of the world economy, especially the United States.
Also read : Economy in the New Normal
The continued weakness of the Chinese economy -- and also India -- is putting pressure on prices of mining goods and commodities, particularly coal and palm oil. The fact is that our exports still depend highly on natural resources. The implication: Indonesia depending on external sources for growth, such as exports.
Second, then what are the alternatives? Focus on sources of domestic growth. Ideally: private investment. However, we need to be clear, economic closure, sluggish demand, is very pressing for the business world for a while. In addition, new investment will increase if there is demand, if there is consumption.
Also read : Speed of Recovery
The policy to reopen the economy can indeed drive production. However, if demand is sluggish, why should production be increased if it does not sell? Perhaps the only sector that still has a machine to move at this time is the government, not the private sector. This is where the role of fiscal policy is very important to encourage purchasing power.
Social restrictions are clearly needed to overcome the pandemic, but they can be biased for the upper- middle class if social protections for the lower middle class is not enough. The upper-middle class who have savings, have the luxury to choose: stay at home -- avoid the outbreak -- or immediately move. Conversely, the lower-middle class does not have many choices. They must go back to work unless they get enough social assistance.
My argument is consistent with the results of the SMRC survey which shows: groups who want the economy to be reopened soon mostly come from those with primary school education, work backgrounds of street vendors, ojol drivers, and others with an income of less than two million rupiah per month.
Also read : Fiscal Policy for the Lower Middle Class
On the other hand, those who consider that the new normal policies need to be postponed mostly come from groups with an income of four million rupiah and above per month, with tertiary education and professional work backgrounds, with a steady income. That is why, social protection is very important to help the purchasing power of the lower middle class.
The jump start must begin with providing broader direct cash assistance (BLT), as well as cash labor intensive programs, and the Family Hope Program (PKH). Social protection needs to be extended to the aspiring middle class group. For example: The World Bank (2020) estimates that there are 115 million people who fall into the aspiring middle class category.
If this group is to be addressed, social assistance needs to be provided to around 30 million households. If the value of benefits is Rp 1 million per month and is given for four months, Rp 120 trillion or around 0.75 percent of gross domestic product (GDP) is needed for this program.
Also read : Stimulus amid the Coronavirus
Real sector
Third, the government states that there is a risk of contraction in economic growth in the second quarter. The hope is that recovery will occur in the third quarter. However, if the demand remains lethargic and contraction is still happening, we will enter into an economic recession. We know that this economic hardship has stalled the real sector. If this happens, bad credit will increase, and the impact can spread to the banking sector.
To avoid that, banks will be very careful, they will even reduce lending or stop it. I remember the experience in the G-20 in 2008-2009. At that time, due to the global financial crisis, the world trade was paralyzed. Almost no commercial banks wanted to give credit to exporters.
The risk of bad credit was too great. Then at the G-20 meeting in London 2009 it was decided to provide trade financing funds of US$250 billion for two years. Not only that, multilateral institutions entered to provide support for working capital financing and credit guarantees, export insurance, so that exports could resume running. The business world needed policies like this.
Also read : Loan and Liquidity Restructuring
Banks are certainly worried about lending to the real sector, unless there is a guarantee from the government. Therefore, the credit guarantee program had to run, as well as the credit restructuring. On the other hand, because economic activity has stalled, there is practically not much demand for new credit. This is what explains -- that in general -- the main problem at the moment is actually the credit crunch (the reluctance of banks to give credit because of the risk of bankruptcy), not because of liquidity.
Liquidity in the banking sector is generally quite good, as reflected in the decline in the loan to deposit ratio (LDR). If the issue is a credit crunch, what is needed is the availability of a credit line for the business world. The government has prepared this scheme. This is a right step. However, it needs to be ensured: credit guarantee arrangements -- and also interest subsidies -- must be made simple, easy to
implement, and do not pose a major risk in the banking, both credit risk, legal risk, and operational risk. If it is too complicated, there is a risk that this program will not be effective.
Also read : New Hopes and Challenges for Indonesia
We also need to appreciate the Financial Services Authority (OJK) for the credit relaxation policy until March 2021. However, don\'t forget, the real problem -- maybe -- will only emerge after March 2021, after the credit relaxation ends.
Because, that is when we will know how much credit is really bad -- unless OJK extends its relaxation policy. That is where problems in the banking sector will emerge. That is where banks may face various problems, ranging from bad loans, profitability, capital, to liquidity.
The trajectory of this problem is important to understand and how to anticipate it. In other countries, the central bank plays an important role in providing liquidity support to banks, non-bank financial institutions, especially those that provide loans to micro, small and medium enterprises (MSMEs). Look at the policy package issued by the Reserve Bank of Australia, the Singapore Monetary Authority, the Bank of Thailand, the Bank of England, the Fed, and various other central banks.
Economic recovery policy
Fourth, after activity returns to normal -- with the opening of the economy, the recovery policy can begin with fiscal expansion to encourage purchasing power, which is then combined with monetary stimulus, such as a reduction in interest rates, minimum statutory reserves (GWM), and policy ease regulations in the real sector.
The problem is whether there is fiscal space to do this. Law No. 2 of 2020 states that the deficit of the State Budget (APBN) must return to below 3 percent by 2023. I understand and support this caution. However, it might be worthwhile to look at our fiscal framework until 2023.
The government projection in the Macroeconomic Framework from the Finance Ministry shows that tax revenue will be in the range of 8.4-9.1 percent of GDP in 2023. On the other hand, the debt to GDP ratio will range from 36.5 to 37.4 percent in 2023. With the increase in debt, the ratio of debt interest to total APBN expenditure is expected to increase from 12 percent in 2019 to 16-17 percent in 2023.
Also read : Recession and Economic Sustainability
On the other hand, we know that there are mandatory expenditures that must be done by the government, such as education funds (20 percent) of total expenditure, transfer funds to the regions (around 30 percent), and village funds (10 percent) from the transfers to the regions. At the same time, the tax ratio is only projected at 9.4-10.1 percent of GDP.
The combination of tax revenue which is still low, the burden of spending continues to increase, and the target to restore the budget deficit to 3 percent in 2023 makes the fiscal expansion space be very limited. In fact, for the time being we need fiscal expansion so that the economy recovers. Therefore, it might be good for the government to make a careful calculation and make decision based on economic conditions (data dependence) whether the exit from fiscal expansion is too fast or not.Another alternative is to improve the quality of expenditure allocations so that each rupiah being spent is productive and can encourage economic growth. Fiscal stimulus given also needs to be evaluated again. For example, to what extent is the effectiveness of tax incentives in such a situation, has it been utilized extensively?
If it is not effective, should it not be used to expand social protection or increase credit guarantees or interest subsidies to help MSMEs. When looking at budget absorption data, the social assistance program, especially BLT, with all its weaknesses, still seems to be the most effective program. What must be done is to improve recipient data and overcome overlapping aid schemes so that they are optimal.
I think he has hope. And that is our hope, too.
The economy will not recover automatically unless the government steps in to encourage demand. And this has implications with increasing budget deficit. I fully understand the risk of a large budget deficit. However, the theme of fiscal policy throughout the world today is whatever it takes. The government must take all steps to save the community and restore the economy. And don\'t forget that the economy will not recover 100 percent before the vaccine is found. Therefore, even though fiscal discipline is very important, maybe it can wait until the crisis subsides.
If economic recovery is slow, the ratio of debt to GDP will not decrease. On the contrary, if economic growth can be boosted, the ratio of debt to GDP will decrease. Exit that is too fast can lead us to a worse economic situation. We must be careful. If there is no second wave of the pandemic -- hopefully true -- our economy will touch its lowest point in the second quarter.
The problem is, will it remain below, like the letter L? Or long time down, like a long U? We want a speedy recovery, like the letter V. I remember the ojol driver who handed me a package of food. He certainly did not talk about it. However, I think he has hope. And that is our hope, too.
Muhamad Chatib Basri, Lecturer at the School of Economics and Business, University of Indonesia.