Post-Pandemic Economy
The global economic recession is different this time around. Carmen Reinhart, now chief economist at the World Bank, has long warned that crisis usually occurs because economic actors are overconfident.
Customers gather at a street stall in Jakarta on November 5, 2020, as Indonesia tumbles into first recession since the Asian financial crisis.
The global economic recession is different this time around. Carmen Reinhart, now chief economist at the World Bank, has long warned that crisis usually occurs because economic actors are overconfident.
The belief that "this time is different" is the main cause of reckless behavior that causes a sharp increase in loans as investors take risks. Finally, this causes an asset bubble. The Covid-19 pandemic did not actually start with a financial bubble that then erupted and damaged the real sector. Instead, it is the stagnation of the real sector that has put pressure on the financial sector. The recession, which began with a supply shock, has caused a tsunami of problems on almost all fronts.
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The household sector, especially low-income groups, as well as the business world, especially micro and small businesses, were the first groups to be affected by the pandemic. The longer the Covid-19 pandemic drags on, the more sectors will be affected. The pandemic has caused complete stagnation, from production to distribution and to spending.
As a result, the budget deficit has widened and government debt has increased dramatically since the pandemic began.
The government is the only party capable of driving the economy through fiscal stimulus. As a result, the budget deficit has widened and government debt has increased dramatically since the pandemic began. The longer the pandemic, the heavier the government\'s fiscal burden is.
Until the end of 2020, almost all countries were focused on addressing health problems and saving the economy. In the first half of 2021, many countries will still focus on dealing with the second wave of the coronavirus. However, in the second half, it is possible that the focus will shift on efforts on how to finance the fiscal deficit and how to mobilize investment to support the economic recovery.
Financing the fiscal deficit
The first case of Covid-19 in the United States was found at the end of January 2020 and the government immediately formed the White House Coronavirus Task Force.
In March 2020, the US Congress approved a US$ 2 trillion stimulus package through the issuance of the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act. At the end of last December, the Congress again approved a second stimulus package worth $ 900 billion.
Like the US government, many other countries including Indonesia have also introduced economic stimulus packages. In March 2020 , the Indonesian government set up the Task Force for the Acceleration of Handling of Covid-19 which focuses on dealing with health issues. Meanwhile, in order to be able to provide large amount of economic stimulus, a Government Regulation in Lieu of Law (Perppu) Number 1 of 2020 was issued, one of which was to annul the budget deficit threshold of 3 percent of gross domestic product (GDP).
Lee Hsien Yang, center left, the estranged brother of Singapore Prime Minister Lee Hsien Loong, wears a face mask while talking to people at the Chong Pang area during a campaign walkabout for the opposition Progress Singapore Party in Singapore on July 5, 2020. Singaporeans go to the polls on July 10 in Southeast Asia\'s first election since the coronavirus pandemic began, with the health crisis and an economic recession expected to bolster Prime Minister Lee\'s party and extend its unbroken rule.
In 2020, the government allocated Rp 686.20 trillion for the National Economic Recovery (PEN) program. As the result, the budget deficit rose to 6.3 percent. In 2021, the government has allocated Rp 356.5 trillion to finance the PEN programs, and the budget deficit is estimated to reach 5.7 percent.
The increase in the government expenditures due to the Covid-19 pandemic is also experienced by many countries in the world. Due to the pandemic, the US fiscal deficit has tripled to $3.1 trillion at the end of September 2020. The increase in the fiscal burden has also boosted the ratio of government debt to GDP. By the end of 2020, government debt had exceeded 100 percent of GDP or the largest since World War II.
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The US experience is shared by almost all countries in the world. According to the Institute of International Finance (IIF), starting from the fourth quarter of 2019 to the third quarter of 2020, Canada experienced an 80 percent increase in debt. Meanwhile Japan and the US reported 55 percent and 50 percent increase, respectively. The Indonesian government is facing a similar situation. The pandemic has caused an increase in the amount of government debt from the previous 30 percent of GDP to around 40 percent.
On average, developed countries have a debt - to-GDP ratio of 131 percent.
The pandemic has caused an increase in debt in all countries. The developed countries experienced an increase in household debt by 6 percent and non-financial private sector debt by 11 percent, while government debt increased by 21 percent. On average, developed countries have a debt - to-GDP ratio of 131 percent.
As comparison, in developing countries, the household debt and private sector debt increased by 4 percent and 11 percent, respectively, while the government debt rose only by 7 percent. On average, government debt in developing countries accounts for 60 percent of their economy.
Developed countries, apart from having a higher debt profile than developing countries, have also a higher increase r. And again, in developed countries, the growth in government debt outstrips that of household and private sector debt, more than those in developing countries.
How to finance the economic stimulus due to the pandemic? Developed countries have already had experience in coping with the 2008 global financial crisis. Most developed countries financed the crisis by printing money. In the US, the central bank purchased government notes by printing money, which is called quantitative easing.
In developed countries, fiscal stimulus by printing money (money-financed fiscal stimulus) is common. On the one hand, there is a conventional monetary policy innovation, and on the other hand, there is a synergy between the monetary authority and the fiscal authority (government).
The US Federal Reserve (the Fed) was unlucky because after the quantitative easing phase, in 2016 the US was led by populist president Donald Trump. The Economist magazine (April 2019) published a main report entitled "Interference Day: Central Banks in the Age of Populism" which examines how central banks have been under pressure since the global crisis which was then exacerbated by the emergence of populist leaders in many countries.
Facing the Covid-19 pandemic, Bank Indonesia (BI) has also helped finance the fiscal burden through the purchase of securities issued by the Finance Ministry on the primary market (burden sharing) since April 2020. Until the end of the year, BI has purchased government securities worth Rp 473.42 trillion. This burden sharing commitment will continue until 2023.
Various central bank innovations in covering the fiscal deficit and encouraging a revival of investment should be continued even though policy options in developing countries are not as many as those in developed countries. BI cannot print money like the Fed because the risk of inflation is quite high.
Men play chess on a sidewalk as a food vendor serves customers in Jakarta, Indonesia, Thursday, Nov. 5, 2020. Indonesia\'s economy entered its first recession since the Asian financial crisis more than two decades ago as the country struggles to curb the coronavirus pandemic under control. (AP
In addition, central banks in developing countries always face an impossible trinity between maintaining exchange rate stability, maintaining a free foreign exchange system, and implementing an independent monetary policy. The Indonesian economy is still very dependent on foreign financing, so exchange rate stability remains an important focus of the monetary authority.
Facing the complexity of economic problems in the midst of a pandemic, BI is also haunted by plans for amendments to the Bank Indonesia Law which will replace Law Number 3 of 2004. The bill that has been included in the list of this year\'s National Legislation Program has the potential to eliminate articles on BI\'s independence. If that happens, the list of BI dilemmas will be even longer.
Reviving investmentz
Financial alternatives should be considered to finance the fiscal deficit. However, an effort to increase investment is also urgently needed. Admittedly, it is very difficult to make calculations when investment cannot be revived. If the pandemic is not over, economic activity will not return to normal.
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Unlike the previous crisis, the middle-upper class did not experience a decline in income. However, they held back spending, especially on the service sector (leisure), due to the coronavirus outbreak. The middle class, which is the driving force in the tourism sector, has shifted excess budget to investment instruments or savings in banks. That is why in the midst of a pandemic, banking liquidity has actually increased.
In August 2020, third party funds in banks grew by 11.64 percent compared to the previous year and rose by 8.53 percent compared that recorded in July. In contrast, according to the data obtained from the Financial Services Authority (OJK), as of August, 2020, loans only grew by 1.04 percent.
Coupled with various government stimulus programs, the banking sector and financial market practically did not suffer a liquidity problem. The Covid-19 pandemic has caused a credit crunch problem because the funds did not flow into the economy. Credit or loan will increase if investment activities begin to move again. However, the pandemic has disrupted activities of various leading sectors in the economy.
The World Bank, in its December 2020 edition of the Indonesia Economic Prospect, categorizes sectors that will rise quickly and those will remain stagnant. Economic sectors that require intensive physical contact and rely on face-to-face interactions with consumers will experience a prolonged stagnation. For example, the transportation sector, hospitality, wholesale and retail warehousing, construction, and manufacturing. Meanwhile, sectors that do not require physical contact will recover faster, such as the financial, education, communications and telecommunications sectors.
People wear face mask as a precaution against the coronavirus as they arrive at the KCM Cinemas theater in Bekasi, West Java, Thursday, Nov. 5, 2020. Indonesia\'s economy entered its first recession since the Asian financial crisis more than two decades ago as the country struggles to curb the coronavirus pandemic under control.
In the future, the technology-based sector will experience rapid progress. Since the 2008 global financial crisis, innovation in technology has accelerated. The emergence of the fourth wave of industrial revolution has caused disruption in almost all sectors of the economy. Facing this pandemic, technology adoption and implementation of Industry 4.0 will further intensify.
Unlike the credit provided by conventional banks which has experienced a sharp decline recently, peer to peer (P2P) lending has sharply increased. According to the OJK statistics, as of October 2020, total P2P lending reached Rp. 137.65 trillion, an increase of 102 percent compared to the same period, last year.
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Although the portion of the P2P lending is still small, the growth is quite robust. The Indonesian Joint Funding Fintech Association (AFP) believes that increase in the loan disbursement will continue in 2021.
Facing the pandemic, many start-up companies have innovated to be able penetrate more sectors, in addition to innovation in financing. That is why in difficult times like this, a number of technology-based companies plan to conduct an initial public offering (IPO) in order to increase their investment capacity.
A number of companies that have already unveiled their plan to float their shares on the stock exchange include Gojek with an estimated value of $10 billion , followed by Tokopedia ($7.6 billion ), Traveloka ($3 billion ), Ovo ($2.9 billion, as well as Halodoc and Tiket.com with an estimated value of $1 billion each. They will become investment drivers that can help drive economic recovery.
Of course, their industrial scales will not replace large sectors, such as manufacturing, trade and tourism, which currently remain stagnant. The Covid-19 pandemic has resulted in fundamental changes in many ways. Therefore, mapping the leading sectors in post-pandemic is one of the keys to economic recovery.
A. Prasetyantoko
In the next few years, various digital-based sectors will emerge, both in the real and financial sectors. Sectors such as e-health, e-education, and other digital-based service sectors will develop rapidly, while various start-ups in the field of financial technology will continue to emerge. For this, a comprehensive road map for economic transformation is needed. Deliberations on the Bank Indonesia Bill or omnibus law in the financial sector should be focused on the context of preparing for a digital-based economic transformation in the future.
A. Prasetyantoko is the rector of Atma Jaya Catholic University of Indonesia and the founder of the Indonesian Fintech Society (Ifsoc)
(This article was translated by Hendarsyah Tarmizi).
