Economy and the Coronavirus

Farewells can indeed come all of a sudden, without preparation. Albert Camus described a dramatic farewell scene in his seminal literary work, La Peste.

REUTERS/DENIS BALIBOUSE

Michael J. Ryan, (lefT) Executive Director of the WHO Health Emergencies Programme and Director-General of the WHO Tedros Adhanom Ghebreyesus, attend a news conference on the coronavirus (COVID-2019) in Geneva, Switzerland February 24, 2020.

In an anxious tone, he talked about an outbreak of pestilence in the city of Oran, Algeria. Oran -- a city without pronunciation -- was struck by anxiety due to a disease outbreak. There people learned what anxiety meant, what confusion meant or life awaited death.

Camus certainly did not write about Wuhan in China, but those who read La Peste can imagine the anxiety and confusion of the people who were isolated in Wuhan. "Separation will only end together with an epidemic," Camus wrote gravely.

Also read : 2019 Economic Growth

The coronavirus or Covid-19 has not only shook Wuhan but also the world. We can feel the panic gripping the world today. CNN news, as of Feb. 23, reported the death toll had reached 2,458 people. Not only that, the global economy has also begun to be affected.

Economic contraction

Japan\'s economy, which contracted 1.6 percent in the last quarter of 2019, is in danger of recession because economic growth may slow even further due to the coronavirus outbreak. Singapore has revised down its economic growth target to 0.5 percent due to this outbreak. What about Indonesia? What can we do to mitigate it? To answer that question, we need to pay attention to the following points.

First, how long will this pandemic last? I cannot answer that. This is the first coronavirus outbreak, so we do not know when it will end. However, with this lack of knowledge, we need to take grip, we need direction. What we can do is create several scenarios, for example, by trying to reconstruct the impact of the 2003 SARS outbreak as a comparison.

Also read : Indonesia’s Economy Stuck with 5 Percent Growth Rate

KOMPAS/LASTI KURNIA

An officer drives his motorcycle amid by busy loading and unloading activities at Operation Terminal 3, Tanjung Priok Port, Jakarta, Thursday (20/2/2020). Statistics Indonesia (BPS) noted the value of non-oil exports and imports to and from China had decreased in January 2020 but said the decline was not entirely due to the coronavirus.

Data shows that the SARS outbreak reduced China\'s economic growth from 11.1 percent (quarter I-2003) to 9.1 percent (quarter II-2003). However, China\'s economy improved again and grew to 10 percent in the third and fourth quarters of that year. The data shows that the growth of the retail sector and industrial output in China decreased very sharply. If it is true that the SARS outbreak can be made a comparison, we can create a scenario for the Indonesian economy.

Impact to Indonesia

Second, how will it affect us? Of course it is too early to conclude. However, we can predict that a slowdown in industrial output in China will reduce demand for raw materials and supporting materials in the production process. We know: out of around 29 percent of the goods exported by China, their raw and supporting materials come from Indonesia (mainly coal and palm oil). Its implication is that we need to anticipate the decline in demand for these products. Predictably, the prices of commodities and mining goods are on the brink of decreasing. If this happens, our export sector will be disrupted.

Besides that, the decline in commodity and mining commodity prices will also result in a decrease in the income of workers in the sector. Because our economy is still dependent on commodities and mining goods, purchasing power will decline. If purchasing power decreases, there is no incentive for entrepreneurs to increase their investment. To make it easy to understand, why should production be increased if there is no demand.

In short, we can imagine that the impact of the coronavirus outbreak can hit the export sector, then the chain effect will affect the household consumption and investment sectors. Not only that, isolation or restrictions on activities that occur in China will also disrupt the availability of import goods originating from China. As a result, the production process of industries or sectors, whose raw materials or capital goods come from China, will be disrupted. Likewise for consumer goods, if local supplies are not available, prices will increase.

From the banking sector, we must be careful and continue to monitor its impact on the possibility of increasing bad loans. The risk of bad credits can also increase if the virus outbreak continues and there is no good mitigation. The impact of an outbreak can be quite serious.

KOMPAS/HERU SRI KUMORO

President Joko “Jokowi” Widodo and Vice President Ma\'ruf Amin chair a meeting with Cabinet ministers and heads of government institutions at the Presidential Office in Jakarta on Tuesday (25/2/2020). The meeting was called to discuss the impact of the recent coronavirus outbreak on the Indonesian economy.

However, as in the case of the trade war, I see that the impact of the coronavirus on Indonesia will not be as bad as the impact on Singapore. The reason is the fact that the portion of Indonesia\'s trade sector to the total gross domestic product (GDP) is much smaller than Singapore, which is above 200 percent. It means that the impact is there, but it is relatively limited compared to Singapore or Thailand. What we must anticipate is the impact of declining imports of capital goods and raw materials which can hit investment and production in Indonesia. It is good for companies to start thinking about substitutions or sources of imports from other countries.

Fourth, how big is the impact? The sensitivity calculation being carried out shows that if China\'s economic growth slows by 1 percent, the Indonesian economy will decline by 0.1 percent to 0.3 percent. I can imagine that the impact during the first half of 2020 will be quite significant. With this scenario, there is a risk that our economic growth will be below 5 percent or in the range of 4.7 percent-4.9 percent in 2020 if we do not do any mitigation. The Indonesian economy alone had indeed grown below 5 percent in quarter IV-2019.

Focus on domestic economy

Fifth, what can Indonesia do? If the global economy and the trade sector are disrupted, we need to focus on the domestic economy. I see that the government needs to carry out counter-cycle policies. The most effective instrument for this is encouraging domestic demand through fiscal. There is no need for us to worry too much to increase the budget deficit. Why fiscal?

I see the problem of the Indonesian economy in the short term is weak demand. In a condition of weak demand, a reduction in interest rates will not have much impact on boosting production, because -- as I mention above -- why should investment be increased if demand does not exist. Therefore, the first step that must be taken is to encourage demand.

KOMPAS/BAHANA PATRIA GUPTA

Would-be umrah (minor haj) pilgrims from Situbondo fall asleep while waiting for a bus to return to their area of origin at Juanda International Airport in Sidoarjo, East Java, Thursday (27/2/2020). The Saudi Arabian government has temporarily stopped the arrival of pilgrims from a number of countries. The temporary suspension is carried out to prevent the spread of Covid-19.

However, it has to be remembered that the role of the APBN (State Budget) is relatively limited. The APBN can only be a trigger to restore confidence and private investment must be followed. That is why, fiscal stimulus requires priority, it needs good quality spending. The problem is not just how much the budget deficit has to rise, but whether it has an impact on economic growth.

I remember, the Triple Three (TTT) called by Larry Summers, former the United States Finance Minister and Professor at Harvard University: Fiscal expansion must meet the TTT (targeted, temporary, timely). In the very short term, government spending must be able to boost purchasing power through household consumption as soon as possible. Give fiscal stimulus to lower middle groups, not the upper group. Why? The lower middle groups have a relatively higher (marginal) propensity to consume. How? Extend and expand programs such as conditional cash transfers, cash for work, non-cash food assistance.

For the middle class, the Pre-Work card program can be used to help the purchasing power while increasing the ability. With this policy, people keep working and purchasing power is maintained. Then, combine this with priority infrastructure spending. Maybe the government can help encourage the tourism sector by, for example, providing subsidies in the form of discounted prices for airplane, bus or train transportation services, or lodging so that the tourism sector continues to run for several months.

KOMPAS/RADITYA HELABUMI

Chatib Basri

The government can also encourage government activities, such as meetings, to be held in tourist areas on weekends. Of course this assistance must be temporary. What else? Maintain the inflation. And, the most important: manage the expectation. Do not make confusing signals.

From the financial sector, if the coronavirus outbreak becomes prolonged, it is necessary to think about the possibility of relaxation of credit restructuring as was done previously. On the monetary side, by maintaining the inflation and the possibility of the Fed to maintain interest rates, Bank Indonesia\'s decision to reduce interest is the right step and needs to be appreciated. In the future, if inflation is under control and the Fed will not raise interest rates, there is still room for Bank Indonesia to reduce interest.

The world is indeed in uncertainty. Anxiety, confusion, and expecting will be with us in the next few months. Humans can indeed be impressed to have no hope in the face of disaster. After all, in the midst of the gloom, anticipation of economic policy must be made. In La Peste, Camus did describe the helplessness of humans in the face of absurdity. However, in the midst of disaster he noted a hope: in human beings there are more characters that can be admired rather than hated. Camus is right.

Muhamad Chatib Basri,Lecturer at the School of Economics and Business, University of Indonesia.