JAKARTA – Indonesian Finance Minister Sri Mulyani Indrawati and her fiscal policy cohorts seem to have a better grasp of what is needed to keep the country ticking over economically during the Covid-19 crisis than her virus-fighting public health counterparts.
President Joko Widodo, as befits his humble beginnings in the Java hinterland, has made clear from the start his government’s focus would be on the lower echelons of society, both to curb social unrest and to shield vast legions of informal sector workers.
The newly unveiled US$24.3 billion health care, social safety net and business rescue package adds up to a relatively modest 3% of gross domestic product (GDP), pushing up the budget deficit to about 5% and fuelling speculation that more cash injections likely lie ahead.
Only this week, the government also successfully launched a pioneering three-tranche $4.3 billion US dollar Pandemic Bond, divided into 10.5 years (3.9% — $1.65 billion), 30.5 years (4.25% — $1.65 billion) and 50 years (4.5% — $1 billion).
Managed by Goldman Sachs, Deutsche Bank, HSBC, Citibank and Standard Chartered, it is Indonesia’s first-ever 50-year Asian bond and the first issue of its kind related to the Covid-19 pandemic.
“This is good fiscal management,” says one foreign banker. “Indonesia’s investment-grade credit rating is now up for review and it has only a limited window in which to get deals out the door before it is possibly downgraded.”
International agencies have already begun downgrading their ratings of Indonesian companies, particularly in the property, manufacturing and mining sectors as questions are raised over their ability to pay back debt amid the Covid-19-driven downturn.
“Refinancing risk is a growing reality for numerous Indonesian issuers,” Standard & Poor’s Global Ratings credit analyst Xavier Jean said last week. “Funding sources are becoming increasingly scarce for small issuers as Covid-19, a depreciating rupiah and low commodity prices drive away foreign capital providers.”
Jean estimated revenues will fall by an average of 5% for rated companies in 2020, mostly in automobile sales, medium to heavy manufacturing, transportation, retailing, hotels, restaurants, real estate and mining, with an after-tax compression in margins of 100-200 basis points.
Some bankers say in this atmosphere it may only be a matter of time before S&P, Fitch and Moody’s feel tempted to downgrade the BBB/stable sovereign credit rating they awarded Indonesia in mid-2019, citing consistent economic growth and good supportive policies.
Indrawati, who guided Indonesia through the 2008 global financial crisis unscathed and then fell an innocent victim to the Bank Century bailout scandal, spent six years as a managing director of the World Bank before Widodo persuaded her to return as finance minister in 2016.
According to friends, it is those years which raised her profile and have helped the country gain access to funds that, as one said, “are critical to the country in times of stress.” One senior diplomat agreed: “Her profile and credibility have helped Indonesia a hell of a lot.”
Bank Indonesia Governor Perry Warjiyo, another United States-trained economist, this week secured a $60 billion repurchase facility from the New York Federal Reserve to boost the central bank’s liquidity requirements if needed during the Covid-19 crisis.
Warjiyo called the credit facility “a second line of defense in case we need liquidity in dollars”, while analysts said it would help ease pressure on the rupiah, which at one point was close to breaching the 17,000 to the dollar mark.
In fact, the rupiah has taken the biggest hit among Asian currencies this year, dropping 14% against the greenback before the central bank intervened last month and diverted $9.43 billion from Indonesia’s otherwise healthy reserves to halt the slide.
Meanwhile, economists say any new spending in the future needs to be directed at supporting e-commerce and essential distribution services, which provide a supply line to markets and pharmacies and are excluded from new social mobility restrictions.
Bluebird, Jakarta’s leading taxi company, and the two ride-hailing start-ups, Go-Jek and Grab, have already switched from moving people to moving goods as locked-down residents have groceries and other essentials delivered to their homes.
The Jakarta municipal government is about to enforce a new Health Ministry social restriction policy, which among other things will ban motorcycle taxis from picking up passengers for the next 14 days. That could be a test of some of the social unrest Widodo has always feared.
The new spending programs have been made possible through a regulation in lieu of law (Perppu), signed by Widodo on March 31, which allows the government to increase the legal limit of the budget deficit beyond 3%.
There is no new limit, but the relaxation applies until the end of the 2022 fiscal year, when the deficit restriction must be returned to the 3% set down in the 2003 Finance Law.
That gives some clue to how long policymakers think it will take for the economy to recover from the pandemic crisis. With only two years at most from then until the 2024 elections, it could make Widodo a lame duck president well before his tenure is up.
Importantly, a provision in the regulation ensures that any actions under the perppu are to be considered necessary economic costs aimed at saving the economy from the current crisis and can’t later be regarded as losses to the state.
That has often been unfairly used as grounds for corruption charges which have seen several senior figures, including the former head of the Pertamina state oil company, draw lengthy jail terms for business decisions that didn’t pay off.
In essence, the government is building on the administrative architecture created through oil price hikes and other crises over the past decade to support a social welfare system that is now one of the most comprehensive in Southeast Asia.
Unlike the collapse of the financial system in 1997-98, the Covid-19 crisis has had an impact across all sectors but particularly hit small and medium enterprises which helped keep the economy afloat through the turmoil of the post-Suharto period.
The new package includes $4.5 billion for health care, much of it to buy test kits, ventilators and specialized protective gear, and $6.6 billion to support 25.2 million low-income families and double benefits for a projected 5.6 million newly unemployed, informal workers and small business owners.
Another $4.2 billion covers tax exemptions for workers earning less than 200 million rupiah ($12,000) a year, and to defer import duties in 19 manufacturing sectors. Corporate income tax will also be reduced from 25% to 22%, although income tax remains at 25%.
Bank Indonesia, the central bank, is authorized to offer guarantees or support to major banks and also to issue financial instruments such as bonds to raise capital from the markets, acting in collaboration with the Financial Services Authority (OJK).
More long-term is a $9 billion economic recovery program combining credit restructuring and financing for small and medium enterprises, which contribute 60% of Indonesia’s GDP, even if many do not pay proper taxes.
Analysts say the financial and related stimulus components of the package, requiring changes to 12 existing laws, demonstrate an awareness that the current crisis has not been caused by money market issues but by a steep slide in consumption and production.
What may hold Indonesia in good stead is its resilience, with relatively low levels of foreign debt, foreign reserves of $121 billion – the second highest level in its history – and an economy driven by domestic demand and less exposed to global economic value chains than most of its neighbors.