Economy: Indonesia’s economy would suffer a contraction of 1.0 percent this year before recovering and grow 5.3 percent in 2021, according to the recent forecast by Asian Development Bank (ADB). The stronger household discretionary spending, improved investment climate, and a recovery in the global economy would help the recovery next year. “The COVID-19 pandemic has caused significant economic disruption globally and in Indonesia, with adverse impact on jobs and livelihoods, especially among the most vulnerable segments of society,” said ADB Country Director for Indonesia. Timely implementation of policy measures, such as those included under the Indonesian government’s economic recovery program, would go a long way to help Indonesia bounce back and safeguard the welfare of households.
Gross domestic product (GDP) levels in 2021 will remain below what had been envisioned and below pre-crisis trends. Indonesia’s economy declined in the first quarter of 2020 to 3.0% year on year. Domestic consumption fell by 2.8% as households reduced discretionary spending, while government consumption expenditure showed signs of a gradual pickup as social services to households were expanded. Growth in fixed investment also slowed down, but recent investments to improve internet connections, such as the Palapa Ring project, have allowed modern industry and services to continue operating amid mobility restrictions. Sustained demand for palm oil and metal ores partly countered a contraction in exports of services, as well as oil and gas. With governments across the world stimulating recovery of their economies, a quicker rebound in demand for Indonesia’s commodities exports may help lift the forecast.
Industry: The pharmaceutical and medical device industries are included in the Ministry of Industry’s Making Indonesia 4.0 Program, which targets to expedite the application of Industry 4.0 in the manufacturing sector. The industry minister stated that Making Indonesia 4.0 is a strategy towards Industry 4.0 with the transformation of digital manufacturing. The aim is to increase productivity, efficiency, and competitiveness of national industries. Making Indonesia 4.0 serves as a roadmap to expedite the development of globally competitive industrial sectors. The program aims to realize the target to secure Indonesia’s ranking among the top 10 countries with the largest economies in the world by 2030. When the program was implemented in 2018, the Ministry of Industry had selected five priority sectors — the food and beverage industry, textiles and apparel, automotive, chemical, and electronics — to be the focus of development under the Making Indonesia 4.0 Program.
“The inclusion of the medical device and pharmaceutical industries in the priority development of Making Indonesia 4.0 is one of the efforts of the Ministry of Industry to immediately realize a self-reliant Indonesia in the health sector,” the industry minister stated. Medical equipment and pharmaceutical industries come under the high-demand category amid the COVID-19 pandemic when other sectors are bearing a major brunt. Furthermore, self-reliance in the medical device and pharmaceutical industries is projected to contribute to the program of curtailing imports by up to 35 percent by the end of 2022. Innovation and application of Industry 4.0 in the medical device and pharmaceutical industries can increase productivity. To this end, the Ministry of Industry has continually boosted the competitiveness of the industries by encouraging the transformation of digital-based technology. Utilization of this digital technology will begin from the stages of production to distribution and to consumers. Running digitalization enables companies manage their work processes and human resources and stay productive.
Employment: Around 6.4 million Indonesians have lost their jobs due to the impact of the Covid-19 pandemic and new rounds of lay-offs are likely to hit the country by August, according to the Indonesian chamber of commerce and industry (Kadin). The data points to even deeper economic downturn than the government’s worst-case scenario for 2020 gross domestic product (GDP) to contract 0.4%, resulting in 5.23 million people losing work and 4.86 million falling into poverty. Breaking down some of the losses, textile industry has laid off 2.1 million workers, land transportation 1.4 million jobs, while footwear makers have shed 500,000 workers and hospitality around 430,000.
Kadin expects GDP to shrink by 6% in the April-June quarter, sharper than the government’s forecast for a 3.1% contraction, and also sees negative growth for full-year 2020. The carmaker association, Gaikindo, now expects 2020 sales of only 400,000 units, down from a pre-pandemic outlook of 1.1 million and a later forecast of 600,000. A gradual easing of Covid-19 curbs has allowed some rehiring, but more jobs could be lost in July and August due to depressed global trade. If there is no support from the government in the form of quickly handed out stimulus, it’s very possible the number of unemployed will rise again. The government’s total allocation for Covid-19 response is Rp695.2 trillion, 42% of which is earmarked for public-health and social-protection programs.
Finance: In the midst of this economic uncertainty, banks will again be haunted by an increase in problem loans or non-performing loans (NPLs). The corona virus domino effect not only drags small and medium-sized businesses but also corporations. The entrepreneurs began to have difficulty paying interest and principal during this pandemic. As a result, in the first quarter, banks continued to record increases in problem loans, even though the authorities had issued credit restructuring rules for debtors affected by Covid-19. In March 2020, the NPL ratio was generally recorded at 2.79% (gross) and 1.04% (net), when entering April 2020, the NPL ratio increased to 2.89% (gross) and 1.09% ( net).
The increase in NPLs more or less affects the capital adequacy ratio or capital adequacy ratio (CAR) because banks must allocate reserves for losses. As a result, in the first quarter, there were several banks that experienced capital depreciation. Regulators as much as possible maintain the integrity of bank capital. The Indonesian Financial Services Authority (OJK) has relaxed a regulation stipulating that banks may loosen credit to the current category after restructuring to avoid disruption on the bank capital. OJK also decided to postpone the implementation of the Basel III framework to keep bank capital in a safe condition. Through the restructuring the loans would not be downgraded into non-performing loans. If they are safe, the bank does not need to form a reserve for bad loans, so that the banking capital composition is maintained.