26 Jun From “10-Year Crisis” to COVID-19 Pandemic: The Journey of Indonesia’s Economy from External Shock
Economy Recession: 10-Year Crisis Cycle
Indonesia has experienced two economic crises in 1998 and 2008. In 1998 there was an economic crisis which affected Indonesia. The crisis was caused by the fall in the exchange rate of the bath, the Thai currency against the US dollar. Meanwhile, in 2008, there was another economic crisis in Indonesia. The crisis began with the great financial crisis in America in 2007.
When viewed from the period of occurrence of the economic crisis in Indonesia, the crisis occurs every decade. Therefore, the term “10-Year Crisis” emerged. When viewed from the background of the causes of the crisis, the 1998 and 2008 crises had different causes. Thus, this ten-year crisis cycle is actually irrelevant because it just happens to happen every ten years. Responding to this issue, the Governor of Bank Indonesia, Agus Martowardojo, believes that the 10-year crisis will not occur this year. This assumption is based on the economic reality that has occurred in Indonesia to date.
Based on data released by Bank Indonesia in the first quarter of this year, Indonesia’s economic condition can still be said to be stable. Investment in 2018 tends to increase due to infrastructure projects. The increase was realized in power plant projects and airports. In addition, increasing government consumption was supported by the distribution of social assistance and village funds, as well as stable private consumption due to the stability of public purchasing power, and export performance that remained positive due to the effect of increasing world economic growth.
In addition, the inflation rate in February 2018 remained under control in the range of 0.17% month to month and 3.18% year to year or can be said to be in the range of 3.5 + 1% (yoy). Indonesia’s financial system is still stable, as reflected in the capital adequacy ratio (CAR) of 23.2% and a liquidity ratio of 23.2% in January 2018.
Analysis of the first three months of this year shows that Indonesia is not overshadowed by the crisis. Even though there are simultaneous regional elections and presidential elections in 2019, according to Standard Chartered Bank Indonesia’s Chief Economist, Aldian Taloputra, there is indeed an impact on investment, but the risk tends to be small because historically the regional elections and elections have gone smoothly and have not interfered with investment. Therefore, the government also made several efforts to prevent the causes of this year’s economic crisis, such as a simulation of crisis management which focused on testing how the implementation of Law no. 9/2016 concerning Prevention and Handling of Financial System Crisis (PPKSK) would be tested.
As for Bank Indonesia, in effort to maintain a balance between macroeconomic and financial system stability, Bank Indonesia seeks to optimize the monetary, macroprudential and payment system policy mix, as well as mitigate the increase in short-term risk. In addition, Bank Indonesia is also strengthening policy coordination with the government to maintain macroeconomic and financial system stability, as well as being aware of the increasing risk of global financial market uncertainty and taking steps to stabilize the exchange rate.
Economic Shock During Pandemic
The economic shock caused by COVID-19 can be divided into three stages. First, the virus has affected employees and their expenses. In the informal sector, workers are not paid when they are sick. Second, in order to flatten the curve, the government has implemented some restrictive measures, including temporary travel bans, restrictions on public transportation, and even closure of businesses. However, these public health control measures have had an impact on the economy. Therefore, thirdly, restricting economic activities will lead to an economic recession.
This recession occurred during the Global Financial Crisis (GFC) in 2008, when consumers and businesses around the world were on the sidelines. Negative economic growth and the decline in the Purchasing Managers Index (PMI) reflected a slowdown in particular. The COVID-19 crisis simultaneously affected the healthcare and economic systems in multiple places. As a result, all departments are affected, although the impact is unevenly distributed throughout the system. Baldwin (2020) adapted the famous currency circulation diagram and pointed out that any interruption in the flow of any place will lead to a slowdown in any place, because the economy will continue to operate only when the currency continues to circulate through the system.
The government of Indonesia has implemented several policies to mitigate the impact of COVID-19:
- It has established a COVID-19 task force to conduct a rapid health response, while using the military and police forces to assist with the logistical response during the shutdown (Djalante et al., 2020).
- At the same time, the government used economic policies, from budget redistribution to expanding social protection programs (International Labor Organization, 2020a) to reduce the negative impact of the pandemic on economic and social activities.
Although these policies can promote the recovery process, it is important to note that COVID-19 not only brings new pressure to the economy, but also exposes the fragility of the current economic system. Ensuring a sustainable recovery is essential not only to address the adverse effects of the COVID-19 pandemic, but also to prevent similar crises from recurring in the future.
The Indonesian Bureau of Statistics (BPS) announced on Thursday that Indonesia’s open unemployment rate has risen to the highest level since 2011, and the pandemic has resulted in 2.67 million unemployment.
The national unemployment rate rose to 7.07% in August, an increase of 1.84 percentage points from 5.23% in the same month last year. A total of 9.77 million people were unemployed in August, a year-on-year (year-on-year) increase of 37.61% since August 2019. “The COVID-19 pandemic has had an extraordinary impact on the labor market,” he told reporters Suhariyanto, the director of BPS, during a press conference. BPS data also shows that approximately 29.12 million people or 14.2% of the country’s labor force are affected by the pandemic.
According to BPS data, of the total, 24 million people have had their working hours reduced, 1.7 million people have been laid off, 2.56 million people are unemployed, and 760,000 people are no longer considered part of the labor force. After Indonesia’s economy contracted again in the third quarter, it officially entered its first recession since the 1998 Asian financial crisis. Southeast Asia’s largest economy contracted 3.49% annually in the third quarter, because almost all components of gross domestic product (GDP) have fallen as COVID-19 cases continue to increase. Also read: Breakdown: Indonesia entered its first recession since 1998, contracting 3.49% in the third quarter. Suharyanto said that the pandemic has also led to an increase in informal workers and a decrease in regular workers.
In August, the number of informal workers among the country’s 1284.5 million labor force rose by 4.59 percentage points to 60.47%. At the same time, regular employees accounted for 39.53% of the total workforce, a decrease of 4.59 percentage points. “Agriculture, commerce and manufacturing hired the most workers in August,” he continued. The agriculture and commerce sectors employ the largest number of workers, representing 29.7% and 19.23% of workers, respectively. Compared to a year ago, these two industries hired more people in August this year.
However, compared to the same period last year, the manufacturing industry, which employs 13.61% of its workers, laid off 1.3% in August. In early June, the Minister of National Development Planning, Suharso Monoarfa, announced that around 5.5 million people could be unemployed this year, raising the unemployment rate from 5.23% last year to 8.1%. at 9.2%. Thus, up to 12.7 million people are expected to be unemployed next year, up from 7.05 million in 2019. The government’s baseline scenario for next year predicts that the unemployment rate will be between 7.7% and 9.1%.
Unemployment surges to decade high as COVID-19 causes millions to lose jobs – Business – The Jakarta PostMicrosoft Word – 20201226 – Thinking Ahead Indonesia’s Agenda on Sustainable Recovery from COVID-19 Pandemic (Final).docx (bappenas.go.id)