COVID-19: General Situation and Business Development

The corona pandemic has severely restricted public life in Indonesia. Schools and universities are closed, and those who not laid off are forced to work from home. Many shopping malls, shops and restaurants have temporarily closed. Road traffic runs smoothly for the first time in Jakarta. The brand new metro is almost empty. In front of all large public and private buildings, visitors have to undergo infrared fever measurement. In some places, they are sprayed with disinfectants. Everywhere floor markings urge you to keep your distance. Much of the international flight has been canceled.

All of these measures have been implemented. Though the number of people infected and the number of deaths are small in international and regional comparison in terms of population size, no one knows to what extent because the test capacities cannot keep up with the demand. The test results are also considered doubtful.

Indonesia has a rapidly expanding health system, but it is that of an emerging country. It is not prepared for a major crisis. Everything is missing - from hospital beds to protective clothing and respirators.

The government warns of "social distancing" and has so far rejected a general curfew, which is requested by local medical experts. Such a situation would simply not be enforceable and certainly not sanctionable due to the cramped living conditions of many people and their need to be economically active. Even if only the existing restrictions lasted longer, this would have serious social consequences, because only about twenty percent of Indonesians live in financially secure conditions.

So far, the measures have been met with a high level of acceptance among the population. Nevertheless, at least temporarily, millions of people would lose work and income and have to use up their sparse reserves. Limiting public life for several months would fuel great dissatisfaction.

The first test of the resilience of the population is the upcoming fasting break ("Idul Fitri"), which will take place in late May after the end of Ramadan. To this end, 20 million people travel across the archipelago to their home villages and towns every year. The government is considering a ban or restriction. For many people, this would be a serious imposition because, on these holidays, the family ties that function as a quasi-welfare state are strengthened.

Industry and tourism suffer 

Indonesia's economy is badly hit by the corona pandemic. The restrictions on public life put pressure on demand. Given the uncertainty of how long the economy will be affected by the effects of the virus, it is too early to accurately predict economic growth for 2020.

Before the pandemic, the Treasury had expected real economic growth of 5.3 percent. In mid-March, the Indonesian central bank then lowered the forecast to a corridor between 4.2 and 4.6 percent. In the meantime, a new scenario from the Ministry of Finance assumes only 2.3 percent. In the worst case, economic output could even decline to 0.4 percent. This would be the lowest growth in more than 20 years. Since the Asian crisis of 1998, Indonesia's economy has been growing continuously - on average by more than 5 percent.

The tourism sector is suffering the most. The manufacturing industry is also affected because it is highly dependent on imported primary products, especially from China. At the same time, the Middle Kingdom is reducing its Indonesian exports by thirty percent beyond the oil and gas sector. As a rule of thumb, for every percentage point of lower economic growth in China, Indonesian economic growth falls by 0.3 to 0.6 percentage points.

The Indonesian Ministry of Finance has also said goodbye to the budget deficit target of 1.8%of GDP for 2020. The current three percent deficit limit was raised to five percent by 2022 in order to support the economy with comprehensive aid measures.

Historical Rupiah exchange rate decline 

With the advent of the corona pandemic, many investors have withdrawn funds from Indonesia, resulting in a dramatic drop in the currency's exchange rate. On April 2, 2020, the US dollar was trading at Rp 16,741 per. This corresponded to a loss in value of almost 20%within just six weeks and scratched at the historical low of Rp 16,950 rupiah per 1 USD. The previous negative record comes from the turmoil of the Asian crisis in 1998.

During the same period, the Rupiah lost about 20 percent of its value against the euro. There are also losses against the other major currencies in the ASEAN area and the Australian dollar. However, they are somewhat lower. The Treasury's worst-case scenarios assume that the rupiah will slide further.

The Indonesian central bank has so far spent large sums to support the rupiah. After all, the country has currency reserves of $130 billion. Indonesian government finances are considered solid, but potential government debt is largely outsourced to state corporations that control large parts of the economy.

The central bank also lowered the key interest rate (seven-day reverse repo rate) by 0.25 percentage points to 4.5% in order to provide the markets with more liquidity. The last cut - also by 0.25 percentage points - had only occurred eight weeks earlier. The key interest rate was 6% a year ago. 

GTAI is the foreign trade and inward investment agency of the Federal Republic of Germany. The organization advises foreign companies looking to expand their business activities in the German market. It provides information on foreign trade to German companies that seek to enter into foreign markets.