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Indonesia could be seriously hurt by coronavirus

  • Date modified: May 02, 2020

Emerging Market Experts (EMEx) - On the 2nd of March, Indonesian President Joko Widodo announced two Indonesian citizens were diagnosed with the new coronavirus. Within hours after the announcement, thousands of Indonesians crowded the supermarkets looking for food and medical supplies. They didnt only target supermarkets but also smaller convenience stores and pharmacies. Shops quickly ran out of certain items, such as instant noodles, while some suppliers raised their prices tendfold the usual on masks and sanitizers.

by: Erwin Adistiana & Tjeerd S. Ritmeester - An Emerging Market Experts (EMEx) Production

Economy

The short lived panic shows what the potential consequences are of a larger outbreak in a major emerging market like Indonesia. Closed shops, quarantine measures and restricted movement would have a significant impact on the country’s economy with half of GDP growth depending on consumer spending. The fact such measures were not taken yet, is also the reason why the impact on Indonesia’s economy has been relatively small. While the Indonesian stock exchange plunged over 7% on the 9th of march, property markets remain largely unaffected because the Indonesia’s domestic market has been less affected. When that changes the impact on Indonesia's economy will reach a new phase.

The current lack of domestic impact doesn’t mean the external impact on Indonesia is neglectable. A 1% drop in China's GDP growth can result in a 0.3% to 0.6% drop in Indonesia's GDP growth, Finance Minister Sri Mulyani said. President Jokowi and his ministers took some important measures to protect consumer spending by announcing a stimulus package worth 742m USD. This underscores the impression that the government believes that as long consumer confidence can be stimulated, the impact of corona will be managable and long term economic damage can be prevented. The announced package is focused on staple goods programs, housing loans and payment subsidies for the bottom 30% incomes. Tax discounts must stimulate consumer confidence as well.

Tourism

Some sectors feel the effects more than others. Especially the tourism sector is stumbling with the virus. Statistics Indonesia (BPS) revealed that year-on-year growth in tourist arrivals dropped from 9.5% in January 2019 to 5.85% in January 2020. With corona starting to move its way around the world, growth rates are expected to drop even further in February. A decline in tourism arrivals compared to the year before is not unlikely. Tourism is a major pillar beneath the development of non-Jakarta regions and an important source of employment. The long-term effects on tourism might therefore have a broad economic impact. For now, Indonesia closed its border for travellers from China, Italy, Iran and South Korea. Its possible more countries might follow. Discounts and tax incentives must convince Indonesian tourists to travel around the country.

Airlines

Airlines and airports are hit hard as well. Airport operator PT Angkasa Pura I, managing 15 airports in the eastern part of Indonesia including Yogyakarta and Denpasar, said that as many as 12,703 flights have been cancelled. That number comes down to about 1.67 million passengers from January to February. The biggest impact was on Bali with several domestic and regional airlines closing international routes. Furthermore, fewer tourists in Indonesia means less commercial activity in airports such as restaurants and stores. The full impact is not known but worrying enough for the operator to try to balance losses by focusing on its other business arms. Airlines were also hit by Saudi Arabia’s decision to ban Indonesian pelgrims who want to visit Mecca. Hundreds of thousands Indonesians go on Hajj each year making it a prime travel destination.

Outlook

So far, Indonesia has mostly felt the impact of measures taken by other countries. It tries to balance losses by protecting and even boosting consumer spending. However, it's unlikely that such measures will be enough when the virus starts to spread in Indonesia. The country is largely dependent on its domestic market and measures to contain the virus will have a significant impact on the economy. Finance Minister Sri Mulyani said projected growth of 5.3% for 2020 might slide to 4.7%. This must be seen as an optimistic scenario where Indonesia has not seen a larger outbreak itself. The latter is all what matters for Indonesia. If Indonesia is able to contain the virus and prevents an epidemic within its borders the current measures might be sufficient. Otherwise, Indonesia's economy might face a difficult 2020, not just for sectors that depend on foreigners but with deep losses all over the board.

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