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Coronavirus: debt and poverty threaten a hydra-headed Covid crisis in Indonesia

South China Morning Post - May 7, 2020

Richard Maude – Indonesian President Joko Widodo, facing pressure to act aggressively against rising coronavirus infections, has declared a national emergency and given virus hotspots like Jakarta the authority to implement tougher social distancing controls.

But he's also made clear he wants the nation back to "normal" by the middle of the year, pinning his hopes on a significant increase of testing levels, contact tracing and isolation for those infected.

The government's desire to get Southeast Asia's largest economy working again is understandable. But the timing of the decision to ease social distancing measures looms as a critical test.

Easing Indonesia's soft lock down too early will hand momentum back to the pandemic, especially in a country in which the true number of infections is almost certainly substantially higher than the official count.

It has reported more than 12,000 infections and nearly 900 deaths. Indonesia's economic pain could then extend into the second half of 2020 or even 2021. Indonesia reports highest daily spike in coronavirus cases

At that point, Indonesia's already severe Covid-19 crisis could become hydra-headed. In addition to a still unfolding pandemic and economic shutdown, Indonesia could face two further crises – a financial shock with foreign debt defaults and food insecurity and social unrest as a result of rising poverty.

The economic damage President Widodo fears is already clear. Tourism has stopped. Export revenue has been slashed by the global demand shock and low prices for Indonesian commodities like oil (a major source of government funds) and palm oil. Domestic demand has slumped and many businesses have shut their doors. Tens of millions of Indonesians who live day-to-day in the informal sector of the economy are losing their livelihoods.

Indonesia's currency has been one of the hardest hit in Asia, falling to lows against the US dollar not seen since the financial and political crisis of 1998.

The International Monetary Fund (IMF) has forecast Indonesia's economic growth to fall from 5 per cent in 2019 to 0.5 per cent in 2020. But this baseline forecast is premised on the pandemic fading in the second half of 2020 and economic disruption being contained largely to the second quarter of the year. These assumptions may prove more hopeful than real.

Beyond the economy, Widodo's greatest fear is a rupture in the social fabric of Indonesia like the one that occurred during 1997-98 Asian financial crisis.

Indonesia is a more resilient society today than back then. But large-scale protests could have unpredictable effects, potentially weakening Indonesia's democracy and further strengthening the role of Indonesia's security forces at the expense of its civilian institutions.

Indonesia's government knows that hunger will drive unrest. It is stepping in with cash transfers and food supplies. Greater poverty, hoarding and higher consumer prices, rather than food shortages, are likely to be the biggest enemies. But the government will keep a close eye on rice export bans from countries like Vietnam.

Indonesia's government has responded to these economic and financial pressures by lifting a legislated three per cent cap on annual budget deficits to five per cent. Stimulus packages totalling some US$33.4 billion are being delivered.

For the time being, Indonesia should be able to manage the pressures on its relatively modest US$410 billion in foreign debt. It has a foreign exchange war chest of some US$120 billion and is raising funds on the international market through a new long-term "pandemic bond".

IMF liquidity and credit lines offer further emergency support. But resentment of the IMF's role during the Asian financial crisis lingers in Indonesia. Accepting such assistance is unpalatable.

The real financial risk for Indonesia lies beyond the immediate. If the pandemic is severe and longer lasting, and the economic damage extends well into 2020 or even 2021, even a more resilient Indonesia could face a debt crisis as foreign exchange reserves are run down and the economy remains shut.

The lessons from past financial crises are to act early. As others have argued, there's an opportunity right now for close partners of Indonesia like Japan and Australia to give Jakarta extra firepower to keep its financial system stable and ensure the confidence of global markets.

This could be done quickly and easily through significantly enhanced bilateral currency swap arrangements. Stand-by loans could also help.

There's more that Indonesia's friends can do. Personal protection equipment remains an urgent need. Indonesia's partners can work together to ensure the free movement of agricultural commodities during the crisis and advocate for the removal of export restrictions.

Even though the pandemic has a long way to run, Indonesia's partners should also be thinking now how they can best support Indonesia in a recovery phase, where the needs will be different.

The IMF has noted there will be an ongoing need for concessionary financing, grants and debt relief. Creating national stockpiles of essential medicines and medical equipment and rebuilding health systems will be a priority for all countries emerging from the pandemic.

As one of the world's largest democracies and most populous nations, its course in coming decades will be a critical factor in determining the shape of a new regional order. It is a country of the future: it will remember who was with it at its moment of greatest crisis.

[Richard Maude is a Senior Fellow at the Asia Society Policy Institute and Executive Director, Policy at Asia Society Australia. He is a former senior Australian diplomat and intelligence chief.]

Source: https://www.scmp.com/print/week-asia/opinion/article/3083203/coronavirus-debt-and-poverty-threaten-hydra-headed-covid-crisis