Adrian Wail Akhlas, Jakarta – Indonesia must focus on controlling the spread of the coronavirus to speed up the economic recovery, economists have said, arguing that the current healthcare response could instead push the economy into a deep recession this year.
The government should implement strict virus containment protocols, such as those implemented by China and Vietnam, to expedite the economic recovery, said the Institute for Development of Economics and Finance (Indef) economist Didik Rachbini on Thursday.
"We should not dream of an economic recovery if we can't control the virus spread," Didik said in a virtual discussion. "Although we may not see another lockdown, the government must shift its focus to control the pandemic first or its risks a deeper economic slump."
Indonesia's economy shrank 5.32 percent in the second quarter, the worst since 1999's first quarter, as all components of economic activity, except net exports, plunged amid large-scale social restrictions (PSBB) implemented in much of April and May to curb the virus spread.
The decline marks the beginning of a near-certain recession, Didik added.
Several economies, such as China and Vietnam, performed much better in the second quarter as they implemented stricter virus containment measures, with China recording 3.2 percent gross domestic product (GDP) growth after a first quarter contraction and Vietnam's GDP grew 0.36 percent.
Indonesia's economic performance in the second half will also depend heavily on the effectiveness of the national economic recovery program, Didik said. "The government failed to realize positive [government] spending growth in the second quarter, that must change soon."
Government spending, which is expected to anchor the economy and boost people's purchasing power amid cooling private sector activity, plunged 6.9 percent during the period. The fall is deeper than the 5.51 percent contraction in household spending, which accounts for more than half of the economy.
President Joko "Jokowi" Widodo ordered on Tuesday the nationwide enforcement of COVID-19 protocols, making violators subject to legal sanctions throughout the country.
The rules, established in Presidential Instruction (Inpres) No. 6/2020, seek to improve public compliance with health procedures to stem the spread of the coronavirus by establishing sanctions against businesses, organizations and collectives that are found to have violated prevailing health protocols.
Indonesia recorded 1,882 new coronavirus cases on Thursday, bringing the total number of confirmed cases to more than 118,000 across the country with more than 5,000 fatalities, official data show. The government has continued with the economic reopening begun in early June despite a jump in the daily infection rate as it works to prevent a deeper economic fallout.
"Looking ahead, we see limited prospects for a healthy economic recovery in the second half of the year due mainly to two factors: firstly, at the time of writing, Indonesia is yet to contain the spread of the COVID-19 outbreak as caseloads continue to rise on a daily basis," Fitch Solutions Country Risk & Industry Research wrote in a report on Thursday.
"Secondly, the outlook for the global economy remains soft as key markets like the United States, Japan and Australia are seeing a resurgence in COVID-19 cases, which has led to renewed confinement measures."
Fitch Solutions continues to expect Indonesia's economy to contract 1.3 percent this year before recovering by 3.3 percent in 2021.
Finance Minister Sri Mulyani Indrawati expects the economy to grow at no more than 0.5 percent or even contract further in the third quarter, while fourth-quarter GDP growth is projected to be near 3 percent, making for a full-year expansion of zero to 1 percent.
"We think both central and local government leaders – some of whom will have their eyes fixed on the 2024 elections – will avoid implementing fresh lockdowns and focus on improving healthcare capacity instead to contain the surge in COVID-19 cases," said Bahana Sekuritas economist Satria Sambijantoro.
"Our sense here is that household spending growth will recover, albeit slowly, as the populace adapts to new normal economic activities through social distancing and IT utilization," he went on to say.
The government plans to spend aggressively in the coming months to support the economic recovery, with state spending to reach more than Rp 1.4 quadrillion (US$101 billion) in the second half of this year, Sri Mulyani said on Wednesday.
The government also plans to reallocate around Rp 70.8 trillion from existing ineffective stimulus packages to fund social aid expansions and new incentives to boost household spending and support small businesses.
It has allocated Rp 695.2 trillion for the COVID-19 response budget to boost the economy and strengthen healthcare spending by providing cash transfers and tax cuts, among other measures.
"The pace of the economic recovery will heavily depend on how well the government controls the spread of COVID-19 in Indonesia and the effectiveness of the national economic recovery program going forward," said Bank Mandiri economist Andry Asmoro.
He projected the economy to shrink 1 percent this year, as the decline in economic activity had been "greater than previously anticipated".