Corona, Oil War, and the Complexities of Our Economy

The negative impacts of the trade war are still everywhere. Yet, the outbreak of Coronavirus Disease 2019 (Covid-19) adds further to the series of economic, political, and social problems as a global pandemic. Until this article was made (31/3/2020), Covid-19 had invaded 199 countries, transmitted to 787.876 people, killed 37.846 of the world population—while 165.935people are recovered.

Indonesia is included in the list of Covid-19 spread, with the rise in the number of positive cases increased dramatically in 21 days since it was first announced by President Joko Widodo on Monday (2/3). The National Agency for Disaster Countermeasure (Badan Nasional Penanggulangan Bencana/BNPB) recorded a total of 1.414 people positively infected with Covid-19, 122 of which died (the death rate is considered the highest in Southeast Asia) and 75 people, fortunately, were cured.

This new type of Coronavirus—which has been spread widely since it was first detected in Wuhan City, China—seemed to ruin the expectations of almost all citizens of the world, most of whom were hoping for bright prospects for the year 2020. Instead of dreams come true, what happened is exactly the opposite. Panic struck, a number of countries isolating citizens and their territories (lockdown), and sadly the number of fatalities is increasing every day.

In the midst of chaos due to Corona, oil-producing countries caused trouble and worsened the situation. Russia and Saudi Arabia triggered the oil price war in the aftermath of disagreement in the volume of oil production at the OPEC summit. Russia, which refused to trim oil production, was opposed by Saudi—at the behest of the Crown Prince Muhammad bin Salman—by raising the production of 1 million barrels per day and discounting prices to USD 6-8 per barrel lower than the market prices. 

As a result, quoting from Reuters, the price of WTI crude oil on the New York Stock Exchange (NYMEX) dropped around 50% to USD 21.16 per barrel, from previously above USD 40 per barrel in the first week of March 2020. Meanwhile, the price of Brent crude oil on the London stock exchange (ICE) was corrected to USD 23.04 per barrel from the previous range of USD50 per barrel. The combination of the trade war, the Covid-19 pandemic, and the oil price war opened the year 2020, a tense and heavily challenging year for the world’s community.

Read: Facing Critical Condition, Indonesia Poured Out IDR 405 Trillion to Address Covid-19

Although previously there were parties who arrogantly believed that this archipelago country with a population of 266 million would be fine, in fact, Indonesia was stuttering and panicking when the reality hit. The IDX Composite (Indeks Harga Saham Gabungan/IHSG)—the indicator of Indonesian capital market activity—dipped sharply in just a matter of days. IHSG started 2020 at the level of 6,284 and began sloping when the outbreak was first discovered in Wuhan on Sunday (5/1).  

Its decline was increasingly drastic, especially since the Covid-19 was first detected in Indonesia. Panic selling occurred on the stock market and made the IHSG fell to the level of 3.398 on 24 March 2020, the lowest since 2012. 

Various attempts were made by the authorities and the government to prevent panic, one of which was by instructing State-Owned Enterprises of Indonesia (Badan Usaha Milik Negara/BUMN) to do a buyback and pouring out fiscal stimulus. These combination of policies is not enough to return the IHSG to its prime position above 6000. But at least, it is enough to temporarily keep the index fall level so from the worst scenario. In trading on Monday trade (30/3), IHSG closed at 4,415 levels. 

Rupiah was even worse.The value of Rupiah experienced freefall since corona issues dominated the news. Garuda's currency exchange rate is approaching the worst level in Indonesian history (IDR 16.650 on 17 June 1998).This condition forced Bank Indonesia (Central Bank of Indonesia) to pour out hundreds of trillions funds to spot markets in the last few days to stabilize rupiah. The last position based on Bank Indonesia's middle rate, Rupiah is at the level of IDR16,367 per USD (31/03).

Not only in the capital and financial markets, but panic buying also takes place in traditional markets. The concerns of contracting the Covid-19 has not only triggered the hunt for masks, hand sanitizers, and disinfectants but also traditional herbal spices such as red ginger and temulawak whose prices have surged significantly. The escalation of consumer spending transactions has also increased on a number of staples, following the social distancing policy of the central and regional governments that dismiss schools for two weeks, as well as encouraging worship and work from home. Circulation of photos of empty shelves in a number of shopping centers depicts supply chain problems and scarcity of staples that have the potential to trigger high inflation.

Above all, we have not seen economic data in other sectors that may have been affected by the disruption of the production process, the tighter trade traffic, the sluggish tourism activities, and the stagnation of the transportation sector.

Read: Indonesia Cuts Tarrif on Corporates Income Tax and Officially Applies Digital Tax

Risk of Stagnation

Minister of Finance Sri Mulyani Indrawati said that overcoming the economic impact of the Coronavirus would be more complicated than the 2008-2009 global economic crisis. One thing is certain, Indonesia's economic pace is certainly slowing down. Through a video conference, this former World Bank Managing Director firmly said that corona pandemic will impact on the economic slowdown of Indonesia, far below the 5,3% economic growth target in State Budget of 2020.  In fact, economic stagnation can occur if the corona pandemic cannot be controlled. This prediction was strengthened by the IMF which stated that the world had entered recession

From the fiscal side, the combination of corona pandemic and declining oil prices will put pressure on the country's balance sheet from two sides, namely spending and revenue. Tax and non-tax revenues from the oil and gas sector are likely to undergo correction following the drop in oil prices. The government fiscal stimulus support to ward off the impact of the Covid-19—Income Tax Article (ITA) 21 is borne by the government for workers in the manufacturing industry sector, exemption from ITA 22 on import, 30% reduction in ITA 25, and accelerated Value Added Tax (VAT) refunds for 19 specific sectors—also make the shortfall risk even bigger.  

Meanwhile, in terms of spending, the cost of Covid-19 countermeasures can certainly add a huge burden to the state budget, especially in the health sector. To tackle the Covid-19, the central government allocated a budget transfer to the regions of IDR 17.17 trillion. Not to mention the special subsidies for the beneficiaries of the Groceries Card (Kartu Sembako) in the area affected by Corona, the estimated budget needs reached IDR 4.56 trillion.    

As a "crisis specialist", Sri Mulyani's words cannot be underestimated. She is experienced in diagnosing economic health and concocting powerful drugs to treat or prevent Indonesia from the epidemic of the economic recession that is sweeping the world.

The question is, how effective is the prescription for treating economic diseases this time? Is the economic stimulus the only "herbal medicine" capable of protecting Indonesia's health from the corona outbreak? How about the readiness of the government in other fields?

This is only the third month in 2020 and no one knows when this Covid-19 epidemic will end. It all depends on how alert—not alarmed—the Indonesian Government in tackling this outbreak. The issue is no longer whether we should do lockdown or not, but whether we are serious in eradicating Coronavirus.

Read: Fighting Against Corona, Indonesia Prepares Economic & Financial Crisis Protocol

China, which was initially blamed for the spread of Corona, is now becoming a concrete example of the country's readiness to deal with the rapid spread of this deadly virus. Indonesia shall not be ashamed of imitating a similar policy if we do not want to lose more in terms of the economy and especially lives. The economy or investment should not be a priority nor ignoring the human side. Such an interesting quote from Ghanaian President Akufo Addo, who recently went viral: "We know how to bring the economy back to life. What we don't know is how to bring people back to life."

*) This article has been published on kumparan.com Tuesday,31 March 2020

 

 

Disclaimer! This article is a personal opinion and does not reflect the policies of the institution where the author works.