Post-Covid Prospects: Indonesia

The fourth most populous country in the world, Indonesia has a vibrant economy with great diversity across the nation. With its demographic dividends, improvements in business environment in recent years, as well as development in export sectors, Indonesia enjoyed decent economic progress, with an average economic growth rate of 4.8% a year from 2010 to 2019.

However, the Covid-19 pandemic has disrupted Indonesia’s growth trend and dragged the country’s economy into recession for the first time since the Asian Financial Crisis in 1998. The unemployment rate once passed 7% and poverty rate climbed over 10% in mid-2020.

With the improving pandemic control lately, economic activity has resumed. The IMF has projected a moderate 3.2% real GDP growth in 2021.

David Sit, Assistant Principal Economist (Asian and Emerging Markets) at HKTDC, interviewed Indonesia’s Consul for Economic Affairs in Hong Kong, Slamet Noegroho, in October 2021 to discuss how Indonesia weathered the impacts brought by the pandemic, as well as the economic outlook and development prospects for the country in the years to come.

David Sit:

Can you brief us on the situation in Indonesia regarding Covid-19 and the progress of the country’s vaccination programme?

Slamet Noegroho:

Indonesia saw its first Covid-19 case in March 2020, with later peaks of infection in January and July 2021. The situation has been improving in recent months. The number of new daily confirmed cases was down to less than 1,000 in October, but we are vigilant on the new variants, particularly in the mu variant that might be more infectious. We are working diligently to prepare for another probable peak in December.

In response to the Covid-19 pandemic, the Indonesian Government has responded swiftly with a three-prong control-detection-vaccination strategy. The control strategy is characterised by measures on social distancing and the restriction of public activity in high transmission areas. In particular, the Large Scale Social Restriction Policy (LSSR, or Pembatasan Sosial Berskala Besar, in Indonesian) was promulgated to provide an overall legal framework to impose restrictive measures.

The Community Activities Restrictions Enforcement (CARE, or widely known as PPKM in Indonesian) was further implemented in early 2021 to clearly define a four-level response scheme based on weekly confirmed cases and other quantitative indicators, responding with compulsory actions that must be taken to restrict activities and residents’ mobility in specific cities and regions with high transmission occurrence in order to curb virus transmission.

The second strategy consists of intensive testing. We are now able to do more than 200,000 tests per day and are aiming for 400,000 per day, along with active tracing – we collect 1,000 samples per month to monitor transmission and new Covid-19 mutations in the country.

Vaccination has been a priority of Indonesian Government in pandemic control. According to the Ministry of Health, nearly 120 million vaccine doses have been secured as of July 2021, of which more than 100 million doses are from Sinovac. More than 46.8 million people have received their first dose, while 20.1 million have also received their second dose.

As we are working towards a vaccination capacity of two million doses per day, we have heightened the target of vaccinating more than 208 million people above 12 years old for their first dose by the end of April 2022.

Currently, the main vaccination scheme, Vaksinasi Program, is mainly government funded, which also covers some foreigners working in Indonesia. The program is supplemented by the Vaksinasi Gotong Royong (VGR) scheme, which allows private and state-owned corporations to purchase vaccines for their employees and families to accelerate vaccination progress. To further encourage vaccination, the government took initiatives such as pick-up and drop-off services or door-to-door vaccinations for elderly.

The issue that currently faced by Indonesia, as described by the Health Minister Sadikin, is vaccine supply. Indonesia is fortunate to have secured enough vaccine doses to achieve the vaccination target, including those delivered and pledged by suppliers. We are also scaling up local vaccine production, with PT. Bio Farma, a state-owned pharmaceutical company, now packing and distributing Sinovac vaccines from bulk packages into individual doses.

In the longer run, we are developing local vaccines to ensure a long-term sustainable supply. Two out of the seven candidates are currently making better progress, they are vaccines being developed by the Eijkman Institute in partnership with PT.Bio Farma, and another by Airlangga University in partnership with PT.Biotis.

Sit:

How was Indonesia’s economy impacted by the Covid-19 outbreak? What do you see as the near‑ to medium‑term outlook of Indonesia’s major industries and trade? What has the Indonesia government done to support businesses and the economy?

Noegroho:

Covid-19 took a heavy toll on Indonesia’s economy. The real GDP contracted by 2.1% in 2020, resulting in the first recession in two decades. While the restrictive measures are essential to control the spread of the virus, they unavoidably impacted both the manufacturing sector and services industries as factories and outlets were once closed down, and caused disruption to supply chain and business activities, in addition to the dropping external demand.

A key government concern is the employment pressure and poverty caused by the pandemic, in which two million people lost their job, resulting in a 1% increase in unemployment rate, as well as a 2.5 million people falling into poverty. In response, the Indonesian Government took strong fiscal and monetary measures to alleviate the effects brought by the pandemic in order to support businesses and the Indonesian people.

According to the Ministry of Finance, the National Economic Recovery Program (PEN) provided IDR576 trillion (approximately US$41 billion) of fiscal support in 2020, which covered income tax exemption, VAT and import tax refunds and sectoral support programs etc for businesses, especially MSMEs, as well as extra spending on healthcare and social protection for people in need of assistance. The PEN program this year increased by nearly 30%, budgeted to IDR775 trillion and will widen the support in the hope of accelerating economic recovery and supporting jobs creation.

On the monetary side, the central bank, Bank Indonesia (BI), has cut interest rates several times to inject liquidity into the financial system.

Noegroho:

Indonesia welcomes investment from all over the world, and the BRI is an important initiative that could help Indonesia in funding much needed infrastructure. The Jakarta-Bandung HSR, as well as the Kayan River hydro power plant are examples of the key BRI projects in Indonesia. While Covid-19 had affected the progress of some projects due to the lack of labour in lockdowns, and the suspension in international travel making overseas engineers coming to Indonesia difficult, the impacts of Covid-19 are largely manageable. The Jakarta-Bandung HSR, which links Indonesia’s capital with its third largest city, is expected to complete by the end of 2022, approximately a one-year delay to the planned completion date.

Sit:

How do you view the post-Covid 19 economic relationship between Indonesia and Hong Kong and mainland China? How are Indonesian companies catching the opportunities offered by the Greater Bay Area (GBA)?

Noegroho:

Hong Kong has always been an important trade and investment partner to Indonesia. Hong Kong was the second largest source of FDI inflow to Indonesia, totalling US$2.3 billion during first six months of 2021. Hong Kong has long been among the top five inward investment sources in Indonesia, currently with more than 1,100 on-going projects invested in by Hong Kong companies.

Currently there are many sectors that require investment, for example in infrastructure, metal, water and energy, and IT. There have been successful cases of Hong Kong investment in Indonesia in recent years. The most notable case featured a merger between Hong Kong’s CK Hutchison group and Qatar’s Ooredoo Group to form the second largest telecommunication company in Indonesia with a total transaction value of US$6 billion, which is also one of the largest deals in ASEAN to-date.

The GBA is a market that can’t be overlooked, and we think Hong Kong is the natural gateway for Indonesian businesses to capture this exciting market. Indonesian companies are looking forward to exploring the GBA market using Hong Kong as the first stop.

There are many products in Indonesia that could satisfy demand in Hong Kong. Recently, the Consulate General in Hong Kong has been working hard to promote the export of Indonesian food products. For example, we believe jamu juice, a traditional Indonesian herbal drink, could be an ideal product that would be warmly welcomed by the health-conscious local community.

We look forward to further exploring opportunities in Hong Kong and the Greater Bay Area, partnering with Hong Kong businesses and professionals.