ECONOMIC UPDATE - What to Expect - Sharp stimulus against pandemic



The best step so far

Eventually, Indonesia has launched the foremost stimulus package on target compared to the previous stimulus packages. The stimulus package will total Rp405.1 tn with focus on health care and the impacted business. This package is what we need the most as we are facing the outrageous pandemic that hits supply and demand side as well. Since Covid-19 brings plenty downside effects to the economy and other aspects, the third stimulus package is more comprehensive as it covers many aspects especially healthcare system. Amid the weakening revenue performance by -0.3% YoY and the rising expenditure by 11% YoY in Feb-20, we believe the relaxation of Law No. 17/2003 on State Finance necessitating the budget deficit at 3% of GDP is the correct thing to do. The government has formulated the regulation which allows the wider budget deficit cap from 3% to 5.07% of GDP for 3 years starting in 2020 to 2022.


What it signals to market

We see that this is the most relevant and the best thing that the government has done in combating Covid-19 so far. If we compared to the previous stimulus package, the first package worth Rp10.3 tn seems contradictive to the effort in containing Covid-19 such as the price cut on transportation to flourish domestic tourism. The second package is still insufficient to address the root of problem itself such as the relaxation of income tax to manufacture industry workers and other fiscal relaxation on export and import. By enacting the third stimulus package, the government sends strong message that this time they really put hands on the root of problem. Although it allows the wider budget deficit, we see that this is aligned with what market wants as it will bring better outcome in long run. According to University of Chicago research (2020), 80% of economists (strongly) agree that abandoning severe lockdown at a time when the likelihood of a resurgence in infections remains high will lead to greater total economic damage than sustaining the lockdowns to eliminate the resurgence risk. It shows that it is better to sacrifice the economic benefit in short run to gain higher economic benefit in long run. In line, it is better for Indonesia to have wider budget deficit rather than risking people’s life due to inadequate money to survive. 


When this will be over

According to projection of Alumni Association of Mathematics Department of Universitas Indonesia, with the strategic policies from the government and strict social distancing from the people, they estimate the peak is on April, 16th with 17,000 accumulated cases then it will cease on June. We see that the current social distancing is not effective enough. Thus, the second scenario may apply where the peak is on May, 2nd with 60,000 accumulated cases then it will cease on July. Things to be noted, plenty of Indonesians will do mudik or annual tradition where urban migrants will return to their hometown in the mid of May-20. The third scenario, if the government does not do strict distancing and have poor policy, then the infections will climb right back up to the peak on June, 4th with more than a hundred thousand cases where the pandemic will be over on Aug-20 or Sep-20. We see that the second scenario is likely to happen since the government has imposed the large-scale social restriction and it will minimize the number of people mobility from urban to rural. We still revise our economic growth projection, but with the second scenario, we expect the growth will align with Ministry of Finance’s severe scenario where the economic growth will be at 2.3% YoY in 2020. We see the Rp563 tn of total fiscal stimulus from 3 packages are sharp enough to contain the outbreak and help the economy to grow.