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Outlook 2021

Commentary by Wayne Forrest

A large, red-tailed hawk landed on a tree outside my study just as I sat down to write this month’s commentary. Some say that if you have a hawk sighting you are ready to take on a larger, more expansive vision of your world.  I take it as an optimistic sign that 2021 will be better than 2020: the US economy will expand 3-4% and Indonesia’s 4-6%.  Most of us will agree that this prediction is reasonable if we can achieve herd immunity. It won’t be easy.

Four words beginning with “d” define the year we just experienced and the one ahead: distortion, disease, debt, and demand. We need less of the first three and more of the fourth.

COVID-19 underlined the degree to which our species can create separate and often distorted realities.  Wearing masks and staying socially distant fundamentally divided the populations of the US and Indonesia. Not all of us viewed COVID as a threat, and even those of us who did differed over whether it was Man or God who could control it. Nine months into the pandemic both countries continue to set new records every week for highest numbers of new case detections. COVID fooled most of us; by June, many of us thought we would certainly be traveling by September, but now we realize how distorted that view was.  Governments of both countries made what seemed to be a rational choice: open a good part of the economy; avoid full lockdowns at all costs; install safety measures at essential workplaces and retail environments; and institute testing and tracing to control the disease’s spread.  This turned out to be a highly imperfect strategy in the US as well as Indonesia. Sadly, COVID is going to continue spreading into 2021 even as vaccines roll out. It will hamper recovery and continue to ravage supply chains, effecting demand.  I personally don’t see Indonesia gaining enough doses or having the distribution logistics for an effective nationwide immunization program this year.  From the information I have, the best that can be hoped is that the effort will start this year and continue into 2022.  As I write, 700,000 doses produced by a Chinese company, Sinovac, have been distributed to 34 provinces, but the Food and Drug Agency has yet to approve it and the Indonesian government now has accepted the argument that it must be halal certified by a non-government Islamic religious body.  Why this was not prepared many months ago is a mystery. This should not even have been necessary given that Islamic clerics have always said that something that can save your life is permissible and not required to be halal.  

2021 will be a struggle to build demand(consumption) that is so interwoven with the reality of the pandemic.  The Indonesian government spent much of the latter part of 2020 designing a better front end for investment and job creation, passing a mostly forward-looking Omnibus Law. The task now is to implement it but how impactful can it be if companies cannot justify hiring based on low levels of consumer demand?  Middle-class consumers who can afford to work from home will be key to the initial recovery, but it will sputter if the pandemic is not pushed back and incomes do not return to the millions of Indonesians engaged in day labor work, representing 60% of the workforce.

Low inflation (below 2%) will continue and this relieves some of the pressure. Indonesia’s knowledgeable technocrats competently balanced fiscal and monetary policy through most of 2020 to lessen the blows of a crashing economy.  The rupiah maintained its value throughout 2020 and although Bank Indonesia breached traditional norms by directly purchasing $40 billion of government paper at 0% interest, its Governor, Perry Warjiyo, has said this was a rarity.  Finance Minister Sri Mulyani can be counted on to be disciplined in managing the national budget, international investors will continue to find Indonesia’s bonds attractive, but her fiscal tools are only as good as the ability of the rest of the government to contain and turn back the pandemic. The nation’s 2020 fiscal deficit reached a record high, and an extraordinary amount of money was spent to backstop businesses, state-owned enterprises, low income earners, and combat the virus.  2021 will see the Indonesian government continue to be strapped for funds as it reaches debt limits.

“We realize that economic recovery should not and will not only depend on the state budget, as it will not be enough to compensate for [falls in] consumption, investment and export activity,” Finance Minister Sri Mulyani said in a recent press briefing. “We need reform to attract investment […] and mass vaccination to build confidence that will speed up domestic consumption recovery.” She didn’t outline the exact nature of reforms, but one suspects they are the most difficult: legal, judicial, bureaucratic, and finally political.  

I believe President Jokowi shares her expansionary vision of how Indonesia can refashion itself out of this pandemic. Let’s hope many others in and out of not just Indonesia’s government, but are own, have seen the hawk.

(These views are the author’s and may not reflect those of AICC or its members.)