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Indonesia in Crisis: Economic Impact and President Joko Widodo’s political legacy

05 Aug Indonesia in Crisis: Economic Impact and President Joko Widodo’s political legacy

From June 2021, Indonesia’s infections surged relentlessly due to the Delta variant. The archipelago is now the world’s pandemic epicentre. After three weeks of a nationwide partial lockdown, the daily number of new cases are gradually decreasing. However, the GDP growth target for 2021 has been downgraded to between 3.7 per cent and 4.5 per cent, reflecting diminished economic sentiments.

On Wednesday, 28 July 2021, the Singapore Institute of International Affairs (SIIA) organised the webinar, “Indonesia in Crisis: Pandemic, Politics and Economic Stresses” to understand the challenges Indonesia will have to face in the coming months and how Southeast Asia’s largest country will emerge from this crisis. The webinar was moderated by Associate Professor Simon Tay, Chairman of the SIIA, and featured Mr. Endy Bayuni, Senior Editor, Jakarta Post, and Mr. Wellian Wiranto, Economist, OCBC Bank.

Wrestling with the Delta variant surge

Since the start of the pandemic, the Indonesian government has constantly agonised between prioritising public health or the economy. There is mounting pressure to ease some measures after weeks of heavy restrictions. But given the severity of the present wave, Mr. Bayuni explained that “the best the government can do is to continue with the restrictions, but ease some of them for small traders”. Meanwhile, the authorities are aiming to rapidly reach herd immunity by inoculating 70 to 80 per cent of the 276.3 million strong population. This target is difficult to reach due to vaccine scarcity and attention being diverted to curb the Delta variant’s overwhelming transmissibility.

Indonesia has achieved some success in tackling the competing pandemic priorities. They have so far avoided social upheaval, despite increasing poverty and unemployment. Authorities decisively shifted funds from big-ticket infrastructure projects into social safety net programmes. Food packages, cash subsidies and unemployment benefits were sufficient to contain initial dissatisfaction, even raising public approval for President Widodo’s leadership. However, a prolonged struggle with COVID-19 has eroded some support, testing the government’s ability to continually appease public dissent.

Political stability has been credited for the government’s decisiveness in providing social assistance. President Widodo presides over a coalition government which, according to Mr. Bayuni, “includes six political parties that together control more than 75 per cent of the [parliament] seats”. Hence, the president is able to introduce major policies with little resistance, expediting the provision of social safety nets and the passing of controversial policies such as the Omnibus Law on Job Creation. But once the crisis subsides, attention will turn to the 2024 general election. There are concerns that the successor will not be able to command a majority as firmly as President Widodo has. For the president himself, there is also a risk of entering a lame-duck period, where his influence lowers as the parties focus on his successor instead.

Economic recovery is going to be an uphill climb

After a catastrophic year in 2020, expectations for economic recovery in 2021 had been optimistic. Manufacturing sentiments remained on the uptick, but the Delta wave has dampened the outlook. Thus far, the Ministry of Finance (MOF) and Bank Indonesia (BI) have been strongly praised for wise macroeconomic management. The MOF capped bond issuance size and prevented the deficit from ballooning, while BI maintained currency stability even as the situation worsened in recent months.

Challenges persist however, Mr. Wiranto stated that “every time Indonesia’s mobility index slows, it translates into a fairly low GDP growth for the quarter.” This explains the decision to relax movement restrictions for local small businesses such as traditional markets and roadside vendors. The need to accommodate the country’s large informal economy while juggling record-high infections is a mammoth task. Judging from the gradual lifting of restrictions and the recent arrival of Moderna vaccine donations from the United States, Mr. Wiranto predicts that there will be a return to subpar growth levels in the short term.

To emerge from the crisis, Indonesia has to overcome short term issues like balancing conflicting priorities and speeding up vaccination, while being prepared for the upcoming political challenges in 2024. As close neighbours, Singapore also has to be aware of the ongoing developments in Indonesia and to lend assistance whenever possible.