Indonesian president Joko “Jokowi” Widodo and his government have been roundly pilloried over the last several weeks for their inadequate response to the COVID-19 epidemic. During much of February, government officials downplayed the seriousness of the crisis and even once they recognized its severity have been slow to roll out testing. The public health system, meanwhile, remains under-resourced in the face of a likely spike in hospitalizations. Of course, that is actually an existing systemic issue – even in the best of times you would probably not want to be hospitalized in Indonesia with a serious ailment.
But the most vocal criticism of Jokowi has centered on his refusal to issue a national lock-down order. As people look at the modelling, which under worst case scenarios is predicting hundreds of thousands of deaths, and then look at the state of the public health system, many have concluded that the best thing to do is to place the entire country on strict lock-down, keeping only essential businesses open until the virus is under control. The logic of this conclusion is not as straightforward as it seems.
Lock-downs of such a nature have been implemented in most of Western Europe and in some parts of the United States. These are countries with social safety nets (even weak ones, like the United States) where the shuttering of all non-essential economic activity can be offset through wage subsidies or unemployment insurance or the provision of small business loans. The structure of their labor markets is also obviously very different – it is possible in high-income countries with large non-retail service sectors for a sizable portion of the workforce to work remotely from home.
Yet even in the United States, the shock of nearly 10 million unemployment claims in 2 weeks has knocked the pants off people. Everyone agrees that shutting down the economy was the right thing to do; yet the scale of the resulting – and totally predictable – jobless claims appears to have caught many off-guard. And that is in the United States, where the government and the central bank have essentially limitless fiscal and monetary firepower to combat the crisis, and where even as imperfect as they are there exist unemployment insurance schemes in every state in the country.
Now imagine that same scale of mass unemployment in developing countries with large informal sectors, poor public health care systems and highly inadequate social safety nets. Now also imagine that there are millions of poor migrant workers who, to avoid destitution, will flee from urban areas as soon as the lock-downs are announced and attempt to return to their hometowns. If they are infected, they may spread the virus with them. If they are stopped, they will have no means of supporting themselves. Now imagine even more: that in country’s with weak rule of law that have imposed strict quarantine requirements, police may take it upon themselves to beat violators, settle scores and commit a host of human rights violations under the shadow of the quarantine because nobody can see them.
Well that is essentially what is happening in developing countries that rolled out quick and poorly planned lock-down orders. We’ve seen chaos in India, parts of Africa and Duterte doing his normal psychopath routine in the Philippines, ordering police to shoot people dead in the streets. And the real tragic irony in all this, is that in developing countries with dense urban squatter settlements, lock-down orders and strict social distancing will not prevent the spread of the virus anyway. For countries with large informal sectors, shuttering all economic activity will plunge millions into immediate dire financial straits with no quick or easy way to get them cash transfers so that they can, you know, live and eat. What do you think will happen in such a situation? I myself shudder to think.
That is precisely the situation Jokowi is trying to avoid, splitting the difference by advising those who can to shelter in place but not imposing martial law to lock down the streets (which, if you’ve ever been in Indonesia you would know would be extremely difficult to enforce). Public gatherings have been, for the most part, put on hold. Here in Bali the traffic has thinned considerably, most restaurants are doing take-out only, the beaches are closed, people who can are staying indoors but those who need to scratch out a living are still at it. That seems to me to be a not terrible compromise – one that reduces the risk of transmission without creating a dozen unintended, and possibly worse, consequences by mandating a total lock-down.
So that is the public health side of the crisis. Testing is clearly very poor, and unlikely to ever get better. Hospitals are not equipped to deal with a large influx of sick people. Total lock-downs, as some are advocating, are probably not the best solution for this intractable situation, though the government could perhaps be doing more to limit domestic travel. But that’s only one part of this crisis. In addition to the simultaneous supply and demand shock precipitated by the crisis (a situation which would be unknowably worsened by a lock-down), there is also an impending liquidity crisis as capital outflows have accelerated at an astonishing rate in the last month.
The government is therefore battling a public health crisis, a liquidity crisis and an economic crisis comprised of both a supply and a demand shock all at the same time, and with limited fiscal resources. When evaluating the government’s response to COVID-19, we must therefore understand the full, truly staggering scope of what is happening right now. It is unlike any crisis that has befallen Indonesia, a country often struck by tragedy, in living memory. Just at the time when the government needs to be able to borrow cheaply so it can finance its efforts to combat both the virus and the economic contraction, it has seen its borrowing costs rise as capital rushes out of the country. Meanwhile, in the midst of all this, people are clamoring for the president to endorse a shutdown of all economic activity that would do incalculably more damage, probably without actually flattening the curve that much. I don’t think such people really understand what is happening.
So on the economic front what has the government done to date, and is it enough? Let’s look at that. First, the monetary side. The rupiah in just a few weeks has gone from 14,000 to the dollar to around 16,500 and it will almost certainly slide further, as investors flee emerging markets seeking cash or US Treasury bonds. I myself think this widespread belief that US Treasury bonds or dollars are the most rock-solid assets in the world is a peculiar shared delusion of the investor-class, but that is a discussion for a different time. Finance Minister Sri Mulyani said to expect it to settle somewhere between 17,000 – 20,000 and I think that is realistic and reasonable. But can Indonesia survive it?
Bank Indonesia has over $100 billion in foreign reserves, last time I checked – which was last year. They can, at least for a time, continue burning through those reserves in order to prop the rupiah up – which is precisely why they have been steadily collecting such reserves for the better part of a decade. I doubt they imagined a crisis of this magnitude, but the reserves are at lease sufficient to fend of imminent collapse of the currency. BI also now has the legal authority to directly buy government bonds – something it could not previously do.
Why is this important? Because nobody wants to buy Indonesian government debt right now, even though the government desperately needs funds. So Bank Indonesia can step in and do it. These functions were kept separate before, I think because people didn’t trust Indonesian institutions not to engage in embezzlement. And the long-term consequences of this probably need some careful thought and attention, but at the moment all that matters is that we get through the short-term and if BI needs to buy government bonds so they can fund stimulus and buy medical equipment, I think we should all get on that train. Otherwise, to paraphrase Keynes, “In the long-term, which will be a matter of weeks at this rate, we will all be dead.”
Unlike some other developing countries, Indonesia’s capital markets are not in imminent danger of collapse, although depending on how things play out that might be different a few months from now. Many have been imploring the IMF to open special drawing rights to emerging markets – basically to flood struggling economies with credit so they can fend off liquidity crises. The way it works is that the Federal Reserve has swap lines with a select few countries – the ones you would expect in Europe, Australia, South Korea, Japan and Singapore, and also Brazil for some bizarre reason.
So they can tap the Fed for cash during a crisis. Every other country is on their own, which is really messed up when you realize that the reason a lot of them are under pressure in the first place is because capital is rushing into dollars and Treasury bonds! So because the dollar is the international reserve currency, these emerging market currencies are getting flayed right now, and the Fed won’t even extend them a lifeline. But it will to Brazil. But I digress.
I think that, at least in the short-term, given Bank Indonesia’s reserves and its ability to directly buy government bonds and intervene in capital markets and the fact that actually qualified people are running the show, the rupiah will emerge from this OK. Weakened, but OK. In the last few years, Indonesian debt has increasingly been denominated in rupiah (rather than dollars) or sourced domestically which reduces exposure to huge fluctuations in the exchange rate when your international creditors decide to abandon you. So I feel cautiously optimistic that, in the short-term, we can expect the monetary side of things to stabilize. But what about the fiscal side?
This week the government relaxed its 3% cap on deficit-spending, allocating about 400 trillion rupiah (which is $25 billion today but might only be $20 billion by next week) to combat the virus and form the basics of a fiscal rescue package for those impacted by the crisis. (And again, if the market doesn’t want that debt who will buy it to ensure these funds can be spent? Bank Indonesia!)
It includes 75 trillion for the healthcare sector which is pretty straightforward and probably not enough, 110 trillion for social protection which is direct cash transfers to about 15 million of the most vulnerable people as long as the government already knows who they are, 70 trillion in tax incentives which I’d be really interested to study in the long-term since tax collection and enforcement in Indonesia is very poor so using taxes as an incentive is an area of great interest to me, and 150 trillion for credit restructuring for small and medium sized businesses.
Will that make a difference? I have no idea, that will take many months and probably years of looking at the data - but it’s a good start. It’s a sensible package, incorporating elements of other rescue packages by providing money for healthcare, for poor people and for businesses that are about to be bankrupt. Can it be implemented efficiently? Again, that is a question for some time in the future, once this is all behind us and we can look back on it and try to figure out what happened. But the concept is solid, and it represents about the maximum of what the government is able to afford at the present time. To be honest, it might not be enough. But imagine considering whether its enough while also forcing millions of informal workers who the government does not have on file to suddenly become unemployed.
OK, so fiscal and monetary policy are working hand in hand to come up with some kind of response to the crisis which seems like it might be OK given these impossible circumstances. What else is gonna happen and what can the state do? Aside from ensuring that capital markets don’t seize up and that some kind of fiscal lifeline gets extended to the most vulnerable people and businesses, the other critical thing the government must do now is secure supply chains. If the rupiah reaches 20,000 to the dollar imported goods will become quite expensive. If people have to shut down businesses, it means that both supply and demand in a regularly functioning market will be interrupted, and basic things like the way an essential good goes from the producer to the distributor to the seller might get messed up. If that happens, and we start to see wide-scale shortages of basic goods, we will be in trouble.
What can the state do? Well, this is where the logic of state-owned companies gets drawn into the spotlight a bit. In a normal, well-regulated and competitive market state-owned companies are generally considered inefficient rent-seeking troglodytes. But in markets that don’t function very well, state-owned enterprises can often be effective at overcoming market or regulatory failures. This is true in Indonesia under normal circumstances. But right now, with normal supply chains in danger of falling apart, state-owned enterprises and their monopoly power could very will be critical.
Why? Because the government of Indonesia can force them to eat short-term losses as long as they can ensure an adequate, affordable and uninterrupted supply of staple goods like rice, sugar, fuel, electricity and medicine. The government can even force them to issue loans or agree to grace periods or debt forgiveness; three of the four largest banks in Indonesia are owned by the state. If Luhut shows up at their office and tells them they need to make certain loans at certain interest rates, I am certain they will make them.
In the United States, the Congress gave $350 billion to private banks to extend loans to distressed small businesses, then basically just hoped they would do the right thing. The Treasury told these banks the interest on the loans was capped at half a percent, and of course they all balked. They don’t want to extend money-losing loans, even if it’s in the best interest of the country. In Indonesia, on the other the other hand, if the government tells Mandiri, BRI and BNI to extend money-losing loans to distressed businesses and individuals they would do it, and simply eat the losses in the short-term. Same for electric utility PLN, gas company Pertamina, or the agricultural commodity broker BULOG.
When markets aren’t functioning as they normally would, because for instance the entire global economy is shut down, that is when state-owned companies and their monopoly power in key sectors suddenly seems like an asset. We have already seen, as part of the fiscal rescue package, that electricity tariffs for low-income households will be eliminated or reduced. That is a function of the state-owned utility doing whatever the government tells it to do, even if it loses money. In a pandemic, where the most important thing is to ensure people have access to staple goods even if global supply chains have imploded, SOEs just might come through for Indonesia.
So, is Indonesia doing enough to combat COVID-19? I don’t know. That really depends on where you are standing, and normatively it depends on what you value. I personally think that the government is doing a pretty good job given the scale of the disaster. Capital markets are doing OK all things considered, the fiscal response is on the right track, the refusal to lock-down is understandable, and mobilizing SOEs to ensure an adequate and affordable supply of staple goods I think might shelter Indonesia from the worst of the potential supply chain disaster scenarios. Who the fuck knows, we are living in really wild times right now. And ultimately, the real question if you ask me is why does Brazil have access to the Fed’s swap lines?
