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Pandemic stalls Indonesia’s push to escape middle-income trap

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Things were looking good back in January for Suryanti, an employee at a small travel agent in Bogor, a city south of the Indonesian capital of Jakarta. She had just paid off her motorcycle loan and was planning a vacation with her parents with a bonus she expected to receive from her employer.

And then the coronavirus pandemic hit.

Suryanti was furloughed, the bonus was cancelled and she wasn’t paid at all for seven months. The 28-year-old became an online reseller of items such as masks and hand sanitiser, but earned no more than 200,000 rupiah ($14) a week on average.

“The saddest thing was having to sell my motorbike. And because the buyer knew I needed money, they asked for a low price,” Suryanti told Nikkei Asia.

This article is from Nikkei Asia, a global publication with a uniquely Asian perspective on politics, the economy, business and international affairs. Our own correspondents and outside commentators from around the world share their views on Asia, while our Asia300 section provides in-depth coverage of 300 of the biggest and fastest-growing listed companies from 11 economies outside Japan.

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Her company finally asked if she could start working again in September, but both her work hours and pay were cut in half. “I do need the job, though, while many of my friends were either laid off or are still being furloughed — so I just [took the offer],” she said.

Suryanti’s story echoes those of millions of other Indonesians who have lost income or jobs as coronavirus continues to ravage south-east Asia’s largest economy. The ripple effects are reversing two decades of steady economic growth marked by declining poverty rates and the rise of a middle class that drove tourism and a tech start-up boom.

Furthermore, Covid-19 is causing considerable delays in plans to overhaul Indonesia’s education system as well as major infrastructure projects including the $33bn relocation of the capital from Jakarta to the island of Borneo. It is making the country’s push to escape the middle-income trap — the phenomenon of previously fast-growing economies stagnating at middle-income levels and failing to join the ranks of high-income countries — and become one of the world’s top five economies by 2045 even more Herculean.

The Central Statistics Agency, or BPS, said the pandemic had pushed 2.67m Indonesians into unemployment as of August, inflating the jobless rate to 7.1 per cent — or 9.8m people. That is a spike from 5.2 per cent a year earlier and the first time Indonesia’s jobless rate has exceeded 7 per cent since 2011.

Over 24m people became part-timers with reduced work hours and pay and many were pushed into the informal sector. BPS says informal economy workers rose to 60.5 per cent of Indonesia’s total 138m workforce in August, from 55.9 per cent the year before. That marks a setback to the government’s two decades of efforts to bring more people and businesses back to the formal economy following widespread lay-offs during the Asian financial crisis in the late 1990s. Such efforts are important for Indonesia to boost its tax revenue to finance developments, with its tax-to-GDP ratio being one of the lowest in the region.

Subsequently, the average monthly salary dropped 5.2 per cent to 2.8m rupiah in August from the same month last year. That contributed to weak household consumption, which makes up more than half of Indonesia’s gross domestic product. The economy shrank 3.5 per cent in the July-September period year on year, following a steeper 5.3 per cent decline in the previous quarter, sinking Indonesia into its first recession since 1998.

The pandemic is hitting low-income households the hardest, where breadwinners typically have little job security or do informal work that denies them basic protection.

Bogi, a Jakarta taxi driver in his 40s, says he was already carrying fewer passengers before the pandemic because of fierce competition with ride-hailing services. He still struggles to get several passengers a day, despite the city of 10m people easing movement restrictions in mid-October.

“Sometimes I only bring home 20,000 [rupiah] a day. Sometimes my son and I have to share a cup of instant noodles, or I let him have it all,” says a tearful Bogi. “My son now occasionally goes busking on the street to help his mother and me. My wife jokes that even he earns more than me.”

There are also the so-called sandwich generation families — adults who enjoy better education than their mothers and fathers but have to support both their children and ageing parents. The pandemic is stretching them even thinner.

Sri Kurniasih, 31, and her husband are one such family.

Kurniasih stays at home to take care of her three small children, while her husband is employed at a shipping company in north Jakarta. He has been working full time, six days a week, during the pandemic — but his salary has been cut to 2m rupiah a month since March, just a third of what it was before the global health crisis emerged.

“That’s not enough because half of the amount is already used to pay the house rent and to send to my husband’s parents in the village,” Kurniasih says, adding that she was behind on rent for two months. Like Suryati, she also started selling items online, but earns no more than 500,000 rupiah a month.

Reflecting Indonesia’s steady growth, the poverty rate had been gradually declining from 23 per cent in 1999 to reach 9.7 per cent in 2018 — the first time in the country’s history that it reported a single-digit figure. In July, the World Bank upgraded Indonesia to an upper-middle income economy after more than two decades in the lower-middle income group. The assessment was based on Indonesia’s gross national income per capita having reached $4,050 last year.

But the bleak situation afflicting millions of households suggests that Indonesia could easily fall back into the latter group. The World Bank in October said extreme poverty in the country — defined as those living on less than $1.90 a day — is projected to increase for the first time since 2006 to 3 per cent this year, from 2.7 per cent last year. Poverty rates using higher benchmarks are similarly expected to pick up.

The government has announced a total of 695tn rupiah in stimulus packages, or 4.2 per cent of GDP, including 203.9tn rupiah for relief aid targeting poor households. But disbursements have been painfully slow because of data discrepancies and bureaucratic inefficiency.

Moody’s warns that the pandemic will exacerbate income inequality, particularly in countries like China, India and Indonesia. Their growth rates have outpaced the rest of the world since 2000, but they also have reported the largest Gini coefficient increases — an indication of growing inequality — among Asia-Pacific nations.

“The pandemic will make inequality starker. Typically, job losses and income shocks disproportionately hurt vulnerable and lower-income groups,” the credit agency says. “Governments with constrained fiscal capacity have limited scope to address the resulting social and political strains, which could amplify credit risks.”

Taxi drivers wait for passengers on the street in Jakarta on May 8, 2020
Taxi drivers wait for passengers on the street in Jakarta on May 8, 2020 © Achmad Ibrahim/AP

Over the short term, Indonesia is faring better than some of its neighbours. The Asian Development Bank in December forecast the country’s economy would shrink 2.2 per cent this year, a downgrade from a 1 per cent contraction projected in September. That compares with contractions in Malaysia of 6 per cent, the Philippines of 8.5 per cent and Thailand of 7.8 per cent.

But longer-term repercussions might be worse, as the pandemic is delaying much-needed reforms in education that President Joko Widodo pledged at the beginning of his second, and final, five-year term. After much focus on an infrastructure push in his first term, the president said it was now time to build a skilled workforce that will man his vision for the future, Indonesia 4.0.

“We have a huge potential to escape the middle-income trap,” Mr Widodo said in his inaugural speech after re-election in October last year. “We’re currently at the peak of our demographic bonus. This will pose a big problem if we can’t provide jobs, but will be a big opportunity if we can build superior human resources.”

ADB Country Director for Indonesia Winfried Wicklein said that human resources development — through better education, health and social protection systems — is needed for the country to reach a higher income level. He added that sustainable and quality infrastructure, better access to funding, and higher government revenues are also important factors.

However, Indonesia scores poorly in the Organisation for Economic Cooperation and Development’s Program for International Student Assessment, with about 70 per cent of students scored below the minimum proficiency level for reading in 2018. Meanwhile, the World Bank’s Human Capital Index shows 12.3 years of schooling in Indonesia equates to just 7.9 years of learning. Such factors explain the low productivity and skills that investors complain about.

Instead of reforms, the pandemic and mobility restrictions have kept more than 68m young Indonesians out of the classroom since March in a blow to learning. The World Bank in a November report said the learning loss during its initial scenario of four-month school closure increased the portion of students failing to meet the minimum reading proficiency to 75 per cent from 70 per cent.

Indonesia’s fiscal deficit is projected to widen to 6.3 per cent of GDP this year to finance stimulus packages and reflect falling tax revenues. The government has won parliamentary approval to remove the deficit ceiling of 3 per cent through 2022, but the country’s debt-to-GDP ratio is projected to expand to 42 per cent of the total economy in 2022 — versus 30 per cent last year.

“It’s a big increase. On the other hand, it’s still very low compared to many other countries,” Ralph van Doorn, acting lead economist at the World Bank office in Jakarta, said in October. “But it’s important to realise if you have more debts, you’ll have to pay more interest payments. So the competition within the budgets for priority spending is going to increase.”

That competition threatens important infrastructure projects essential to reduce logistics bottlenecks and boost export competitiveness, as well as those intended to spur new sources of growth in less developed regions — including the plan to capital move that has been put on indefinite hold.

Finance Minister Sri Mulyani Indrawati on November 5 said that despite the recession “the worst is over”, noting that quarter on quarter, the economy grew 5.05 per cent in July-September. “On the production side, the turning point for economic recovery was seen in the third quarter, which gives us all a big hope — nearly all sectors improved.”

And on December 6, in a sign of hope, the first batch of coronavirus vaccines — 1.2m doses — from Chinese biopharmaceutical company Sinovac arrived in Jakarta. But there remains uncertainty over the vaccine’s efficacy as well as its procurement and distribution for the entire population of 270m.

A view of the area around Samboja, Kutai Kartanegara, one of two locations proposed by the government for Indonesia’s new capital
A view of the area around Samboja, Kutai Kartanegara, one of two locations proposed by the government for Indonesia’s new capital © AFP

Coronavirus infections, meanwhile, continue to climb nationwide, with cases hitting new highs over the past two weeks — averaging around 6,000 daily. As of December 14, Indonesia had reported a total of 623,309 cases with 18,956 deaths, the highest in Asia after India. Poor testing capacity suggests there could be a lot more cases that have gone undetected, which could lead to a collapse in the limited healthcare system.

One silver lining is Indonesia’s expanding digital economy that is projected to grow 11 per cent to $44bn in gross merchandise value this year, outperforming south-east Asia’s average of 5 per cent — according to the e-Conomy SEA 2020 report by Google, Temasek and Bain & Company released in November. Ecommerce is leading the pack with a projected 54 per cent jump to $32bn. Indonesia’s internet economy is projected to further expand to $124bn in 2025.

“Covid would be a throwback for sure, but [it is] one more reason for Indonesia to take this opportunity [to accelerate] tech reforms . . . [and] to have a labour intensive growth, to have green growth and recover as fast as possible and emerge stronger,” Mr Wicklein said.

And an omnibus law, despite its controversy and continued rejection by labour unions, also offers some optimism. Passed in October, the legislation bypasses revisions to as many as 79 laws with the basic aim to simplify bureaucratic procedures and draw more investment.

“The omnibus law passage is quite timely, given the migration of various multinational companies diversifying their supply chains from China. We’ve heard from several corporations that the omnibus law improves Indonesia’s standing compared to Vietnam,” Helmi Arman, chief economist at Citi Indonesia, told reporters last month.

“The omnibus law gives a strong signal for future outlook of reforms in business environment and climate. It can help Indonesia escape the middle income trap,” the economist said.

A version of this article was first published by Nikkei Asia on December 15, 2020. ©2020 Nikkei Inc. All rights reserved.

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Emerging Markets

India moves to scrap retrospective tax

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Indian politics & policy updates

India took a big step towards repairing its damaged image as an investment destination by moving to scrap a controversial retrospective tax that ensnared multinationals such as Cairn Energy and Vodafone.

Prime minister Narendra Modi’s government on Thursday introduced a bill in parliament to rescind a 2012 tax code provision that had allowed New Delhi to impose retrospective taxes on some foreign investments.

The controversial provision — pushed through parliament after New Delhi lost a $2.9bn tax battle with Vodafone in India’s Supreme Court in 2012 — had severely damaged the country’s reputation as an attractive place to do business.

“We think this is an important time for India to be welcoming of investment,” T.V. Somanathan, India’s finance secretary, told a local television channel after the bill was tabled. “We are very keen to basically get the economy on a faster growth path.”

The move comes as India’s economy is reeling from the impact of the Covid-19 pandemic, with GDP growth contracting 7.2 per cent last year. Even before the virus hit, the economy was in the doldrums, with GDP growth slowing for eight consecutive quarters.

New Delhi’s image has suffered in recent months from its high-profile international tax battle with Cairn Energy over the Scottish energy company’s 2006 corporate restructuring before it listed its Indian operations on the Bombay Stock Exchange.

In December, an international arbitration tribunal ordered New Delhi to pay Cairn $1.7bn as compensation for its’ seizure and sale of a 10 per cent stake in Cairn India against the disputed tax.

New Delhi refused to honour the award, and Cairn last month secured an order from a French court freezing Indian-government owned properties in Paris as a step towards collecting on its debt.

Cairn also filed a lawsuit in a US court seeking to seize aeroplanes of state-owned carrier, Air India, in lieu of payment, and said it had identified more than $70bn worth of other Indian government assets abroad that it could seize in lieu of payment.

Amending the Indian tax code — which will allow a tax refund to Cairn, though without interest — will allow New Delhi to say it has settled the dispute under Indian law, rather than appear to comply with an international arbitration ruling whose jurisdiction it has long contested.

“Those cases that predated the 2012 amendment are now going to be let off the hook, but we are doing this under Indian law,” Somanathan said. 

“There is a principle at stake here — it’s being done through Indian statute. We continue to assert that we have the right to tax but we are choosing to do this. We are not accepting those arbitral awards. We have an objection to such disputes getting adjudicated outside India.” 

Cairn said it had “noted” the proposed legislation and was “monitoring the situation.” Shares in Cairn soared as much as 47 per cent before easing slightly to close at 160p a share, up 27.4 per cent on the day.

Tax experts welcomed the move but questioned why the ruling Bharatiya Janata Party waited so long. The BJP had fiercely criticised the retrospective tax law when the previous Congress party government pushed it through in 2012, and had described it as ‘tax terrorism’.

“It should have been done a while ago, it’s absolutely the right decision and it sends the right signal to investors,” said Nigam Nuggehalli, registrar at the National Law School Bangalore. 

“I’m sure that the immediate prod for them was the fact that they lost their arbitration cases against Vodafone and Cairn,” said Nuggehalli, “any more intransigence on this would really result in loss of face for [the government].” 



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Erdogan under pressure over Turkey’s response to wildfires

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As Turkish firefighters battle blazes across the Mediterranean coastline, President Recep Tayyip Erdogan has been criticised over his government’s response to what he called the worst fires in the nation’s history.

While all of Europe has experienced extreme weather this summer, from heavy flooding in the north to severe heatwaves and fires in parts of the Mediterranean, Turkey has been hit by its most intense blazes on record.

Eight people have died since the fires began last week, with hundreds of tourists evacuated as the flames spread across 40 provinces. Almost 300 fires had been extinguished by midday on Wednesday while 13 were still burning, according to a forestry official.

“This year’s fire is unlike any other in our history. This is the largest,” Erdogan said in a television interview. “On the eighth day of our operations, we are now confronted with a thermal power plant fire.”

The flames reached the coal-fired power station in Mugla province late on Wednesday, prompting soldiers to evacuate nearby homes amid sounds of explosions at the facility, according to news channels. Military landing ships reached the coast 20km away to move residents to safety, the defence ministry said on Twitter.

A Spanish hydroplane ‘waterbombs’ a wildfire near Mugla
A Spanish hydroplane ‘waterbombs’ flames near Mugla on Wednesday © ERDEM SAHIN/EPA-EFE/Shutterstock

Although soaring temperatures, low humidity and winds gusting at 50km/h complicated the response, anger has mounted over an apparent failure to adequately prepare a country where summer forest fires are a perennial concern.

The absence of a functioning national fleet of firefighting aircraft forced Turkey to wait for specialised planes to arrive from other countries, including Spain, Ukraine and Russia. Ankara declined an offer of assistance from Greece because its planes had low water-load capacities, according to Bekir Pakdemirli, the forestry minister.

“I have not seen any planes. Due to the topography, it is almost impossible to intervene by land . . . so the fires run their course,” said Mehmet Oktay, an opposition party mayor in the resort town of Marmaris, where more than 13,000 hectares of nearby forest lay charred and half a dozen fires continued to burn. “We are clearly not prepared if we suffered this kind of loss.”

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Marmaris and other areas hit by the fires are among Turkey’s most important destinations for a tourism industry already battered by coronavirus travel curbs.

Scientists say Turkey’s fires are part of a chain of extreme weather events caused by a changing climate; this summer, blazes have also raged in Italy and Greece. Even Finland, where temperatures hit a record high in July, has suffered its worst forest fire in half a century. Yet Turkey is the only G20 nation to refuse to ratify the Paris agreement on climate change.

“The failure to ratify the climate change accords is part of the government’s regard for the environment as something to be exploited, rather than protected,” said Saruhan Oluc, a lawmaker in parliament’s second-biggest opposition group, the People’s Democratic party. “A lack of preparation, including having aircraft, and negligence is to blame for the scale of this disaster.”

The emergency adds to voter discontent with Erdogan’s Justice and Development party (AKP), whose support in opinion polls has fallen to record lows over its handling of an economy plagued by high unemployment and inflation stuck in the double digits for most of the past four years. “There’s a sense among Turks that the government is failing in its function to deliver a better standard of living across the board. The polls show there’s a majority who believe that in the near future things will get worse,” said Sinan Ulgen, a visiting scholar at Carnegie Europe.

President Recep Tayyip Erdogan talks to residents of Manavgat, Antalya
President Recep Tayyip Erdogan talks to residents of Manavgat, Antalya, which has been hit by wildfires. He has attracted criticism for his response to the emergency © Turkish Presidency via AP

Erdogan travelled to some of the worst-hit areas at the weekend, expressing sorrow for the loss of life and promising to “dress the wounds of our citizens”. Crowds applauded him. But some of his attempts to console victims were met with derision. In Marmaris, he tossed bags of free tea from his moving bus — a week after he gave handouts of tea to residents of a Black Sea community struck by deadly floods.

Hip-hop artist Sehinsah mocked the gesture, telling a concert audience he had a “surprise” for them before hurling tea, according to a video. Another video circulating on social media showed a woman throwing boxes of tea at unsuspecting pedestrians and asking “Are you happy now?” A play on the ruling party’s initials, “AKParTea” trended on Twitter.

The spoofs are all the more striking because criticism of Erdogan is heavily policed, with prosecutors last year opening cases against almost 10,000 people for insulting the president, a crime in Turkey. “People found this idea of throwing tea as odd [when] in previous years, this government was savvy about the pulse of the population. Now they seem to have lost that touch,” said Ulgen.

Erdogan’s communications chief, Fahrettin Altun, dismissed information shared on social media as “fake news” and said that Turkey would compensate people for the loss of property. “We are continuing our fight against forest fires by mobilising all means of the state,” he said on Twitter.

An anguished woman surveys the scene in Oren
An anguished woman surveys the scene in Oren © Emre Tazegul/AP

Even pledges to rebuild hundreds of destroyed or damaged homes have hit the wrong note.

The state housing authority posted on Twitter mock-ups of new village houses as the conflagration engulfed villages last week. Mehmet Ozeren, the AKP mayor of the hard-hit district of Gundogmus, said this week those who lost homes they owned would now enjoy low interest-rate loans from the housing agency. “It may be wrong to say this, but I think people with very old houses will say, ‘If only our homes had burnt too’,” he told a reporter.

“Trust in the government is declining as people see problems cannot be managed,” said Bekir Agirdir, who runs the polling agency KONDA Research. “Turkey remains polarised over culture and identity but the problems of everyday life are so burdensome — the pandemic, unemployment, inflation, floods, fires — the feeling this government cannot solve these issues is strengthening.”



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Brazil poised for biggest interest rate increase since 2003

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Banco Central do Brasil updates

Brazil’s central bank is expected to enact its biggest interest rate rise in almost two decades on Wednesday, with economists predicting an increase of 100 basis points to curb the risk of spiralling inflation.

Latin America’s most populous nation is witnessing a sharp acceleration in prices as its economy recovers from the Covid-19 pandemic, pinching households and putting pressure on the Banco Central do Brasil, or BCB, to act.

A weak exchange rate, buoyant worldwide demand for raw materials and rising electricity bills due to the worst drought in almost a century have all contributed to Brazilian inflation that exceeded 8 per cent in the 12 months to June, more than double the official target of 3.75 per cent for 2021.

A majority of economists polled by Reuters expect the BCB’s Selic rate will be lifted from 4.25 per cent to 5.25 per cent, which would be its fourth consecutive rise. The benchmark was at a historic low of 2 per cent until March. The decision is expected on Wednesday evening.

A full percentage point jump would represent a step up from the 75 basis point increases announced after the three previous meetings this year of the rate-setting committee, known as Copom. It would be the sharpest increase since its last 100bp rise in 2003.

As a commodities boom and pandemic-related bottlenecks in global supply chains feed an international debate about whether a return of inflation will be temporary or long-lived, central bankers in some countries are already tightening monetary policy. 

Russia, Mexico and Chile have all recently raised interest rates, while the US Federal Reserve is edging closer to a decision on slowing its massive monetary stimulus.

The BCB, which gained formal autonomy this year, is at the forefront of emerging markets pursuing an aggressive approach, said William Jackson, chief EM economist at Capital Economics.

However, he noted that Brazil’s gross domestic product was still below the level of 2014, before a deep recession struck.

“That would suggest the economy is operating below its potential and that monetary policy should be stimulative,” Jackson said. “But with the inflation threat as it is, there’s a belief that can’t continue for the time being.”

In a country that experienced runaway prices and hyperinflation only a generation ago, monetary policymakers will have to strike a balance between shielding consumers and encouraging growth.

Cristiano Oliveira, chief economist at the business lender Banco Fibra, suggested Copom should accelerate rate increases to bring estimates of future inflation closer in line with its objective.

“In 2022, the centre of the inflation target is 3.25 per cent, but inflation in the previous year should be close to 7.5 per cent. In other words, the central bank has a difficult job ahead of it, which is to reduce the inflation rate by more than 50 per cent”.

Food costs have pushed millions of people into hunger, with unemployment near a record in Brazil since data collection first began in 2012. Transport and housing have also become more expensive lately.

At the same time, low reservoir levels have affected hydroelectricity production, the South American nation’s main source of power, forcing utilities to turn on more costly thermal plants.



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