The World Bank’s Indonesia Covid-19 Observatory is a Indonesia Brief multi-GP partnership that aims to generate usable and Covid–19 Observatory №4 near-real-time insights on the impact of the pandemic to inform the Government of Indonesia’s policy response to the crisis. P LE ASE DIRECT INQ UIRIE S TO AUFA DOARE ST — A DO A R EST@WO R LDBA NK .O R G 20.08.2020 Page 1/2 B E RT INE KAM P HUIS — BKA M P H UI S @WO R LDBA NK .O R G How COVID-19 is affecting firms in Indonesia Results from the 1st round of the COVID-19 Business Pulse Survey (COV-BPS) JUNE 15, 2020 – JUNE 23, 2020 Firms across the provinces surveyed and in almost all sectors Key surveyed were negatively affected by the COVID-19 crisis.1 They Messages were affected simultaneously by multiple channels. 86 percent of firms reported a reduction in sales. 73 percent of firms faced a This brief presents decrease in input availability. With falling demand, firms faced cash findings from flow shortfalls and serious liquidity constraints. the first round of a survey of 850 Many firms (42 percent) have turned to the internet, social media, firms in Indonesia. specialized apps or digital platforms in response to COVID-19, with a The survey was small share of firms investing in new equipment, software or digital implemented through solutions or changing their product mix. phone interviews and found that COVID-19 has had pronounced Demand and Only 7 percent of effects on Indonesia’s supply shocks firms accessed private sector. are widespread government among all sectors support. Firms are and firm sizes,2 but largely not aware MSMEs particularly that assistance struggled to adapt. may be available. 1 Impact on firms T he COVID-19 crisis had a enced the worst impact of the COVID-19 large temporary effect on crisis. One exception is the information the operational status of and communication sector, which appears firms.3 Only 36 percent of to have been able to take advantage of in- firms have been continuous- creased demand for digital products and ly open since March 2020. services and saw a 60 percent average in- Nevertheless, about 40 percent of firms that crease in sales. Compared to January 2020, 1 Out of 850 surveyed were previously closed due to COVID-19 re- 73 percent of firms experienced reduced firms, 280 were manu- facturing firms in North strictions reopened in June 2020. A signif- supply of inputs. Sumatra, West Java, Bant- icant share of firms (22 percent) were still en, Central Java, East Java and South Sulawesi prov- closed temporarily as of June 2020. Most of With falling demand, 77 percent of firms inces. 285 were high-val- ue added services firms these firms were closed based on their own reported a decrease in cash flow. While 30 and 285 were low-value added services firms, all decision, not because they were mandated percent of these firms did nothing, 24 per- on Bali and Java islands. by the government to do so. cent tried to solve these cash flow shortag- 2 Micro firms are firms es by reducing expenses. Only 16 percent of with less than 5 workers. Small firms have 5-19 This crisis severely hit firms in all sectors firms that experienced cash flow shortages workers; medium-sized firms have 20-99 work- but the information and communication utilized market-based financing (i.e., loans ers. Large firms are firms sector. Around 86 percent of firms saw a from commercial banks or non-banking with 100 or more work- ers. Micro, small and me- reduction in sales in June 2020 compared to financial institutions or equity finance). dium-sized enterprises (MSMEs) are thus firms the same period last year. Most of them re- Notably, MSMEs reported having signifi- with less than 100 work- ported a sales drop of more than 20 percent cantly more difficulties in meeting their ers. (Figure 1). For most sectors, average sales payment obligations. Furthermore, 9 per- 3 COV-BPS findings are likely a lower bound given halved or more. With an 87.5 percent sales cent of firms also reported having filed for that firms that are closed have a lower likelihood of drop, firms in the rental business experi- insolvency or bankruptcy (Figure 2). responding. Indonesia Covid–19 Observatory 20.08.2020 Page 2/2 2 Responses by firms Figure 1 The COVID-19 crisis has hit A Indonesian firms hard round 64 percent of internet or digital platforms to adapt to firms have responded the negative shocks from COVID-19. 42 Year-on-year (YoY) sales drop 86% to the crisis by reduc- percent of firms started or increased their ing labor cost. 29 per- use of the internet, social media, special- Large YoY sales drop (>20%) 82% cent of firms adjusted ized apps or digital platforms in response Lower cashflow availability 77% by reducing working to COVID-19. A substantially smaller pro- Reduced labor costs 64% hours of workers. A similar share of firms portion of firms invested in new equip- Difficulty in repaying loans/credit 27% (28 percent) granted unpaid leave or re- ment, software or digital solutions (4 per- Difficulty in paying wages 24% duced wages. Notably, micro firms and cent) or changed their product or services firms in the tourism and creative econo- mix (5 percent). Micro firms were signifi- Difficulty in paying utilities 22% my sectors were much less likely to pro- cantly less likely to make use of digital Difficulty paying rent 16% vide workers with paid leave. About 12 technologies and made almost no new Filed for insolvency or bankruptcy 9% percent of firms reported firing workers, capital investments. The uptake of digital corresponding to close to 5 percent of to- platforms is higher among large firms: al- tal employment. MSMEs and firms in the most 9 in 10 reported having started or in- tourism and creative economy sectors re- creased use of the internet, social media, Figure 2 Many firms, particularly micro ported firing workers the most. specialized apps or digital platforms in the firms, face difficulties to finance their past month in response to the COVID-19 operations A significant share of firms utilized the outbreak (Figure 3). Micro Small-medium Large 3 Policy Support Filed for insolvency or bankruptcy T he Government’s econom- sons for the low take-up rate of the exist- ic support programs for ing programs. More than half of the firms Difficulty in repaying loans or credit firms have yet to reach not receiving support indicated that they many of those affected were not aware of the existence of these firms, especially badly programs. Others (21 percent) do not know hit MSMEs. To support the reasons for not getting support (Fig- Difficulty in paying wages the private sector during the crisis, the ure 4). This low take-up rate is consistent Government of Indonesia implemented with the reported low utilization of the several programs, such as: reducing tax market financing scheme to solve liquidi- Difficulty in paying rent payments; reducing electricity expenses ty constraints. This suggests the need for for small firms; facilitating loan restruc- increasing and facilitating access to cred- turing, especially to MSMEs; providing it applications and other market-based interest rate subsidies and facilities for instruments. Similarly, there is a need to Difficulty in paying utilities new working capital loans, especially for improve the roll-out and expand the eligi- MSMEs and labor-intensive industries,5 bility of the reduced or waived electricity and—more recently (as of August 2020)— expenses for small firms, as many of them an income support scheme for employees still struggle to pay utilities. 0 20 40% earning below IDR5 million per month. As of June 2020, only 7 percent of firms The Government can also explore new or surveyed reported receiving government adjusted policies to reduce firms’ costs. Figure 3 Share of firms reported support. While tax incentives are most- A plausible channel to reduce the ongoing making adjustments to respond to ly enjoyed by large firms, MSMEs mostly costs of firms are wage subsidies, which COVID-19* reported receiving food vouchers and—in have been used effectively in other coun- terms of firm support—mostly received tries to preserve valuable employer–work- All Firms credit-related assistance. Nevertheless, er relationships. However, these may need Micro Small-medium Large badly hit firms (i.e., firms with a sales to be carefully targeted and time-bound, drop of more than 20 percent) have a as widespread wage subsidies may be Digital higher probability of receiving assistance. too onerous for the fiscal budget. More- Among badly hit firms, large firms have over, it may be challenging to implement received more assistance, largely because in Indonesia’s context of high business they can avail more of the tax instruments. and worker informality. The government could also reduce input costs by eliminat- To further help the private sector during ing non-essential checks and restrictions New Capital this crisis, the Government needs to im- on imported inputs (e.g., pre-shipment in- prove the effectiveness of its support spections, third-party verification of SNI through better communication and eas- compliance, port-of-entry restrictions, ier access to support programs. Lack of state import monopolies), fast-tracking clear information on programs and their other checks, and waiving import duties. New Product eligibility criteria are the two main rea- Figure 4 Firms are largely not aware that assistance may be available Not Aware 0 50 100% 53% * DI G I TA L — starts to use or increased the use of internet, social media, specialized apps, or digital platforms; Too difficult N E W CA P I TA L — invested in new equipment, Did not receive to apply software or digital solutions; Received any assistance 4% N E W P R ODUCT — changed or is in the process 7% of changing its products or services. 93% Applied but not received 6% No Need Not Eligible 21% 5 For more details see: World Bank. 2020. Indonesia Economic Prospects, July 2020: The Long Road to Re- covery. World Bank, Washington, DC, pp. 41-42. http:// 4% 5% Don't know why hdl.handle.net/10986/34123