Indonesia Post-Pandemic Economy
How Businesses Adapt to the New Normal of Economic Activities in Recovery Period
by Alvian Andrean — KLS Capital
2021 Outlook: Slow but Sure
The COVID-19 pandemic has put the world’s 2020 economy into the negative territory. Recovery is incoming, whether it is a V-shaped or U-shaped recovery. The pandemic has also brought up new leading sectors, the tech enabled business and changes in consumption habit. Companies need to be agile to adapt with the current situation and make us of the momentum to either maintain or expand their business.
Here’s how companies anticipate the situation.
As of 26 March 2021, there were 126 million Covid cases registered around the world. United States, Brazil and India were the top three countries with the most Covid cases, followed by Eurozone countries: France, Russia, UK, Italy, Spain, Turkey and Germany. Most countries above have already suffered the second wave and third wave.
China, the first country to be infected, did not see more new cases and stayed at around 90 thousand cases. Meanwhile, Indonesia Covid cases were at 1.5 million cases and stayed around 4–5 thousand cases/day in March 2021.
The COVID cases has slowed down in 2021 compared to Q2 or Q3 2020, driven by tight social distancing protocol issued during 2020 and vaccinations around the world.
The vaccine distributions reached 489.7 million dosages (6.2% vaccination ratio). United States was the most aggressive country in terms of vaccination, with 130 million vaccines were already injected (note: most vaccines require two shots to be counted as fully vaccinated).
We expect vaccination rate will reach 70% by the end of 2021 with Indonesia only reached 50% as the current vaccination progress remained below the government’s target.
The Global Economic Recovery
The World GDP was projected to contract by 4.4% in 2020, the lowest since Great Financial Crisis 2007–2009. COVID-19, which lasted the entire 2020 with many countries suffering 2 waves, has put the whole economy to a long halt. Travel, leisure and consumers are the three sectors being hit most.
It was an entirely different contraction compared to the 2008 subprime mortgage crisis, which was more severe and took a longer time to recover due to more systemic damage of financial activities.
A quick move from many central banks has put a hope for a faster recovery, notably a move from Federal Reserves of US, European Central Bank and various stimulus from the governments around the world. US Fed’s assets purchase and zero interest rate policy have saved lots of companies from further damage of the economic activities halt. This policy has also positively impacted the stock market, as we saw a new high on Dow Jones, Nasdaq and S&P 500. This also put US financial institutions at more ease compared to 2008, as the investment banking activities surge high, patching up the negative side of debt restructuring.
V-Shaped Recovery for US, U-Shaped for Indonesia
IMF projected the Global growth to increase by 5.2% in 2021, 0.6% above the 2019 economy. The recovery will be backed by vaccine distribution, thus resuming the economic activities. Besides China, which has recovered much faster in 2020, we expect United States to have a V-Shaped recovery (5.5% in 2021), as Central Bank’s policy in asset purchase and zero interest rate until 2023, together with Government’s huge stimulus and the companies’ technological readiness, have subdued the employment rate and avoided US from a deeper contraction.
On the contrary, Indonesia and most other countries will have to expect a slower rate of recovery. This was due to the longer lockdown period, lower stimulus and traditional based companies are hit hard by COVID-19 as shown on the chart below. Manufacturing, automotive, construction, mining and transportation were the negatively impacted sectors and it will take some time to recover. However, the chart also indicated hidden gems: rising information & technology, healthcare & social and agriculture & fisheries activities during the pandemic.
We estimate a mild recovery in Q1’21 as Government has just started the vaccination initiative in this quarter. Q2’21 will see a stronger recovery on the back of rising commodity price (coal, nickel and CPO), companies’ adaptation to the “new normal”, as well as more evenly distributed vaccine, resuming the economic activities to 70–80% of its pre-pandemic level. The second semester will be the main recovery momentum and we expect Indonesia GDP to grow by 3.5% this year.
New Consumer Behavior and Faster Technology Penetration
COVID-19 has changed lot of activities aspects. People travelled less and do more activities at home. This has put technology penetration at a faster rate than expected. According to PWC research during Covid-19, 49% consumers avoided leaving their homes, 50% worked from home partially or entirely, 42% avoided public transportation and 57% conducted social distancing from friends and community.
As people are traveling less and staying at home more, the consumption behavior also changed, both on the ways they purchase items and the items they purchase. According to McKinsey’s research, Indonesians focused their purchase on groceries, snacks and entertainment at home. Indonesians also shift from offline to online channels in nearly all consumer product categories.
This changes will continue in the following years. Thus, as consumers’ behavior and purchasing channel change, companies should adapt to match their product & service offerings with consumers’ consumption and channels they use, meaning:
1. Companies might need to tune up their products or services to fit the new consumer’s behavior.
2. Companies should make their products easier to be found through online channels.
3. Companies need to adapt more to technology and accelerate the digitalization of their business processes.
Strategy
As COVID-19 has changed significant consumption behavior and the sales channels, companies need to change their approaches in reaching and offering products & services to the customers. However, some companies will be much impacted from the COVID-19 last year while some companies enjoy the momentum as they are already in line with the new trend.
We divide strategies based on Companies’ Product Market Fit (PMF) and Liquidity Available to provide more comprehensive strategies based on Companies’ circumstances:
Closing
COVID-19 has clearly impacted various aspects of life, including economic activities. Working From Home is not widely considered prior to the pandemic. Enterprise tools such as meeting apps, productivity and collaboration apps are now a requirement.
While many Indonesian companies are negatively impacted, we believe that the technology push will eventually cover the negative side and improve companies efficiency. Meetings, which was usually conducted offline, taking hours only to transport, can now be brought online. Offline channels, which require high capex/opex for building and maintenance, can now be reduced and be allocated to other productive expenses.
We believe these sectors will be the key for business transformation in Indonesia:
1. SaaS Collaborative and Productivity Technology
2. Integrated Logistics Enabler
3. E-Commerce Platform
4. Healthcare Technology
5. Education Technology
6. Agriculture Technology
as the leading sectors in the few years ahead.
However, the uncertainty from COVID-19 impact remain high, thus companies should be more resilient and be prepared for the worst case, which means recovery is not accelerating, or even decelerating. Runway reserves will be the key anticipation resource while exploring and preparing for a better future.
Opportunities lie ahead for companies who are well prepared.
