The Great Dissonance: 20th ICMSS Final
Since its first occurrence in late 2019, COVID-19 has been devastating for the majority. The number of lives taken now exceeds one million and the number of infections is already above 33 million globally of which 60% are in developing countries. The condition sustains the uncertainty that 2019 left to 2020. Thanks to substantial monetary and fiscal support, wage subsidies and job retention schemes have prevented unemployment rates from rising significantly in most countries. The hospitality, tourism, transport and retail sectors have been hit hard, but the overall balance sheet damage to corporates and households has been relatively limited despite the large lockdowns. The current ups and downs of economic recovery including the progress of vaccines rekindle hope towards the prospect of global economy. 2021 should bring stabilization and a reset for a number of disruptions experienced this year, with front-loaded market momentum and an economic recovery to follow. J.P. Morgan Global Research analysts believe that recovery, reflation and rotation against the backdrop of accommodative monetary and fiscal support will set the foundation for key market and economic calls for 2021. “Global growth will be below trend in early 2021, but the strongest global recovery in a decade will play out by the end of 2021 if the vaccine prospects play out as expected,” said Joyce Chang, Chair of Global Research.
Though global economic growth is estimated to decline by 4.9% YoY in 2020, it is expected to soar by 5.4% YoY in 2021. However, the legacy is an incomplete recovery with a 2.0% output gap that is larger than any similar recovery stage at any cycle over the past 50 years. Policymakers remain committed to limiting spillovers, and there will not be a move away from accommodative monetary policy in 2021. This year’s expansion of central banks’ balance sheets is expected to be half the size that’s seen in 2020 and as a result, global fiscal policy should turn to a modest 1.5% drag after the 4.7% record fiscal thrust provided in 2020. The financial market recovery is well advanced compared to the economic recovery, but John Normand, Head of Cross-Asset Fundamental Strategy, points out that some segments of equities and fixed income, commodities and currencies still remain as much as 10%, or as much as 200 basis points, cheap to pre-pandemic levels. “Stocks will outperform bonds but our total return forecasts are below average for almost every fixed income sector due to low entry yields and spreads,” noted Normand. The largest beneficiaries will be stocks at the epicenter of the pandemic, such as Consumer Discretionary, Financials and Energy. Surprisingly in Indonesia, investment realization in 1H20 still showed a positive trend where it increased by 1.8% YoY to Rp402,6 tn. For domestic direct investment (DDI), it reached Rp207 tn (51.4%) and foreign direct investment (FDI) reached Rp195,6 tn (48.6%). There were 57,815 investment projects that absorbed 566,194 workers. It reached 49.3% of the 2020 investment target of Rp871,2 tn. The impressive results may not sustain in 2H20 as the pandemic impact seems to take a lag. However, the government has maneuvered to accelerate and attract investment through some efforts such as Investment Coordinating Board (BKPM) consolidation and Omnibus Law.
The stress is real, but it has been abating as time passes by. The pandemic might bring a kind of shock that the world has never encountered before. Yet, there's still a silver lining in every hardship, and we're making some noteworthy progress onwards. So, like many financial recessions we've experienced, this too shall pass. Given the difficulties, Indonesia experienced a recession; even in 4Q20, the economy has contracted compared to the previous period. Indonesia contracted at 1.2% YoY in 2020, and the GDP is expected to grow at 4.4% YoY in 2021. The mix between fiscal and monetary policy will bring the recovery this year. However, the condition in 2021 will still be below the pre-COVID level with a rosy outcome ahead. Hopefully, every effort taken in 2020 to attract investment will reap the apparent results in 2022 and afterward. In 2023, the government will push the budget deficit to below 3%, according to Law No.2/2020. As inflation rises, BI-7DRRR starts to go up. Furthermore, the 2024 election year comes alongside its positive impact on economic growth from higher domestic consumption as the main driver. All in all, we might still encounter many hurdles in taking a step forward, even how the stock market shifts is still an enigma. This unprecedented period might be stressful and requires significant changes in how we live. But we must view these urgent changes not as a barrier but as a great way for us to learn more.
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