Maintaining liquidity amid COVID-19 crisis

Source: Bisnis Indonesia

The spread of the COVID-19 pandemic has raised growing concerns over its broader economic impact. Governments around the world have been continuously implementing various measures to address the crisis. This global outbreak has pushed many countries to the edge of economic instability. The International Monetary Fund (IMF) has even declared that the world has entered a recession, describing it as significantly more severe than the 2008 global financial crisis.

Sri Mulyani Indrawati, Indonesia’s Minister of Finance, has also stated that the national economy is expected to contract. Economic growth for 2020 was projected at 2.3%; however, under a worst-case scenario, Indonesia’s GDP growth could potentially turn negative.

The Indonesian government’s policy to allocate additional state budget spending and financing amounting to IDR 405.1 trillion for handling the COVID-19 crisis was a strategic and necessary step. The allocation covered IDR 75 trillion for the healthcare sector, IDR 110 trillion for social protection, IDR 70.1 trillion for tax incentives and micro-business credit stimulus, and IDR 150 trillion for the national economic recovery program.

Likewise, the policy issued by Financial Services Authority of Indonesia (OJK) through POJK No.11/POJK.03/2020 regarding economic stimulus for debtors affected by COVID-19—particularly for SMEs with financing facilities below IDR 10 billion—deserves strong appreciation.

However, one critical question remains in times of economic crisis: what should be prioritized and managed effectively to support a faster economic recovery?

Based on practical experience, particularly during the 1998 financial crisis, the answer is clear: LIQUIDITY.

If examined more closely, not all business sectors were equally affected during the 1998 crisis. The most heavily impacted sectors were corporations that pursued overly aggressive investments and major banks owned by conglomerates that failed to uphold proper corporate governance principles.

Although those institutions experienced financial distress, liquidity solutions were still available because global markets remained relatively strong. Economic recovery gradually took place as global liquidity flows entered Indonesia.

At that time, many investors acquired Indonesian corporations and banks at significantly discounted valuations. There were even foreign individuals who came to Indonesia to purchase luxury assets at reduced prices from business owners facing liquidity pressures.

Today’s situation, however, is fundamentally different.

Unlike the 1998 crisis, the current economic contraction is global in nature. Almost all countries have experienced economic slowdown. According to market reports, advanced economies were projected to face negative GDP growth, with recessionary conditions expected to continue into the following year.

Multi-Sector Crisis

Unlike the 1998 crisis, the current crisis has significantly impacted the services sector, which serves as one of the major pillars of the national economy.

Large-scale social restrictions and quarantine measures have caused substantial disruption across multiple industries, including hospitality, restaurants, cafés, travel, transportation, aviation, tourism, and manufacturing. Economic activity in many sectors has been partially or entirely suspended, and this situation has occurred globally and almost simultaneously.

Given these conditions, it is both important and urgent to identify solutions to maintain corporate liquidity flow.

Liquidity remains the key factor for business survival and resilience during prolonged economic uncertainty.

In simple terms, corporate liquidity is generated through revenue, while individual liquidity depends on income generation. Liquidity can also be strengthened through reserve withdrawals, surplus funds, deposits, asset liquidation, or financing support from financial institutions, family, or business networks.

However, the prolonged impact of the COVID-19 pandemic has disrupted this liquidity cycle due to several factors:

First, income and revenue—both for individuals and corporations, particularly SMEs—have declined significantly.

Second, access to liquidity from financial institutions has become more difficult, as many banks have adopted stricter credit policies and temporarily suspended new loan disbursements.

Third, liquidating assets to generate cash has become increasingly difficult due to reduced market demand and weakened purchasing sentiment.

Urgent Strategic Measures

The OJK policy aimed at maintaining asset quality and controlling Non-Performing Loans (NPL) is a positive and necessary measure.

Similarly, Bank Indonesia’s policy to maintain monetary stability, financial system stability, and payment systems—particularly to support the stability of the Indonesian Rupiah—is also highly important.

However, one equally important aspect requiring immediate attention is the liquidity resilience of banks and other financial institutions, particularly smaller institutions or those with weaker liquidity management.

Several urgent strategic actions should therefore be considered:

First, conducting a comprehensive review of banks and financial institutions to assess short-term liquidity risks.

This becomes increasingly relevant following OJK’s policy on loan repayment restructuring for debtors affected by COVID-19. While beneficial for borrowers, the policy creates chain reactions within the financial ecosystem.

For example, if debtors postpone installment payments to finance companies, those finance companies may face difficulties meeting their own obligations to banks.

At the same time, large and medium-sized corporations experiencing delayed receivables may struggle to pay trade payables or loan interest, potentially leading to production disruptions and workforce reductions.

Ultimately, this could contribute to rising NPL levels and liquidity challenges within the banking sector.

In cases where financial institutions face liquidity challenges but maintain healthy financial performance and sound management practices, liquidity stimulus policies should be considered to maintain their role as active lenders and support liquidity circulation in the market.

On the other hand, institutions facing liquidity problems due to poor governance, improper lending practices, or internal mismanagement should be subject to stricter consolidation and restructuring policies.

Second, comprehensive reviews should also be conducted on mutual funds and investment products to anticipate potential default risks and strengthen investor communication to prevent market panic.

Third, close monitoring should be implemented on USD-denominated offshore bonds issued by national corporations to assess potential default risks and systemic economic impacts.

Fourth, the top banking institutions should be encouraged to continue extending credit selectively, particularly to businesses facing liquidity pressure but maintaining healthy operational fundamentals, including SMEs.

Fifth, market liquidity should be maintained through major banks supported by liquidity stimulus policies, enabling financing activities to continue with more competitive lending and deposit rates.

Maintaining liquidity in the banking and financial sector does not mean doing so at any cost. There must always be a reasonable and measurable framework in determining the scale and scope of liquidity support.

In conclusion, beyond maintaining financial sector liquidity, the broader economic impact of the COVID-19 crisis must continue to be assessed comprehensively by identifying vulnerable sectors within the national economy.

These include finance companies that may face repayment difficulties to banks, smaller banks vulnerable to liquidity stress, large corporations facing debt repayment pressure—both domestic and international—mass layoffs, business closures, and individuals with insufficient income.

Immediate, effective, and strategic actions focused on these vulnerable sectors are essential to prevent Indonesia from falling into a deeper and more multidimensional economic crisis.