A Brief View on How Omicron Variant Complicates Policymaking
The Emergence of Omicron Variant
• WHO considered Omicron as a variant of concern (voc). However, a little is known about this new variant in terms of its transmissibility and nature of its infection.
• It is rapidly spreading and now found in more than 30 countries with high vaccination rate.
• Tightening measures are taken by some nations including nationwide lockdown for unvaccinated people and international travel restriction.
• Despite the drop in Covid-19 daily cases reported in Indonesia, the local government followed a tightening measures by upgrading PPKM level of Jakarta from level 1 to level 2 up until Dec 13, 2021.
• Ahead of Christmas and New Years Eve’s Holiday, government of Indonesia plans to introduce PPKM level 3 from Dec 24 to Jan 2.
How it Complicates Policy Measures & Its Impact
• The emergence of Omicron variant may hinder global growth in FY21E and FY22F.
• Markets have reacted negatively and investors appetite shifted towards a safe haven asset such as UST bond.
• Prices of stock, cryptocurrencies and commodities like oil tumbled last week along with the jump in VIX index (>30) gauging a fear in the markets.
• The rapidly spreading variant also triggered foreign outflows worth of IDR12.5tn from domestic financial markets.
• As a consequence, JCI dropped more than 1%; rupiah depreciated 0.5% against USD and 10-year Indo GB yield spiked more than 10 bps.
• Should the circumstance worsen, it will complicate how policymakers would respond particularly the Fed that face high inflation and improving job markets given the lack of understanding on the variant nature.
• We carefully assess how it may impact Indonesia, the worst case scenario is, if the infection rate rise significantly and government aggressively tighten public activity restriction measures.
• This would trigger foreign outflows which resulted in domestic financial asset price correction and lower economic growth, but the impact differ across sectors.
• Service sector like hotel and tourism as well as transportation will be the most severely impacted and this will prolong the sector recovery.
• Meanwhile sectors that can benefit from the pandemic curb measures will be healthcare, e-commerce, logistic and telco.
• All in all, the spread of Omicron variant pose another threat to economic recovery and increasing the risk of uncertainty and volatility.
