Indonesian economy remains under stress as Covid-19 cases continue to climb

A butcher checks his phone while waiting for buyers at West Tebet Market in South Jakarta on Feb 9, 2021. - JP

JAKARTA (The Jakarta Post/ANN): The Indonesian economy will remain under pressure this year and its recession is likely continue into the first quarter, economists have said, because of persistently rising Covid-19 cases, which have depressed economic activity and limited consumption.

The country’s gross domestic product (GDP) shrank 2.07 per cent year-on-year (yoy) in 2020, the first annual contraction since the 1998 Asian financial crisis, Statistics Indonesia (BPS) announced on Friday.

Nearly all components of GDP fell last year, with the exception of government spending, which grew as a result of Covid-19 stimulus packages.

The country’s GDP is expected to contract again in the first quarter, marking a prolonged recession, although the decline will likely be less severe than in the fourth quarter of last year, when the economy shrank by 2.19 per cent yoy, said Piter Abdullah, an economist at the Center for Reform on Economics (CORE) Indonesia.

In the second quarter, the vaccination [programme] is expected to be implemented more widely, Covid-19 cases are expected to plateau and social and economic activities are expected to be relaxed further, so [the economy may] start to pick up, ” Piter told The Jakarta Post last Friday.

However, such an economic recovery timeline is only possible if the government refrains from tightening mobility restrictions again, Piter said.

Indonesia entered its first recession in two decades last year, as the economy contracted by 5.32 per cent in the second quarter and by 3.49 percent in the third.

In response to the unabated rise in Covid-19 cases, the government imposed public activity restrictions (PPKM) for two weeks from Jan 11 of this year in the country’s economic heartland of Java and Bali.

The measures were later extended until Feb 8. The government then introduced more lenient restrictions from Feb 9 to 22.

Under the new rules, workers may work at the office half of the time and retail businesses may stay open until 9pm, among other provisions.

On Sunday, the country recorded more than 10,800 confirmed Covid-19 cases, which brought the cumulative national tally to about 1.15 million.

This year, the government plans to increase the national economic recovery (PEN) fund to Rp 619 trillion (US$44.3 billion) from the previous Rp 533.1 trillion, reported.

Rp 156.1 trillion of the fund will be allocated for small and medium enterprises (SMEs) and corporations.

This year’s figure is lower than last year’s fund of Rp 695.2 trillion. Even though government spending grew by 1.94 per cent yoy last year, the state only managed to spend 83.45 per cent of the PEN fund by the end of the year.

Coordinating Economic Minister Airlangga Hartarto said on Friday that the government expected GDP to rebound in the first quarter and grow between 1.6 and 2.1 per cent yoy.

The government has forecast that the economy will grow between 4.5 and 5 per cent yoy in 2021.

“We are hoping for positive growth in the first quarter, ” Airlangga said during a virtual press conference on Friday.

“It is the government’s task to spur on household consumption, which could grow by 1.3 to 1.8 per cent yoy.”

Household consumption, which accounts for more than half of Indonesia’s GDP, fell 2.63 per cent yoy last year – a stark contrast to its 5.04 per cent growth in 2019 – as mass layoffs and wage cuts battered purchasing power.

Demand has remained low so far this year. The consumer price index (CPI) fell by 1.55 per cent yoy in January to its lowest point since November of last year, according to BPS data.

The inflation rate is now below Bank Indonesia’s (BI) target range of 2 to 4 per cent for 2021.

Bank Mandiri economist Faisal Rachman said the country may need to maintain “some degree of restrictions” in the beginning of this year, and he expected these measures to last until the middle of the year, hindering the economic recovery.

While government stimulus spending may help spur GDP growth, if the disbursement of these funds, the country’s pandemic handling or its vaccination programme do not go as planned, a downside risk could arise, he said.

“A K-shaped recovery may also be present due to a prolonged pandemic in which healthcare, [information, communication and technology], agriculture, mining and basic metals sectors will continue to be resilient, while services-related and discretionary consumer sectors further decelerate, ” Faisal said in a written statement released on Friday.

Moody’s Analytics, in a Feb 4 research note by Sonia Zhu, noted that while the government was banking on vaccinations to deliver it from the health and economic crisis, the nation had been slow in rolling out the programme.

“The path to recovery for Indonesia will be a challenging and protracted one, ” the note reads.

Mirae Asset Sekuritas analyst Anthony Kevin wrote that despite the improvement in the manufacturing sector in January, demand remained weak, and Indonesia’s economic downturn would likely continue.

The country’s manufacturing Purchasing Managers’ Index (PMI) rose to 52.2 in January from 51.3 in December of last year, according to business information provider IHS Markit earlier this month.

A reading above 50 reflects an expansion from the previous month.

“We expect this trend to last in [the first quarter of the year] as the Covid-19 outbreak in the country remains out of control, ” the note reads, adding that the smaller fiscal stimulus package would do little to help revive the purchasing power of middle-to-low-income households.

Mirae Asset has revised its growth forecast for the first quarter down to a 1.5 per cent yoy contraction, from its previous prediction of 2.15 growth yoy. It has also revised down its full year growth forecast to 3.85 per cent, from 4.15 per cent previously. - The Jakarta Post/Asia News Network

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Indonesia , economy , covid-19


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