Indonesia's economy contracts for first time in 20 years amid Covid-19 crisis

The country's GDP declined 5.32% in the second quarter from a year ago - its deepest contraction since the first three months of 1999

Indonesia's GDP declined 5.32 per cent in the second quarter compared to a year ago. Bloomberg  

Indonesia’s economy contracted for the first time since the aftermath of the Asian Financial Crisis more than two decades ago, as movement restrictions to contain the coronavirus outbreak took a toll on South East Asia’s largest economy.

Gross domestic product declined 5.32 per cent in the second quarter from a year ago, data from the statistics bureau showed Wednesday, its deepest contraction since the first three months of 1999. The median estimate in a Bloomberg survey of economists was for a 4.72 per cent slump. GDP fell 4.19 per cent compared to the previous quarter, worse than the 3.65 per cent drop expected.

“You know a blow is coming and you’ve been bracing yourself for it, but when it comes it’s still going to hurt - a lot,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corporation in Singapore. “While we still see a recovery in the second half, the path is made all the more uncertain by global developments.”

Indonesia’s benchmark stock index closed 1 per cent higher, rebounding from a 0.3 per cent drop after the data release. The yield on benchmark 10-year government bonds dropped 2 basis points to 6.821 per cent, while the rupiah rose 0.5 per cent against the US dollar.

Retail sales in the consumption-reliant economy have taken a knock amid the pandemic, while manufacturing continues to contract, as the latest purchasing managers index shows. Indonesia’s exports, dominated by commodities such as coal and palm oil, have shown some improvement in recent months.

The government has lowered its growth forecasts several times already and now sees GDP in a range of -0.4 per cent to 1 per cent for the year. The central bank has cut its own estimate to 0.9 -1.9 per cent growth.

President Joko Widodo has said the economy is showing signs of recovery, with household consumption, purchasing power and money circulation in rural areas rebounding recently. However, the country’s virus outbreak – the worst in Southeast Asia – shows no signs of abating and could weigh on that outlook.

“Household consumption and investment are the biggest sources of our GDP growth, so we should put much more effort for these components to perform better in the next quarters,” Suhariyanto, head of the Indonesia Statistics Agency, said in a briefing.

"The sharp contraction in Indonesia’s economy in 2Q is likely to have been the low-point," said Tamara Mast Henderson, Asean economist at Bloomberg. "Even so, declines in 3Q and 4Q cannot be ruled out, as Covid-19 restrictions in some form will need to remain in place until a remedy is widely available. Whether Indonesia can reopen substantially further and return to positive growth by 4Q would hinge on fatalities remaining relatively low."

In a separate briefing, coordinating minister for economic affairs Airlangga Hartarto noted recent improvement in the PMI, car sales and retail sales as harbingers of revival.

“We believe the economy starts showing a reversal from its bottom in the second quarter,” he said.

Josua Pardede, an economist at Bank Permata, said the data show a rising risk of recession and called on the government to boost its fiscal support. The government has disbursed only 141 trillion rupiah ($9.7 billion/Dh35.5bn), or 20% of the 695.2tn rupiah it has allocated for stimulus.
Bank Indonesia has cut interest rates by 100 basis points this year and agreed to finance the widening budget deficit by buying billions of dollars of sovereign bonds directly from the government.

“Steps to stimulate the economy through accelerating the stimulus of government spending is crucial, by continuing to encourage productivity, which has a multiplier effect on public demand and consumption,” he said. “Economic performance in the third quarter of 2020 is expected to be a turning point.”

Wisnu Wardana, an economist at Bank Danamon Indonesia, said he doesn’t see scope for much more central bank easing.

“We are of the view that monetary policy has been stretched, especially under the recent burden-sharing scheme,” he said.