Indonesia - OECD Economic Outlook June 2020

228 _

Indonesia Following the outbreak of COVID-19, GDP is projected to contract in 2020, for the first time since the 1997 Asian crisis, by 2.8% or 3.9% depending on the scenario. The recovery will be subdued, with employment and income losses holding back private consumption, and by end-2021, GDP is projected to be 8% to 10% below its pre-crisis trend level depending on whether a second global wave of infections occurs later in 2020.

The socio-economic consequences of the recession will be severe, notably for lower middle class groups, which are at great risk of falling back into poverty.

The COVID-19 recession is revealing some shortcomings of existing programmes in providing assistance to vulnerable individuals. Doubling the resources for the new pre-employment card programme and reorienting it to assist laid-off and furloughed workers has been an expeditious solution, but cannot substitute for the progressive introduction of a well-funded unemployment insurance scheme. Restarting infrastructure investment, while ensuring that the stimulus is socially and environmentally sustainable, should also be a priority.

The disease has spread fast The pandemic officially reached Indonesia in early March, with the first imported case reported on 2 March.

By 9 April, the pandemic had spread to all provinces, with Jakarta, West Java, and East Java worst hit.

Health insurance covers over 80% of the population, but gaps remain in terms of health infrastructure, medical equipment and health professionals, especially in rural areas. Focusing resources devoted to the COVID-19 pandemic may aggravate vulnerability to other diseases endemic in Indonesia, such as dengue fever. In addition, co-ordination failures between local and central government are complicating policy responses to the health emergency.

Indonesia 1 The recession will be severe Index 2019Q4 = 100,s.a.

105

Consumer confidence and tourism are declining sharply

Real GDP

Thousand persons 1750

Single-hit scenario Double-hit scenario

100

Index 140

1550

130

1350

120

1150

110 100

950 750

95

90

← Tourist arrivals

2020

2021

0

Consumer confidence →

90

550

80

350

70

150

2018

2019

60

Source: OECD Economic Outlook 107 database; and CEIC database.

StatLink 2 https://doi.org/10.1787/888934139518

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION © OECD 2020

_ 229

Indonesia: Demand, output and prices (double-hit scenario) 2016

2017

Current prices IDR trillion

Indonesia: double-hit scenario GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1 Total domestic demand Exports of goods and services Imports of goods and services Net exports1

2018

2019

2020

2021

Percentage changes, volume (2010 prices)

12 401.7 7 171.5 1 181.6 4 040.2 12 393.3 - 85.4 12 307.9 2 367.4 2 273.5 93.8

5.1 5.0 2.1 6.2 5.1 -0.2 4.8 8.9 8.1 0.3

5.2 5.1 4.8 6.6 5.6 0.7 6.2 6.5 11.9 -0.9

5.0 5.2 3.2 4.4 4.8 -1.0 3.6 -0.9 -7.7 1.4

-3.9 -4.4 8.8 -5.9 -3.8 -0.3 -4.1 -7.4 -9.1 0.1

2.6 2.7 7.3 0.3 2.3 0.0 2.3 2.1 0.2 0.4

_ _ _ _ _

4.3 3.8 3.4 -1.9 -1.6

3.8 3.2 3.3 -2.2 -3.0

1.6 3.0 3.2 -1.9 -2.7

1.1 2.4 2.9 -6.9 -2.7

2.6 2.7 3.2 -5.5 -2.7

Memorandum items GDP deflator Consumer price index Private consumption deflator General government financial balance (% of GDP) Current account balance (% of GDP)

1. Contributions to changes in real GDP, actual amount in the first column.

Source: OECD Economic Outlook 107 database.

StatLink 2 https://doi.org/10.1787/888934138017

Nationwide measures to stem the spread of the virus have been relatively mild, especially compared to the rest of East Asia. The focus has been on distancing, school closure, telework, and international travel restrictions. As the number of infections rose, stronger measures were introduced in mid-April, including a partial lockdown in Jakarta and other large cities, declaring COVID-19 a national disaster, banning the annual post-Ramadan Idul Fitri mudik (exodus), and suspending intercity travel. The classification of COVID-19 as a disaster emergency was intended to expedite administrative responses.

Indonesia 2 Employment prospects are increasingly precarious

Financial market developments expose structural frailties

50 = neutral Manufacturing PMI, employment sub-index 55

50

18.0

← Exchange rate (Indonesia Rupiah to 0.001 USD)

13

17.5

Yield spread (10-year Indonesia vs US bonds) →

12

17.0

Foreign exchange reserves (Months of Import) →

11

16.5 45

10

16.0

9

15.5 40

8

15.0

7

14.5 35

30

2018

2019

0

14.0

6

13.5

5

13.0

4 Dec 2019 Jan 2020 Feb 2020 Mar 2020 Apr 2020 May 2020

Source: Markit; Refinitiv; and CEIC database.

StatLink 2 https://doi.org/10.1787/888934139537

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION © OECD 2020

230 _

Indonesia: Demand, output and prices (single-hit scenario) 2016

Indonesia: single-hit scenario GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1 Total domestic demand Exports of goods and services Imports of goods and services Net exports1 Memorandum items GDP deflator Consumer price index Private consumption deflator General government financial balance (% of GDP) Current account balance (% of GDP)

2017

Current prices IDR trillion

2018

2019

2020

2021

Percentage changes, volume (2010 prices)

12 401.7 7 171.5 1 181.6 4 040.2 12 393.3 - 85.4 12 307.9 2 367.4 2 273.5 93.8

5.1 5.0 2.1 6.2 5.1 -0.2 4.8 8.9 8.1 0.3

5.2 5.1 4.8 6.6 5.6 0.7 6.2 6.5 11.9 -0.9

5.0 5.2 3.2 4.4 4.8 -1.0 3.6 -0.9 -7.7 1.4

-2.8 -3.1 8.5 -4.6 -2.7 -0.3 -3.0 -5.9 -7.4 0.1

5.2 5.3 6.3 4.2 5.0 0.0 4.9 5.8 4.7 0.3

_ _ _ _ _

4.3 3.8 3.4 -1.9 -1.6

3.8 3.2 3.3 -2.2 -3.0

1.6 3.0 3.2 -1.9 -2.7

1.2 2.5 3.0 -6.7 -2.8

2.8 2.8 3.2 -5.2 -2.8

1. Contributions to changes in real GDP, actual amount in the first column.

Source: OECD Economic Outlook 107 database.

StatLink 2 https://doi.org/10.1787/888934138036

The economic situation has deteriorated sharply GDP contracted in the first quarter of 2020, weighed down by weak household consumption and investment. Despite falling commodity prices, foreign trade recorded a surplus as Indonesian manufacturing exporters seized opportunities deriving from the lockdown in China. Since mid-March, consumer confidence, new car sales, and the manufacturing PMI have all retrenched, while CPI inflation declined. As containment measures became effective, the impact of COVID-19, initially limited to the tourism sector, spread to retail trade and manufacturing. The number of foreign visitors, in particular, fell dramatically in March-April following the suspension of air transport services and is likely to plunge even lower at least until mid-year. Major investment projects were suspended. With economic activity losing momentum, the labour market has weakened, as reflected in the number of new social security system registrations and indicators of employment in manufacturing. Hardships are particularly severe for informal workers, who account for more than two-thirds of the workforce and cannot afford to respect stay-at-home recommendations as their lives depend on securing a daily income.

The economic policy response has been swift and substantial The constitutional ceiling on the fiscal deficit of 3% of GDP has been suspended until 2023 and an economic stimulus package worth IDR 405.1 trillion (USD 27.5 billion) was announced end-March. The emergency resources are directed at strengthening the health sector (purchases of medical equipment and incentives for medical workers) and sustaining the most vulnerable individuals and firms. Specific actions include reorienting the pre-employment card programme to assist laid-off workers, deferring tax payments, favouring SME credit restructuring, accelerating VAT refunds, and reducing the corporate income tax rate by 3 percentage points. In addition, the deteriorating financial and operational situation prompted the adoption of the National Economic Recovery Programme that includes new capital injections into selected state-owned enterprises (SOEs) to prevent them from missing debt obligations. Bank

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION Š OECD 2020

_ 231 Indonesia trimmed its policy rate from 5% to 4.5%, started purchasing government securities in the primary market as a last resort to maintain financial system stability, relaxed macro-prudential policy to counter adverse developments, and boosted dollar liquidity supply through bilateral swap agreements with other central banks. The State Financial Services Authority has issued regulations to facilitate financial restructuring.

With the stimulus package, the government aims at mitigating the economic slowdown and supporting the population in need, while preserving its hard-won credibility with international investors. The budget resources will prioritise the 10 million families in the Family Hope programme (Program Keluarga Harapan) and the 20 million families in the staple food one (Rastra), thus focusing on food security and poverty traps.

The risk exists, however, of missing vulnerable groups in metropolitan areas, such as self-employed workers and micro and small business owners, as well as informal itinerant workers who do not have a government identity card. The actions of the monetary and financial authorities have sustained asset prices, stabilised the currency, and contributed to the successful placement of the first global bond issue, which included the longest-dated dollar debt tranche ever issued in Asia. However, foreign exchange reserves have fluctuated and the deterioration in investor sentiment towards emerging-market economies remains a headwind.

The recovery will be bumpy Following a sharp GDP contraction in the second quarter and a rise in unemployment, the recovery is set to start in the third quarter, as the authorities lift distancing measures and consumer confidence slowly returns. Under both scenarios, GDP is projected to shrink in 2020 and then to recover modestly in line with global developments, albeit registering a substantial loss compared to the pre-pandemic trend. The budget deficit is expected to more than double in 2020, but then to decline slowly in 2021, as some of the exceptional support measures are phased out. With the economy still sluggish, inflation will remain under control, although some pressures on food prices may emerge from disruptions in the domestic agricultural supply chain and export controls in producing countries. In the double-hit scenario, the policy interest rate is assumed to be cut further.

Over the projection horizon, Indonesia will confront a set of risks that are common to all emerging market economies, such as rising protectionism, growing risk aversion, a flight to quality and sudden capital reversals, as well as others that are country-specific. Among the latter ones, a major risk is of a resurgence of the pandemic in the second half of the year, with the corresponding re-imposition of containment measures. If the labour market rebound is weaker and slower than expected, higher unemployment may weigh on domestic demand and delay the recovery. Tourism could suffer more and for longer than anticipated due to the severity of the shock. In addition, as private sector debt has risen fast in recent years, especially in foreign currencies, non-financial corporates and banks are strongly exposed to any deterioration in financial market conditions. On the upside, emergency social interventions may be more effective than expected and private consumption may return faster to its trend growth rate. Similarly, liquidity-enhancing measures may result in higher investment and greater demand for consumer durables.

Commodity prices may also experience a faster and larger rebound.

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION Š OECD 2020

232 _

Policies should respond to the emergency and maintain the reform momentum The unprecedented scale of the fiscal stimulus is appropriate to support the economy and should be continued as long as needed and be accompanied by complementary actions to monitor the use of state resources, including for the bail-out of state-owned enterprises, and avoid any misallocation. Spending should be directed at reinforcing the preparedness of the health system against future pandemic outbreaks in terms of hospital beds, test kits, personnel, medicine and appropriate medical procedures. Appropriate resources should also be devoted at collecting high-quality data on eligible beneficiaries of food aid and cash transfers, especially in peripheral municipalities and regencies. The crisis is also revealing the need to strengthen existing programmes to help the most vulnerable in society, including unemployed and informal workers who are at risk of falling into poverty. Reallocating the resources of newly launched pre-employment cards to assist laid-off and furloughed workers has been an expeditious solution, but in the medium run it cannot substitute for the introduction of a well-funded unemployment insurance scheme.

The pandemic emergency reinforces the importance of meeting the long-run targets of eradicating poverty and escaping the middle-income trap through inclusive growth. Parliament is discussing two major omnibus bills on job creation and on taxation that in the medium run would facilitate investment, productivity growth, and sustainable development. Their approval would be a strong signal of the commitment to keep the momentum of both regulatory and social reforms, even amid very unfavourable circumstances.

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION Š OECD 2020