Indonesia, OECD Economic Outlook, December 2020

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Indonesia The economy contracted sharply in the first half of 2020 and GDP is set to shrink by 2.4% this year, the first recession since 1998. The 2021 rebound, provided containment measures are lifted, will be only partial. With lingering concerns about the health situation and consumer and business confidence remaining low, growth is projected to remain below trend in 2021, with severe consequences on incomes and living standards, before picking up to 5% in 2022. Trade prospects, however, are supportive, as key Northeast Asian markets recover and new agreements including the Regional Comprehensive Economic Partnership (RCEP) come into force.

In a few months, the pandemic reversed some hard-won advances in well-being, with poverty, malnutrition, and even hunger rising fast. The credibility built up by the central bank over the years through wise use of its independence – a fragile achievement that must be preserved – has permitted an unconventional policy mix of rate easing, liquidity injection and asset purchases. Fiscal policy has been relaxed, within the structural limits of extremely low tax revenue. The policy imperative is to protect citizens from sudden further shocks: devote more resources to assistance programmes, improve targeting and monitoring, and establish a proper unemployment insurance system. In the longer run, further improvements in well-being and growth require ambitious reforms to boost human capital formation. Reform momentum is returning, as shown by the Omnibus Bill on Job Creation passed in early October.

Containment measures have slowed but not halted the spread Indonesia has recorded a seemingly low number of COVID-19 cases and fatalities, considering its population, although some care must be taken when interpreting data since the number of tests performed as a share of the population is also the lowest among G20 economies. Large-scale social restrictions were loosened in June, only to be reintroduced in Jakarta in September due to a rising number of COVID-19 cases and high hospital bed and ventilator occupancy rates. However, mobility restrictions were more moderate in this phase.

Indonesia 1 Confinement measures weigh on activity Index 100 90

Tourism activity has plummeted Million 6

PMI index, manufacturing

USD 6

Travel services revenues (USD billion) → Implied expenditure per visitor (USD thousand)¹ →

Oxford stringency index

5

80 70

5

← Number of visitors

4

4

3

3

2

2

1

1

60 50 40 30 20 10 0 Jan-20

Mar-20

May-20

Jul-20

Sep-20

0 Nov-20

0 2010

2012

2014

2016

2018

2020

0

1. Implied expenditure per visitor is computed by dividing travel services revenues by the number of visitors in the same time interval.

Source: Bank of Indonesia; CEIC; Oxford COVID-19 Government Response Tracker, Blavatnik School of Government; and Markit.

StatLink 2 https://doi.org/10.1787/888934218729

OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 2: PRELIMINARY VERSION © OECD 2020

186 

Indonesia: Demand, output and prices 2017

2018

2019

Current prices IDR trillion

Indonesia 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

2020

2021

2022

Percentage changes, volume (2010 prices)

13 589.8 7 783.7 1 239.5 4 370.6 13 393.7 60.4 13 454.0 2 742.1 2 606.3 135.8

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

-2.4 -3.0 4.4 -4.6 -2.9 -0.9 -3.8 -6.7 -14.3 1.3

4.0 3.7 5.6 3.1 3.6 0.0 3.6 3.0 1.2 0.4

5.1 6.2 3.2 5.7 5.7 0.0 5.7 3.8 7.4 -0.4

_ _ _ _ _

3.8 3.2 3.3 -1.6 -3.0

1.6 3.0 3.2 -2.2 -2.7

-0.4 1.9 1.9 -6.5 -1.0

2.3 2.0 2.3 -5.8 -0.4

3.0 3.0 3.0 -4.2 -0.9

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 108 database.

StatLink 2 https://doi.org/10.1787/888934218748

Indonesia 2 Despite monetary easing, credit growth is lacklustre Y-o-y % changes 16

Consumer confidence remains weak % 16

Y-o-y % changes 60

14

14

40

140

12

12

20

120

10

10

0

100

8

8

-20

80

6

6

-40

4

4

-60

2

2

-80

0

-100

0

2015

2016

Policy rate →

← Loans

2017

2018

2019

2020

Index 160

60

← Motor vehicle sales: retail

40

Consumer confidence index →

20 2016

2017

2018

2019

2020

0

Source: Bank Indonesia; and CEIC. StatLink 2 https://doi.org/10.1787/888934218767

OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 2: PRELIMINARY VERSION © OECD 2020

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The recovery path has been uneven The easing of restrictions since the end of the second quarter boosted activity in the third quarter, as evidenced by the recovery in the manufacturing PMI during the summer. The return of restrictions weighed on production and the manufacturing PMI has worsened again since September. Consumer surveys similarly point to improving confidence until August and a deterioration since then. Exports of goods recovered in September but fell again in October. Imports declined further in October to nearly 27% lower than a year earlier, bringing the January-October trade balance to a surplus of USD 17 billion (from a deficit of USD 2 billion in 2019). Despite a fall in services exports, due to the precipitous decline in tourism, the current account balance reached a surplus of 0.4% of GDP in 2020Q3, as against a deficit of 2.7% in 2019.

Consumer price inflation moderated through 2020 to 1.4% in October (year-on-year). Survey evidence suggests a surge in poverty and malnutrition.

Low tax revenues constrained the fiscal policy reaction The government reacted gradually as the crisis escalated with a series of fiscal packages, totalling around 2.5% of GDP. This is a substantial effort, as the ratio of tax revenues to GDP is the lowest amongst G20 countries. The 3%-of-GDP constitutional limit on the government deficit was temporarily lifted. Initially addressed to the tourism industry, government support expanded to include extra resources for the health sector, in-kind and cash transfers to the poor, tax exemptions and rebates for employees and businesses, state financial guarantees for new capital loans, and capital injections in state-owned enterprises.

Bank Indonesia (BI) cut its policy rate four times in 2020 to an all-time low of 4%. The central bank also enacted additional measures in May, such as reducing the reserve requirement ratio by 200 basis points and increasing the macroprudential liquidity buffer ratio by the same amount. In September, it extended to mid-2021 its policy of requiring lower reserves for banks that lend to small and medium or export-oriented businesses. In addition, BI has entered into a burden-sharing scheme with the government, and has bought government bonds directly, bearing the interest cost. BI’s post-1999 independence is challenged by a recent parliamentary proposal to assign decision-making powers to a new monetary policy council in which the government would have voting rights.

Prospects are uncertain and risks mostly on the downside In 2021-22, growth is projected to be driven by consumption as pent-up demand is met, but the level of GDP will remain far below its pre-pandemic trend, and therefore insufficient to prevent social distress. The projected recovery of exports will contribute to a further significant narrowing of the current account deficit.

Inflation is set to edge up to 3%, the mid-range of the BI target, by 2022. The fiscal deficit is expected to shrink but will still exceed 3% of GDP in 2022.

Risks are multiple and mostly on the downside. While the deployment of a safe and effective vaccine would allow the complete lifting of COVID-related restrictions, the logistical, operational and financial challenges of rolling out an immunisation campaign are significant. The loss of growth momentum that was already manifest before the pandemic may hold back investment, thus leaving open existing gaps, notably in infrastructure. Household consumption may remain sluggish if the implementation of the economic relief programme is too slow to rebuild confidence. An upside risk to the projections is that a smoother-than-expected vaccine campaign would bring back international tourists sooner than anticipated.

The investment and employment boost of the Omnibus Bill might also beat expectations, especially after the signing of the Regional Comprehensive Economic Partnership.

OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 2: PRELIMINARY VERSION © OECD 2020

188 ď ź

Making the recovery more inclusive, sustainable and efficient For the first time in 15 years, progress in eradicating poverty and deprivation has halted, while substantial swathes of the middle class are struggling to prevent the erosion of their living standards. In the recovery phase, it will be fundamental to monitor the quality of growth, in particular for those who are most vulnerable such as women, children, migrants and the disabled. The Omnibus Bill is an important reform, which will make the labour market more flexible by reducing provisions that discouraged firms from offering long-term contracts, and will help to attract new investment by simplifying business procedures. If properly implemented, it can help bring about an inclusive recovery that generates decent jobs and respects the environment. A sustainable recovery requires additional action in fighting deforestation, reducing existing subsidies and incentives for dirty energy, and accelerating the transition to renewables. Last but not least, removing the numerous regulatory obstacles to resource allocation would make the recovery more efficient as well as fairer, since anti-competitive regulations often breed corruption.

OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 2: PRELIMINARY VERSION Š OECD 2020