Indonesia country note: OECD Economic Outlook, May 2021 by OECD

76 

Indonesia GDP growth is projected to resume at around 5% annually in 2021 and 2022. The economy has been slowly recovering since mid-2020 thanks to policy support, gradual reopening and favourable global conditions. The second wave of the virus and the slow pace of inoculation are preventing a faster normalisation of activity. Lingering concerns about the pandemic weigh on consumer and business confidence and prevent domestic demand to return to trend levels. External demand for commodities such as coal, palm oil and rubber supports growth, with positive prospects thanks to the signing of RCEP (Regional Comprehensive Economic Partnership) and other trade agreements. The impact of the recession is bound to persist for a long time, especially for youth who have suffered from a year-long school disruption and confront difficult labour market conditions. Containment measures have slowed but not halted the pandemic. The policy priority is to protect citizens, most of whom work in the informal sector and face difficulties in accessing social services, from sudden further shocks. Fiscal and monetary policies should continue to seek synergies to support the recovery, although a credible normalisation path should be announced. In the longer run, improving well-being and growth requires to boost human capital formation. COVID-19 is still not under control Since January, the weekly number of new confirmed cases has remained above the peak reached in the first wave, leading to the introduction of targeted measures to restrict inter-personal contacts (so-called “micro-scale public activity restrictions”) with a lesser economic impact than outright lockdowns. By midApril, daily cases have eased considerably, although testing remains insufficient. The vaccination campaign began in January, but the number of inoculated citizens is still low on account of shipment delays, production bottlenecks, logistical issues and cultural resistance. The vaccination of the elderly lags far behind that of the working-age population.

Indonesia 1 Expectations are improving Index, 50=neutral 70

Tourism remains in deep crisis

← PMI index, manufacturing

Index 130

Million 6

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

Consumer confidence index →

120

USD 6

5 ← Number of visitors

110

100

10 Jul-19

Jan-20

Jul-20

Jan-21

2010

2012

2014

2016

2018

2020

1. Implied expenditure per visitor is computed by dividing the travel services revenues with the number of visitors in the same time interval. Source: CEIC; and Markit. StatLink 2 https://stat.link/0v7nfz

OECD ECONOMIC OUTLOOK, VOLUME 2021 ISSUE 1: PRELIMINARY VERSION © OECD 2021

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Indonesia: Demand, output and prices 2017

2018

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

2019

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 6.7 5.6 0.8 6.3 6.5 12.1 -1.0

5.0 5.2 3.3 4.5 4.8 -0.9 3.7 -0.9 -7.4 1.4

-2.1 -2.7 1.9 -4.9 -3.1 -0.3 -3.3 -7.7 -14.7 1.1

4.7 3.5 4.5 8.4 5.2 -1.7 3.4 12.5 5.7 1.5

5.1 6.1 0.1 5.9 5.5 0.0 5.5 6.2 7.3 0.1

_ _ _ _ _

3.8 3.2 3.3 -1.6 -3.0

1.6 3.0 3.2 -2.2 -2.7

-0.5 1.9 1.9 -6.5 -0.4

3.4 2.4 1.6 -5.7 -1.3

3.0 2.9 2.5 -4.1 -1.6

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 109 database.

StatLi https://stat.link/3zu4ck

Indonesia 2 Despite monetary easing, credit growth keeps declining Y-o-y % changes 12

The risk spread has returned to pre-crisis levels Risk spread on sovereign debt¹

% 6

Basis points 800

← Commercial banks' loans Policy rate →

700

600

500

400

-3

300

-6 juil.-19

janv.-20

juil.-20

janv.-21

2018

2019

2020

200

1. Spread of 10-year government USD-denominated bond yields vis-à-vis the US Treasury bonds. Source: Bank Indonesia; CEIC; OECD Main Economic Indicators database; and OECD calculations. StatLink 2 https://stat.link/0oqxwb

78 

The recovery path is proving bumpy While the 2020 recession was relatively mild compared to neighbouring countries, with GDP shrinking by 2.1%, the unemployment rate rose and progress in poverty reduction was halted if not reversed. The return of restrictions since the fourth quarter of 2020 has slowed the economic pick-up and both the manufacturing PMI and consumer surveys have been volatile. A slowing momentum of retail sales is reflected in the decline in credit growth, especially consumer credit. The current account deficit in 2020 shrank and the size of the trade surplus in 2020 was the largest since 2011. The trade balance remained positive in the first quarter of 2021, with support from higher international prices of commodities such as coal, palm oil and rubber. On the other hand, tourism shows no sign of a recovery after the precipitous decline last year, with January-March arrivals 85% lower than in the same period in 2020. Consumer price inflation has moderated since 2020 to 1.4% in April 2021 (year-on-year).

Economic support measures are set to remain in place as long as uncertainty prevails Within a few months, the pandemic reversed some hard-won advances in well-being, with poverty, malnutrition, and even hunger rising fast. Fiscal policy has mitigated the damage, with planned capital expenditures partly diverted to relief measures and the deficit exceeding 6% of GDP, although actual spending was 14% below target. Efforts are now underway to speed up disbursement (although only 11% of the budget had been spent by mid-March). The fiscal deficit is projected to narrow only marginally in 2021, before fiscal consolidation intensifies to respect the temporarily-suspended 3%-of-GDP deficit ceiling by 2023. The phasing out of relief measures and spending rationalisation will underpin the changing fiscal stance, whereas tax revenues relative to GDP are set to remain the lowest among G20 countries and insufficient to meet public investment needs. The recently approved Omnibus Bill for Job Creation encourages hiring in the formal economy, eases foreign investment, provides new opportunities for small and medium-sized enterprises and introduces a risk-based system for authorising environment-sensitive projects. In 2020, Bank Indonesia resumed monetary financing of the deficit after more than two decades of not funding revenue shortfalls. The “burden sharing” arrangement proved useful in reducing the government’s interest costs and freeing up resources for relief measures. The Bank has announced that in 2021 it will only be ready to purchase bonds in the primary market as the buyer of last resort, with a maximum share per auction of 25% for conventional domestic bonds and 30% for shariah bonds. The principal policy rate was trimmed by 25 basis points in February, to 3.5%, and is projected to remain unchanged through 2021, as an improved current account position should help offset pressures from higher US yields.

Prospects are uncertain and risks are mostly on the downside In 2021-22, if the outbreak is held in check, an effective and safe vaccine is available to a large part of the population and remaining restrictions are lifted, growth is projected to pick up to around 5%, driven by consumption as pent-up demand is met. Investment, including inventory restocking, and exports are also expected to be supportive. Output is projected to recover to its pre-pandemic level by mid-2021, although it will remain far below its pre-pandemic trend. Jobs in contact-intensive, often informal, services will be the slowest to come back and social distress will remain high. Inflation is set to edge up to close to 3%, the mid-range of the target band, by 2022. The fiscal deficit is expected to shrink, but will still exceed 3% of GDP in 2022. There are multiple risks, and most of them are on the downside. Failure to accelerate the vaccination campaign may slow the loosening of mobility restrictions. Insufficient mobilisation of domestic resources

 79 would accentuate dependence on foreign financing of the debt (40% of government debt is denominated in foreign currencies and non-residents hold 25% of local-currency government debt). This increases the vulnerability to shifts in investor confidence towards emerging-market economies, such as a further rise in global bond yields. The loss of growth momentum that was already manifested before the pandemic may hold back investment, leaving open existing gaps, notably in infrastructure. The recent bombing in Makassar has highlighted the persistence of the security threat. On the upside, an acceleration of the vaccine campaign, in Indonesia as well as globally, 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.

Policy measures need to be taken to exit the crisis with the right skills Indonesia has enjoyed a “demographic dividend” over the past few decades, supporting economic growth. The share of the working-age population is expected to peak in 2021, remain broadly stable for ten years, and then gradually decline. Against this background, more efforts are required to meet the goal of making Indonesia a developed country by 2045 – the centenary of independence. Educational attainment has improved considerably, but COVID-19 has increased absenteeism and school drop-out. Improved public spending efficiency and starting school earlier could raise educational attainment and learning performance. The importance of securing adequate skills will increase as the economy becomes more knowledge-based and greater ICT investment would help reap the benefits of digitalisation. Vocational education and lifelong training should be further promoted to upskill and reskill the workforce, and also in support of the technical competences required for the green transition. More resources should be devoted to assistance programmes for those most at risk, in particular informal workers with improved targeting. Implementing the measures in the Omnibus Bill for Job Creation will be crucial to achieve desired outcomes and should be elaborated in consultation with relevant stakeholders.