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Jakarta Post

Indonesia's domestically driven economy could be blessing in disguise amid outbreak: ADB

  • Riska Rahman

    The Jakarta Post

Jakarta   /   Thu, March 5, 2020   /   01:32 pm
Indonesia's domestically driven economy could be blessing in disguise amid outbreak: ADB Asian Development Bank (ADB) president Masatsugu Asakawa speaks during a restricted press briefing in Jakarta on March 4, 2020. (Reuters/Reuters)

Indonesia may not be affected severely by the global health emergency, thanks to its minimal exposure to the global trade and its wide room to maneuver in monetary policy, the Asian Development Bank (ADB) has said.

Newly appointed ADB president Masatsugu Asakawa, speaking during a restricted media briefing in Jakarta on Wednesday, expressed his belief that Indonesia was less likely to experience a strong impact from the global outbreak compared to other countries in the region, such as Japan or Thailand.

“Indonesia isn't deeply integrated in the global supply chain, so it is still considerably fortunate compared to other countries,” Asakawa said. He added that the Indonesian economy, which was primarily driven by domestic activity, was an advantage during the global health emergency.

Read also: Reforms may jeopardize Indonesia’s role in global value chains: World Bank

Indonesia is heavily dependent on domestic demand, with household consumption growing 4.97 percent year-on-year (yoy) in the fourth quarter of 2019 to account for more than 50 percent of gross domestic product (GDP). 

Asakawa did not deny, however, that the outbreak would have a negative impact on the Indonesian economy, because it had already dampened the global tourism industry.

Many countries, including Indonesia, have issued travel bans and restricted flights to destinations with localized outbreaks in a bid to stem the transmission of COVID-19 – the disease caused by the SARS-CoV-2 virus.

Although he did not provide a projection of how the outbreak might affect Indonesia, Asakawa said he believed that the country still had ample room to maneuver in macroeconomic policy and fiscal expansion to buffer the economy.

“[Bank Indonesia] Governor Perry [Warjiyo] has cut the policy rate five times so far and he can do this because Indonesia still has enough policy room to do so, unlike Japan or Europe that currently have negative interest rates,” he said. “By taking advantage of this policy room, Indonesia could accommodate future contingencies from the outbreak.”

Read also: BI sees room for more easing to jack up weakening economy

 

“China has become a major player in the global economy and plays a big role in the global supply chain,” Asakawa noted, saying that he expected the COVID-19 outbreak to have a greater impact than the 2003 SARS outbreak on China’s economy as well as the global economy.

The rapid spread of the virus, which originated in the Chinese city of Wuhan at the end of 2019, has prompted the Chinese government to restrict economic activities. As a result, factory activity in China contracted to the lowest level in history in February at 35.7 on the Purchasing Managers’ Index (PMI). 

Figures below 50 on the PMI indicate contraction, while figures above 50 indicate expansion.

Given China's place in the global supply chain, Asakawa warned that world production and trade could see some disruption if the global epidemic lasted longer than expected.

“The virus could also impact consumption, depending on how long this outbreak lasts,” he added.

Perry echoed Asakawa’s sentiments, saying that Indonesia’s economic growth would likely drop to just 4.9 percent in the first quarter of the year. Although this would be the lowest growth in three years, it would still fall within the 1 percentage point range of the 4.97 percent growth recorded in the fourth quarter of 2019.

“That’s not a doomsday scenario, [and is] based on the V-shaped scenario we are projecting. Recovery is likely to occur over the next six months after bottoming out in February and March,” the central bank governor said while briefing chief editors on Wednesday at BI headquarters in Jakarta.

Read also: Indonesia to launch second, ‘bigger’ stimulus to cushion virus impact

 

He said that possible easing measures to jack up growth included setting a lower reserve requirement for both the rupiah and the US dollar for local banks, as well as lowering the benchmark interest rate.

BI cut its benchmark rate, the seven-day reverse repo rate (7DRRR), by 25 basis points in February.

“There are plenty of BI instruments from among BI’s five main instruments that we can still use,” he said.

The bank announced five measures on Monday to stabilize the financial market and prop up the rupiah. The measures included cutting the reserve ratio to free up billions of dollars in the banking industry, which could bolster the financial market and export-import activities that had been severely hit by the outbreak.

The government has already launched a Rp 10 trillion fiscal stimulus package to support the tourism industry and boost consumer spending to counter the economic impacts of the outbreak. It is currently finalizing a second, bigger stimulus package to ease imports and exports, and to support manufacturing.