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Jakarta Post

Indonesia’s GDP to grow 4.8% this year as COVID-19 shakes economy: Fitch Solutions

  • Adrian Wail Akhlas

    The Jakarta Post

Jakarta   /   Thu, March 19, 2020   /   03:28 pm
Indonesia’s GDP to grow 4.8% this year as COVID-19 shakes economy: Fitch Solutions A worker at a McDonalds outlet checks the temperature of a customer in Penang during the first day of a partial lockdown in Malaysia on March 18, 2020. The novel coronavirus outbreak will weigh down private spending and weaken the external sector amid disruptions to the trade of goods and services, Fitch Solutions wrote. (AFP/GOH CHAI HIN)

Fitch Solutions has revised down Indonesia’s economic growth forecast this year as the COVID-19 pandemic places a heavy burden on the state budget and current account and limits Bank Indonesia’s monetary space to support the weakening rupiah.

The novel coronavirus outbreak will weigh down private spending and weaken the external sector amid disruptions to the trade of goods and services, Fitch Solutions wrote, while the drop in global oil prices could limit the government’s ability to provide a substantial stimulus to bolster the economy.

According to the latest available data, 13 percent of the government’s revenue comes directly from the commodities sector, Fitch Solutions wrote. Meanwhile, household spending contributes to more than a half of the country’s gross domestic product (GDP).

“We at Fitch Solutions have revised down our real GDP growth forecast for Indonesia to 4.8 percent in 2020 from 5.1 percent,” Fitch said in a research note on Wednesday.

Read also: Indonesia records $4b budget deficit in February as big-check stimulus spending looms

Indonesia’s economy expanded 5.02 percent last year, down from 5.17 percent in 2018. Finance Minister Sri Mulyani Indrawati projected on Wednesday that the country’s economic growth might drop to 4.5 to 4.9 percent in the first quarter, with potential to further plunge in the second quarter, amid weakening economic activities caused by the spread of the novel coronavirus.

The government has announced two stimulus packages worth trillions of rupiah to cushion the economy and support people’s purchasing power. It is preparing a third stimulus package that will fund the healthcare system.

Fitch Solutions expected Indonesia’s fiscal deficit to widen to 2.8 percent of GDP from the previous forecast of 2.5 percent, as the government is expected to cut spending later this year to keep the deficit within the constitutional limit of 3 percent.

“We have also revised up our forecast for Indonesia’s current account deficit from 2.6 percent to 3.0 percent of GDP for 2020,” it wrote. “However, we believe the current account situation could worsen with financial market stress rising on a daily basis.”

Fitch Solutions noted that Indonesia was set to record its worst quarter in terms of portfolio income outflows since the 1998 Asian financial crisis when foreign investors pulled close to US$8 billion out of the country. Investors have pulled out almost $2.8 billion from Indonesia’s bond markets so far this year, it added. Foreign investors dumped around $547.9 million in Indonesian stocks during the period, Indonesia Stock Exchange (IDX) data show.

“All of this has placed significant stress on the Indonesian rupiah,” Fitch said.

The rupiah continued its deep depreciation and reached Rp 15,712 per US dollar, according to the Bank Indonesia Jakarta Interspot Dollar Rate (JISDOR). The last time it touched this level was in June 1998 when it reached Rp 16,650 after widespread rioting that led to the downfall of president Soeharto, who led Indonesia for 32 years.

Read also: ‘Desperate times, desperate measures’: Calls grow for flexible state budget amid virus

“The rupiah sell-off will likely limit BI’s ability to support the economy through further monetary easing,” Fitch Solutions said. “Although BI has launched several lines of defence to protect the currency, including limiting short-selling in the stock market, intervening in the currency market and purchasing up to Rp 130 trillion worth of government securities, we expect the central bank to increasingly struggle to defend the currency.”

“With the number of cases reported in Indonesia surging, investors will remain nervous about the archipelago's ability to contain the virus,” it added.

Indonesia has announced 227 confirmed COVID-19 cases, with 19 deaths. Globally, the pneumonia-like illness has infected nearly 202,000 people and taken at least 8,000 lives.