The Jakarta Post
Bank Indonesia (BI) is expected to cut its benchmark interest rate further as economic growth may drop to the lowest level since 1999 against the backdrop of an economic recession triggered by COVID-19, multinational investment bank Morgan Stanley says.
Four economists at Morgan Stanley said Indonesia’s economy faced several headwinds, including a spillover from COVID-19 to exports and domestic demand, the impact of lower oil prices on prices of oil-substitute commodities and USD funding stress, given the dependence on external funding.
“We see BI cutting another 50 basis points [bps] and there’s also a plan to raise the fiscal deficit ceiling temporarily to 5 percent,” Morgan Stanley said in a research note made available to The Jakarta Post.
However, under a bear case scenario, Bank Indonesia may cut its interest rate by 100 bps, according to the economists.
“A still present current account deficit means that policymakers will have to balance between providing growth support and managing macro stability risks.”
The central bank has cut its benchmark rate by 50 bps to 4.5 percent this year to protect the economy from COVID-19 effects, continuing its dovish monetary policy stance after a 100 bps cut last year to mitigate risks from a trade war between the United States and China.
Under a baseline scenario, Morgan Stanley expects Indonesia’s economy to grow by 3.7 percent this year. However, in a bear case scenario, Indonesia’s economic growth may likely drop to just 2.8 percent this year.
“Between fiscal and monetary policy, there is more space on the fiscal front given generally manageable public debt, fiscal deficits,” the economists said regarding Asia’s economy. “Overall, policy easing helps to mitigate the fallout on the private sector and labor market but a growth turnaround still needs COVID-19 containment.”
President Joko “Jokowi” Widodo has revealed that government officials and legislators were in talks to raise Indonesia’s budget deficit cap from the current 3 percent of GDP, which would allow the state to borrow more money to fund emergency response measures against the novel coronavirus pandemic.
The chairman of the House of Representatives’ budget committee (Banggar), Said Abdullah, said on March 23 that the government should raise the ceiling from the current 3 percent to 5 percent.
According to data by Morgan Stanley, Indonesia’s budget deficit may reach between 2.7 percent and 3.5 percent this year, which would be the highest level in the country's history.
Meanwhile, Bahana Sekuritas economist Satria Sambijantoro said the budget deficit would eventually hover at 3.5 to 4 percent of GDP.
“Indonesia’s deficit cap of 3 percent of GDP, introduced in the aftermath of the 1997-1998 Asian financial crisis, brought fiscal prudence and lowered the country’s credit risks,” Satria said in a research note. “Therefore, we expect the waiver to be only temporary, with the deficit cap back in place after risks from the COVID-19 outbreak subside.”