Fitch Solutions has forecast Indonesia’s GDP to contract by 1.3 percent this year, compared with 2.8 percent economic growth in its previous projection, as the country is likely to see a slow recovery and remain under lockdown for a prolonged period.
The national economy is heading into contraction as the country is still in the early stages of combating the COVID-19 pandemic while postponed infrastructure projects will severely weigh on investment growth, researchers at Fitch Solutions wrote. The global economy is expected to contract by 2.8 percent this year.
“We have factored in a slow recovery in Indonesia as the country is still in the early stages of combating the virus and may need to remain under lockdown for a more prolonged period,” Fitch said in a research note released Thursday. “A series of postponed infrastructure projects this year will severely weigh on investment growth in Indonesia.”
Indonesia’s GDP grew slower than expected at 2.97 percent year-on-year (yoy) in the first quarter, as household spending and investment growth lost steam amid the coronavirus outbreak, Statistics Indonesia (BPS) announced on Tuesday. It was weaker than the government’s, the central bank’s and economists’ projections of around 4 percent.
Four provinces and 22 local administrations nationwide have implemented large scale social restrictions since late March to contain the virus spread, forcing businesses to close and hitting demand as people are required to stay home.
“The significant weakness in the first quarter suggests that Indonesia’s economy will suffer for the rest of the year as the first quarter figures do not fully reflect the impact of the COVID-19 outbreak domestically,” Fitch noted. Indonesia announced its first COVID-19 cases in early March and began implementing social restriction measures in mid-March.
Fitch researchers expect household spending to contract by 1.5 percent this year, down from a previous growth forecast of 1.2 percent. Factors including a slowdown in China’s economy and a drop in tourism inflows will deal a severe blow to consumer spending, which accounts for nearly 60 percent of Indonesia’s economy.
“We [also] believe that private consumption will remain under pressure over the year as employment conditions continue to worsen,” Fitch said. Over 2 million people have lost their jobs during the pandemic, according to the Manpower Ministry.
Fitch added that investment will contract by 2.5 percent this year, from its initial projection of 1.5 percent growth as the government decided to postpone big-ticket infrastructure projects including the new capital city development.
“We continue to believe that two factors could provide a cushion for growth this year, although they will be insufficient to prevent a full year contraction in growth,” Fitch said, citing net export contribution and expansionary government spending.
Singapore-based DBS economist Radhika Rao also cut Indonesia’s economic outlook following underperforming GDP figures in the first quarter. She now projects the country’s GDP to grow by 1.3 percent from an initial projection of 2.5 percent on account of the deeper impact of the restrictions in the second quarter.
“This assumes a gradual lift in restrictions from late in the second quarter and recovery sets in third quarter onward as social-distancing requirements ebb,” Rao said in a research note. “If these expectations don’t materialize, headline growth might register flat or net decline this year.”
The government’s baseline projection is that economic growth will slow to 2.3 percent this year, the weakest in 21 years, or slump to 0.4 percent contraction in a worst-case scenario.