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Jakarta Post

Indonesian economy could shrink 3.9 percent if hit by second COVID-19 wave, OECD warns

  • Adrian Wail Akhlas

    The Jakarta Post

Jakarta   /   Thu, June 11, 2020   /   03:32 pm
Indonesian economy could shrink 3.9 percent if hit by second COVID-19 wave, OECD warns Let me help you: A mother helps her son get tested by Relawan Indonesia Bersatu Lawan Covid-19 (Indonesian Volunteers United Against COVID-19) at the Kampung Rambutan terminal in Jakarta on June 4. Public minivan drivers and sanitation workers also took the test that day. (JP/P.J. Leo)

The Indonesian economy could witness a 3.9 percent contraction this year, a more dramatic decline than initially expected, if it is hit by a second wave of COVID-19 infections, according to a worst-case projection by the Organization for Economic Cooperation and Development (OECD).

The OECD report, published on Wednesday, highlights the rocky path that lays ahead for Southeast Asia’s biggest economy as the government seeks to spur an economic recovery by reopening the economy this month after more than two months of partial lockdown.

Under a baseline scenario, the Paris-based think tank projects the economy to shrink 2.8 percent this year if the government manages to avoid a second wave of infections. According to officials statistics, roughly 34,000 confirmed COVID-19 cases have been recorded across the country.

“The major risk is of a resurgence of the pandemic in the second half of the year with the corresponding re-imposition of containment measures,” the report reads, noting that the contraction would be the first since the 1997 financial crisis.

President Joko “Jokowi” Widodo recently warned of the possibility of a second wave of COVID-19 infections as the number of new cases continued to soar over the past few days, following the loosening of large-scale social restrictions (PSBB) in several regions. A total of 1,241 new confirmed cases were recorded on Wednesday, surpassing the previous all-time-high of 1,043 new cases recorded the previous day.

Meanwhile, Indonesia will confront a number of hazards as it seeks to reignite the economy, including growing risk aversion, flight to quality and sudden capital reversals, according to the OECD.

“If the labor market rebound is weaker and slower than expected, higher unemployment may weigh on domestic demand and delay the recovery,” the report stated, adding that tourism could suffer for longer than anticipated due to the severity of the shock.

With many nonessential businesses shutting down, the coronavirus restrictions have forced more than 2 million people out of work as of April, according to data from the Manpower Ministry and the Workers Social Security Agency (BPJS Ketenagakerjaan). More than half are formal sector workers furloughed by their employers.

“In addition, as private sector debt has risen fast in recent years, especially in foreign currencies, non-financial corporates and banks are strongly exposed to any deterioration in financial market conditions,” it also states.

To support the country’s economic recovery, the government will widen the budget deficit to 6.34 percent of GDP this year to cover the Rp 677.2 trillion (US$47.7 billion) in stimulus packages aimed at spurring the economic recovery. It expects to see an economic growth rate of below 2.3 percent this year.

“The unprecedented scale of fiscal stimulus is appropriate to support the economy,” the OECD said, adding that it should be accompanied by “complementary actions to monitor the use of state resources, including for the bail-out of state-owned enterprises”.

Meanwhile, Bank Indonesia (BI) has cut its benchmark interest rate twice this year to 4.5 percent.

BI has also bought up to Rp 166 trillion in government bonds in the secondary market during the first quarter of 2020 to stabilize the rupiah and another Rp 26.1 trillion to support budget financing needs, boosting the central bank’s ownership of bonds to Rp 445.4 trillion.

“The actions of the monetary and financial authorities have sustained asset prices, stabilized the currency and contributed to the successful placement of the first global bond issue,” the OECD said. “However, foreign exchange reserves have fluctuated and the deterioration in investor sentiment toward emerging-market economies remains a headwind.”

Despite the grim outlook for this year, the OECD expects Indonesia’s GDP to grow 2.6 percent to 5.2 percent next year.

Meanwhile, the OECD projects global economic activity to fall 6 percent in 2020 or fall more sharply by 7.6 percent if a second wave of infections hits, which would be the deepest recession since the Great Depression in the 1930s.

Meanwhile, the World Bank projects Indonesia’s economy to grow zero percent this year. “While not a contraction, Indonesia’s growth rate will nevertheless be 5.1 percentage points lower than January forecasts.”

Senior World Bank economist for Indonesia Ralph van Doorn said earlier this month that Indonesia’s economy might shrink 3.5 percent this year should the large-scale social restrictions imposed by several regional administrations last for four months.

“The zero percent growth [in the baseline scenario] assumes two months of large-scale social restrictions and takes into account a severe global economic slowdown and a very big drop in commodity prices, all of which will have an effect on Indonesia’s economy,” Van Doorn told reporters recently.