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Jakarta Post

Govt again revises down 2020 GDP amid year-end surge of COVID-19 cases

  • Riska Rahman

    The Jakarta Post

Jakarta   /   Tue, December 22, 2020   /   01:20 pm
Govt again revises down 2020 GDP amid year-end surge of COVID-19 cases Finance Minister Sri Mulyani Indrawati speaks at a hearing with the House of Representatives in Jakarta on June 29. (Antara/Aditya Pradana Putra)

The government has further downgraded this year’s economic growth forecast amid the rise in COVID-19 cases ahead of the Christmas and New Year holidays, as well as tighter restrictions that will impact consumption.

Finance Minister Sri Mulyani Indrawati said on Monday that the government projected a gross domestic product (GDP) contraction of between 1.7 percent and 2.2 percent this year, driven by shrinking household spending, which accounts for more than half of Indonesia’s GDP.

The latest forecast is lower than one announced in September, when the government projected an economic contraction of 0.6 percent to 1.7 percent.

“We expect household spending to contract by around 3.6 percent to 2.6 percent due to rising COVID-19 cases in December that triggered tighter restrictions,” she said during a virtual press briefing.

With the restrictions in place, the economy is forecast to shrink by between 0.9 percent and 2.9 percent year-on-year (yoy) in the fourth quarter, despite signs of recovery in November, the minister stated.

The grim last quarter is another blow to Indonesia, which recorded a GDP drop of 3.5 percent yoy in the July–September period, that sent the country into its first recession since the 1998 Asian financial crisis. The contraction is less severe than the 5.3 percent yoy decline seen in the second quarter.

Sri Mulyani’s prediction is more pessimistic than Coordinating Economic Minister Airlangga Hartarto’s projection of minus 2 percent at worst or 0.6 percent growth in the fourth quarter.

Read also: Indonesia’s GDP could shrink 2% in Q4: Airlangga

The government has made concerted efforts to ban crowd-pulling events and New Year’s Eve celebrations from Dec. 18 to Jan. 8 in a bid to prevent a spike in the coronavirus transmission during holiday season. A latest national COVID-19 task force circular also requires negative rapid antigen test results for travelers using air transportation or trains to, from or within Java Island.

As of Dec. 21, the country has recorded more than 671,700 confirmed COVID-19 cases, around 20,000 of which have ended deadly so far.

The Asian Development Bank (ADB) and World Bank have also downgraded their projections for Indonesia’s economy this year. Both now expect Indonesia’s economy to contract by 2.2 percent this year, as opposed to previous forecasts of a GDP contraction of 1 percent and 1.6 percent, respectively.

Read also: ADB downgrades Indonesia’s economic prospects as slowdown persists

Meanwhile, Sri Mulyani went on to say that she also expected investment, another major contributor to Indonesia’s GDP, to contract this year.

“We expect investment to shrink at about 4.5 percent to 4.4 percent in 2020,” she said.

However, she believes that the contraction of investment in the fourth quarter would improve to around 4.3 percent to 4 percent, from the minus of 6.5 percent recorded in the third quarter, as commercial vehicle sales and imports of capital goods have improved.

Car wholesales rose by 9.84 percent month-to-month to 53,844 vehicles in November, according to Indonesian Automaker Association (Gaikindo) data compiled by diversified conglomerate PT Astra International.

Read also: Pent-up demand boosts car sales in November

Sri Mulyani projected that government spending would remain relatively stable in the fourth quarter, possibly growing or contracting by 0.3 percent yoy, as the government continues to boost spending during the pandemic, particularly for social aid.

“Spending for social aid grew exponentially by 80 percent yoy with the aim to protect consumption among the poor and vulnerable during the pandemic,” she said.

Government spending has increased by 20.5 percent yoy to Rp 1.56 quadrillion ($111 billion) as of November.

Meanwhile, total state expenditure rose by 12.7 percent yoy to Rp 2.31 quadrillion from last year.

In the meantime, state income during the period fell by 15.1 percent yoy to Rp 1.42 quadrillion as tax revenue shrank by 18.5 percent yoy to Rp 925.34 trillion. Nontax revenue also dropped by 15.9 percent yoy to Rp 304.9 trillion.

“Even though tax revenue declined, revenue from some categories, like corporate income tax and value-added tax, was showing signs of improvement in November compared to the third quarter,” said Sri Mulyani.

Still, the higher expenditure and lower revenue saw the country’s budget deficit widen to Rp 883.7 trillion, or 5.6 percent of GDP. The figure is higher than the budget deficit in October that stood at 4.67 percent of GDP, albeit still within the government’s forecast of a record high 6.34 percent deficit.

Given that the government plans to offer free COVID-19 vaccination, Sri Mulyani said that the government planned to also carry over Rp 36.4 trillion of 2020’s national economic recovery budget into next year.

Bank Permata economist Josua Pardede expects Indonesia’s economy to shrink by 2 percent this year as consumption and investment have yet to return to their normal trajectory.

“Our GDP in the fourth quarter will improve compared to the previous quarter, but tighter restrictions and negative loan growth will still burden our economy in the fourth quarter,” he told The Jakarta Post on Monday, projecting a fourth quarter GDP contraction of between 1 and 2 percent. 

He also urged the government to plan out its expenditure early in the year to ensure there will be enough funds to finance the vaccine procurement and distribution.

As Josua expected the government to encounter logistical issues in providing the vaccines, he forecast the country’s economy to only grow by 4 percent in 2021, lower than the government’s projection of 5 percent economic growth.