The government, the central bank and various international institutions have predicted that Southeast Asia’s largest economy will grow between 4.4 and 6.1 percent this year, largely driven by an expected recovery in consumer spending after vaccines become widely available, commodity prices rise and monetary and fiscal stimulus packages take effect.

“Vaccination will play a key role in supporting economic growth in the second half of 2021 and will help boost household spending,” Bank Mandiri economist Faisal Rachman told The Jakarta Post in December. “Fiscal stimulus, accommodative monetary policy and higher growth in exports compared with imports will all support the economy [in 2021].”

Indonesia plunged into a recession for the first time in two decades last year as the coronavirus outbreak took a huge toll on economic activity, raised the country’s unemployment rate and exacerbated wealth inequality. The government estimates the economy shrank by 1.7 to 2.2 percent last year while Bank Indonesia (BI) believes the economy contracted 1 to 2 percent.

“Growth in 2021 is projected to rebound, partly driven by a base effect and assuming that consumer confidence improves and household income is supported by a stronger labor market and adequate social assistance,” the World Bank wrote in its “Indonesia Economic Prospect” report published on Dec. 17.

“Public health remains a top priority to allow the economy to stay open and to move towards a safe full reopening,” the report went on, noting that continued improvement in testing and contact tracing, as well as preparations to procure and widely administer effective vaccines, would be the keys to recovery.

Fiscal support

The government has allocated Rp 2.75 quadrillion (US$193.24 billion) for state expenditure this year, higher than the Rp 2.73 trillion allocated last year, to fuel the virus-battered economy and fund its development programs in infrastructure, education, health care and stimulus spending, among other efforts.

The government is looking to raise Rp 1.74 quadrillion in state income this year, more than last year’s Rp 1.69 trillion target, as stronger economic activity is expected to boost state revenue collection.

The state budget deficit is expected to reach Rp 1 quadrillion, or 5.7 percent of gross domestic product (GDP), less than the estimated 6.34 percent of GDP last year. Meanwhile, the country’s debt-to-GDP ratio is expected to reach 40 percent this year, up from 37 percent last year.

“The state budget is an important instrument in boosting and supporting people and businesses in their recovery,” Finance Minister Sri Mulyani Indrawati said on Dec. 22, 2020. “Thus, all these allocations will provide wealth for people in the form of job creation and higher income.”

She expected the economy to grow 5 percent this year, supported by vaccination and higher household spending, up from the projected contraction of 1.7 to 2.2 percent last year.

“But of course, this whole economic forecast for 2021 will depend on the development of the COVID-19 pandemic and whether the vaccination can restore confidence so that business activity on both the demand and supply side can be positive,” she said on Dec. 21.

Indonesia usually takes longer to recover from an economic downturn than its peers, and therefore, the government needs to provide a boost through a sector-based stimulus in 2021, Bank Central Asia economist David Sumual said in December.

“The government’s fiscal support is crucial to restoring business confidence and spurring economic recovery [this year],” he noted.

The government has relaxed its fiscal policy by temporarily removing the constitutionally mandated state budget deficit cap of 3 percent of GDP and allowing BI to help fund some of the shortfall. The finance minister reiterated her commitment to bringing the deficit below 3 percent of GDP by 2023.

“From 2021 onwards, we believe that the Indonesian government will exercise caution with its spending,” Fitch Solutions wrote in a note. “We do not expect expenditure to overshoot by much as the government will remain keen to record a narrower deficit in 2021 than in 2020.”

Loose monetary policy to support growth

BI Governor Perry Warjiyo said on Dec. 3 that the central bank would maintain its loose monetary policy stance and keep its benchmark interest rate low in 2021 to support the economic recovery.

The central bank has cut its benchmark interest rate five times last year, ending at 3.75 percent, its lowest level in history, to support an economy reeling from the pandemic. It has also taken quantitative easing measures to support the economy, including buying government bonds, cutting the reserve requirement ratio and undertaking monetary expansion.

“We believe that the central bank’s accommodative stance will be maintained for the foreseeable future, in line with the global monetary policy climate,” Bank Danamon economist Wisnu Wardana wrote in a note recently. “The [rupiah] exchange rate will further strengthen while inflation will remain low, providing the central bank with room for a policy rate cut [in 2021].”

BI will continue to buy government bonds through the primary market in 2021 as a noncompetitive bidder but will no longer continue the burden-sharing agreement with the government.

BI bond purchases helped maintain financial stability amid rapid capital flight to safety in March and contributed to lowering long-term rupiah-denominated government bond yields, the World Bank said.

“But the program involves macrofinancial tradeoffs and may heighten concerns about the credibility and effectiveness of monetary policy if not kept time-bound, well calibrated and communicated.”

Risks loom

Certain key risks could jeopardize the optimistic scenario, according to economists and financial organizations.

One is the possibility, raised by the World Bank, of a surge in virus cases that could trigger stricter mobility restrictions in the country. The institution noted that slower-than-expected progress on the availability of a safe and effective vaccine “would weaken consumer and business confidence and dampen economic activity longer than expected”.

Indonesia is hoping to secure 246.6 million vaccine doses and has been in negotiations with Pfizer, AstraZeneca and global vaccine program COVAX, in addition to China’s Sinovac Biotech, to reach the target.

The government has ordered some 143 million doses from Sinovac in various forms, from ready-to-administer doses to vaccine bulk. However, the lack of data on the efficacy of the Sinovac vaccine has raised concerns.

A second risk is the possibility of weaker global demand and a slower recovery among advanced economies that would weaken trade and commodity prices, which would impact Indonesia’s economy, the World Bank said.

Another risk is possible financial disruption if the economic recovery in advanced economies is faster than that of Indonesia, as this would raise the risk of capital reversal, Faisal of Mandiri said, adding that this situation might push BI to raise its benchmark rate to stabilize the rupiah exchange rate, which would hurt economic recovery.

“The risk of capital reversal could also materialize if virus cases continue to rise and the country is forced to implement further restrictions,” Faisal added.