We at Fitch Solutions continue to expect Indonesia's economy to contract by 1.3% in 2020 as a whole before recovering by 3.3% in 2021. Following the economy's contraction by 5.3% y-o-y in Q220, we believe that the sluggishness in activity will continue in the second half of the year as Indonesia experiences an elevated number of new Covid-19 cases. We believe that the recovery in domestic demand could be further delayed due to the devastating impact the pandemic is hav- ing on Indonesia's labour market and as such, we expect growth to continue to underperform the historical trend.
Bank Indonesia (BI, the central bank) cut its benchmark 7-day reverse repurchase (repo) rate by 25 basis points (bps) at its monetary policy meeting on July 16, taking the rate to 4.00%, from 4.25%. We expect a low inflation environment and a stable rupiah outlook to provide room for the central bank to focus on sup- porting and economy which we believe will be slow to recover from the Covid-19 shock, and hence expect BI to cut its policy rate by another 25bps to 3.75% by end-2020.
We expect Indonesia's current account deficit to narrow to 1.5% of GDP in 2020 from 2.8% in 2019 and a previously forecast 1.9%. Weak domestic demand due to the Covid-19 outbreak will mean that imports will continue to fall at a faster pace than exports. Moreover, the government is looking to introduce some import restrictions that could buffet demand further. In 2021, we expect some reversal in this trend with the deficit forecast to widen to 2.5% of GDP (revised down from 2.9% previously). We remain tentative about a robust economic recovery next year, however and as such demand may remain sluggish in this year as well.
We at Fitch Solutions have revised our full year forecast for the Indonesian rupiah from IDR15,500/USD to IDR14,624/USD in 2020. In 2021, we expect the IDR to strengthen to IDR14,400/USD from IDR15,000 expected previously. Through the rest of 2020, we believe that the rupiah will find resistant at the IDR15,000/ USD level whilst still tracking a slight depreciatory trend against the US dollar. A combination of dollar weakness and gradually improving prospects for the global economy will drive IDR appreciation over the longer-term horizon.
President Joko Widodo's administration's tepid handling of the Covid-19 outbreak in H1 2020 has partly resulted in Indonesia's domestic outbreak spiraling into the worst public health crisis the country has ever faced. While we believe that the economic fallout from the health crisis is likely to be severe, particularly weighing on employment prospects over the immediate term, we do not expect this to precipitate large-scale protests against the president himself. Neverthe- less, we have revised our Short-Term Political Risk Index score for Indonesia from 67.5 previously to 65.8 as we expect that the administration will increasingly adopt a populist policy stance to quell any discontent.
Key Risks:
With our growth forecast for 2020 still slightly below consensus of -0.7%, the risks to our view are arguably on the upside. Indeed, the course of the economy could change dramatically in the second half of 2020 if the authorities are able to successfully mitigate the contagion or find an effective way to treat the virus. For now, both the infection rate and death rates remain relatively high in Indonesia compared to its regional peers.
Risks to our forecast are weighted to the downside as the Covid-19 outbreak continues to spread in Indonesia. Our forecast is contingent upon the assumption that external conditions will improve faster than the domestic situation, and this in turn will provide a lift to the IDR due to carry-trade benefits. If a second wave of outbreaks globally were to require another worldwide lockdown, this assumption would fall through. Moreover, with BI monetising a substantial portion of government debt, there is a risk that inflation could suddenly spiral due to the oversupply of IDR liquidity.
Table of Contents
Executive Summary
- Core Views
- Key Risks
- Country Risk Summary
- Economic Risk Index
- Political Risk Index
- SWOT
- Economic - SWOT Analysis
- Political - SWOT Analysis
- Economic Outlook
- Economic Growth Outlook
- Indonesia Faces Limited Recovery Prospects As Covid-19 Rages On
- GDP By Expenditure Outlook
- TABLE: GDP GROWTH FORECASTS
- TABLE: PRIVATE CONSUMPTION FORECASTS
- TABLE: GOVERNMENT CONSUMPTION FORECASTS
- TABLE: FIXED INVESTMENT FORECASTS
- TABLE: NET EXPORTS FORECASTS
- External Trade And Investment Outlook
- Narrower Current Account Deficit In Sight For Indonesia
- Monetary Policy
- Bank Indonesia To Remain On An Easing Path
- Monetary Policy Framework
- TABLE: MONETARY POLICY FORECASTS
- Structural Fiscal Position
- TABLE: FISCAL AND PUBLIC DEBT FORECASTS
- TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
- Currency Forecast
- Indonesian Rupiah To Be Cushioned By Credible Central Bank Policy
- THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Any comments or data included in the report are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research.Indonesia Country Risk Q4 2020Contents10-Year Forecast
- The Indonesian Economy To 2029
- Covid-19 Speedbump To Weigh Down Indonesia's Medium-Term Outlook
- TABLE: LONG-TERM MACROECONOMIC FORECASTS
- Political Outlook
- Domestic Politics
- Jokowi's Position As President Assured Despite Covid-19 Woes
- TABLE: POLITICAL OVERVIEW
- Long-Term Political Outlook
- Outlook Improved, But Uncertainty Lingers
- Operational Risk
- Labour Costs
- TABLE: LABOUR REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE
- Legal Environment
- TABLE: BUREAUCRATIC PROCEDURES
- Global Macro Outlook
- Recovery Taking Shape, But Headwinds Remain
- TABLE: GLOBAL MACROECONOMIC FORECASTS (2019-2024)
- TABLE: DEVELOPED MARKETS - REAL GDP GROWTH, % y-o-y
- TABLE: EMERGING MARKETS - REAL GDP GROWTH, % y-o-y
- Index Tables
- TABLE: INDONESIA - MACROECONOMIC DATA AND FORECASTS
