We at Fitch Solutions retain our view for a 1.3% contraction in Indonesia's economy in 2020 as a whole. Followed by a revised 6.1% recovery in
2021 from 3.3% forecasted previously. Indonesia's economy contracted by 3.5% y-o-y in Q320 plunging it into a technical recession for the first
time since the Asian financial crisis of the 1990s.
Nevertheless, on a quarterly basis, the economy staged a 5.1% q-o-q recovery from -4.2% in Q220 suggesting to us that fundamentals remain
resilient despite the devastating effects of the global pandemic. In 2021, we expect quarterly growth to be capped by lasting uncertainty with
regards to the virus and the availability of a vaccine. Nevertheless, we expect Indonesia to record positive growth throughout as its economy
benefits from the general improvement in global economic activity.
We expect the Bank Indonesia (BI, the central bank) to keep the benchmark 7-day reverse repurchase rate unchanged at 3.75% over the
forthcoming months. Having undertaken five rate cuts so far in 2020, we believe that BI will slow the pace of easing in 2021 although further
cuts of up to 50bps to 3.25% next year is still likely. We expect consumer price inflation to remain within the BI's target range of 2-4% through
2021 and as such room for dovish monetary policy will remain.
We forecast the Indonesian rupiah to average IDR14,590/USD in 2020 as a whole (slightly revised from IDR14,624/USD) before strengthening
slightly to IDR13,900 in 2021. In 2021, the currency will continue to be closely managed by the BI but some tailwind is likely to also emerge
with the availability of a Covid-19 vaccine globally and in Indonesia. Continued quantitative easing undertaken by BI could raise inflationary
risks over the long term, which in turn could accord downside pressures on the Indonesian rupiah.
We have revised down our overall score for Indonesia's Short-Term Political Risk Index (STPRI) from 65.8 to 64.6 out of 100 to reflect growing
resentment against the Indonesian government's newly passed omnibus law. The omnibus law encompasses 79 reformed rules and
regulations relating to the operating environment for businesses. One of the most contentious sub-categories in the law is rulings pertaining to
labour, which removes some protections for workers. Accordingly, we have revised down the score for the social stability sub-category of our
STPRI from 60 to 55, as a combination of high unemployment and labour union's nervousness around the omnibus bill will likely stoke further
protests against the government's policies.
Key Risks
We believe that the risks to our growth outlook are balanced and much remain dependent on the pandemic's development. If a vaccine is
made available to emerging markets sooner than the second half of 2021, then upside risks will emerge to our growth forecast. In contrast, if
the vaccine development faces severe delays and nations across the world are required to impose strict lockdowns once again, then severe
downside risks will emerge to our 2021 forecast.
The risk to our monetary policy outlook is on the downside. A combination of factors such as increased risk aversion and high inflationary
pressures due to enhanced liquidity in the domestic market could limit BI's room to undertake further easing. In such conditions, we would
expect the central bank to either entering into a prolonged holding pattern or considering rate hikes towards the middle of the year.
The risks to our exchange rate forecast outlook is to the downside. If there are delays in the availability and rolling out of the Covid-19 vaccine
which leads to a second wave of infections in Indonesia and thereby delays the economic recovery that we have factored in, we expect
investors' sentiment to turn. Rising risk aversion could lead to significant sell-off in Indonesian assets and thereby the rupiah.
MACROECONOMIC FORECASTS (INDONESIA 2018-2021)
Indicator
Nominal GDP, USDbn
Real GDP growth, % y-o-y
Consumer price inflation, % y-o-y, ave
Exchange rate IDR/USD, ave
Budget balance, % of GDP
Current account balance, % of GDP
e/f = Fitch Solutions estimate/forecast. Source: National sources, Fitch Solutions
14,267.33
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.
fitchsolutions.com
Country Risk Summary
Political Risk
Indonesia scores 64.6 (out of 100) in our Short-Term Political Risk Index. Despite the continuing presence of secessionist sentiment within the
country and occasional terrorist attacks, Indonesia scores 73.3 for 'security/external threats' which, when combined with a score of 70.0 for 'policy
continuity', offsets a weak score of 55.0 for 'social stability' - a reflection of relatively high unemployment and social tensions. However, Indonesia
performs poorly in our Long-Term Political Risk Index, coming in at 62.7, with weak government spending limiting its 'scope of state' score to just
65.0 and high levels of poverty and a heterogeneous society constraining its 'characteristics of society' score at 57.5.
Economic Risk
Indonesia's Short-Term Economic Risk score of 61.5 continues to be constrained by an inefficient tax system and reliance on resource revenue,
which weigh on the 'fiscal sector' score of 43.3. Indonesia's Long-Term Economic Risk score comes in at 64.0 out of 100, dragged down by the
poor quality of government expenditure and the high volatility of its currency due to a high NIIP deficit.
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.
fitchsolutions.com
Economic SWOT
SWOT Analysis
Strengths
Weaknesses
Indonesia's strategic location between the Indian and Pacific Oceans and its adjacency to major east-west
trade routes make it an important economy in the region. Indonesia is also resource-rich and is the world's
largest producer of palm oil.
Indonesia has a low cost and large supply of available labour resources. Its labour force, the fourth-largest in
the world, is also one of the world's youngest.
Indonesia's economy is not growing fast enough to reduce unemployment, with the rate still relatively high
at 5.0% as of Q119. Many are forced to work in the informal sector. Of particular concern is the youth
unemployment rate, which is three times the overall rate.
Indonesia's physical infrastructure is considered sub-standard. The archipelagic nature of the country makes
it difficult to weave national infrastructure together. Despite an ambitious infrastructure revitalisation plan,
the country currently compares unfavourably with its peers within the region.
Opportunities
Indonesia can attract much-needed foreign investment by strengthening its business environment,
Threats
particularly through reform of its unreliable legal system.
Indonesia stands to benefit from the rise of Islamic financing, having adopted new legislation in early 2008
designed to tap into this rapidly expanding sphere. With an overall market share of only 5.0%, growth
prospects for Islamic banking in the world's largest Muslim country are enormous.
Production at Indonesia's ageing oil fields has been in decline since the mid-1990s. The country has
therefore become a net importer of crude oil in recent years, putting downward pressure on its current
account position. The resumption of the Cepu field, which occurred in late 2009, may help to alleviate
Indonesia's dependence on foreign oil given its small boost to production output, but we expect this bounce
to be short-lived.
Indonesia has a high foreign ownership of government bonds at around 40% of the total. Coupled with
recurring twin deficits, the economy is vulnerable to sudden capital outflows at times of risk aversion, which
can lead to sharp swings in the currency.
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.
fitchsolutions.com
Political SWOT
Strengths
Weaknesses
Opportunities
Threats
Indonesia managed a successful transition to democracy in 2004. In addition, the April 2019 parliamentary
and presidential elections passed peacefully, signalling the consolidation of the democratic process.
The military's role in politics has gradually been reduced. The prospects of a military coup - which seemed a
real possibility in the late 1990s and early 2000s - have diminished substantially. As the military's role in
politics continues to wane, Indonesia's political stability should likewise improve.
Indonesia's domestic political scene is characterised by a proliferation of minority parties and coalitions are
necessary to govern and legislate. Moreover, the efficiency of state institutions is encumbered by
bureaucracy and corruption. Prospects for reform are beset with numerous challenges, such as the long-
running practice of politicians promising government positions to campaign supporters.
The country was impacted by separatist rebellion and ethnic violence in the late 1990s and early 2000s,
which took great efforts to bring to heel. In the event of a new economic crisis, calls for regional secession
could re-emerge.
Indonesia has built a more stable democracy following peaceful handovers of executive power dating back
to the early 2000s. We expect this trend to continue to bolster political stability over the coming years.
Indonesia's status as the world's most populous Muslim country leaves it well positioned to speak out on
global Islamic issues and act as a bridge between the Middle East and the Asia Pacific region.
Regional militant group Jemaah Islamiah poses a lingering threat to security in Indonesia. Jemaah Islamiah is
blamed for a series of attacks, including the Bali bombings of October 2002 and the Jakarta bombings of July
2009.
The fact that Indonesia subsidises basic goods means that when the government raises prices, there is a risk
of public unrest, or at least a political backlash. Additionally, Indonesia's population is extremely young, with
more than 50% of Indonesians younger than 30. Younger populations have historically been a predictor of
political instability.
Risks of political Islam are rising, as conservative currents of Islam gain traction across Indonesia. In the April
2019 elections, politicians used religious themes to secure support, with President Joko Widodo selecting
prominent Muslim cleric Ma'ruf Amin as his running mate. This could pose risks to social stability and the
business environment.
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.
fitchsolutions.com
Table of Contents
Executive Summary
- Key Country View
- Country Risk Summary
- Economic SWOT
- Political SWOT
- Economic Outlook
- Indonesia To Emerge Out Of Recession In 2021
- GDP By Expenditure Outlook
- External Trade And Investment Outlook
- Outlook On External Position
- Monetary Policy Outlook
- Dovish Monetary Policy Bias To Remain In Indonesia But Easing Could Slow
- Monetary Policy Framework
- Fiscal Policy And Public Debt Outlook
- Indonesia Looks Set To Record A Narrower Fiscal Deficit In 2021
- Structural Fiscal Position
- Currency Forecast
- Rupiah Appreciation Likely Over The Long Term But Downside Risks Remain
- 10-Year Forecasts
- Political Outlook
- Mixed Consequences Of Indonesia's Omnibus Law
- Long-Term Political Outlook
- Outlook Improved, But Uncertainty Lingers
- Operational Risk
- Economic Openness Analysis
- Trade Openness
- Investment Openness
- Utilities Network Analysis
- Utilities Costs And Availability
- Global Macro Outlook
- Q3 Surprise Will Give Way To Challenging Q4
- Index Tables
- Macroeconomic Forecasts
