Indonesia’s Economy Hit by Virus Domino Effect, Indrawati Says

(Bloomberg) -- Indonesian officials are becoming increasingly worried about the stability of the financial system amid an exodus in capital caused by the Covid-19 pandemic that’s already much larger than flows during the global financial crisis.

“The domino effect of Covid-19 and its threat to financial-system stability has become the main concern,” Finance Minister Sri Mulyani Indrawati told reporters in an online briefing Monday after the nation’s Financial System Stability Committee met to assess the economy. The uncertain economic conditions require strengthening anticipatory steps to mitigate risks to macroeconomic and financial-system stability, she said.

Indonesia is battling a health crisis as cases of Covid-19 continue to surge, with economic growth slowing to its slowest pace in almost two decades in the first three months of the year. Officials Monday reiterated they still see the economy growing 2.3% this year, but warned it could contract 0.4% in a worst-case scenario.

The spike in risk aversion saw outflows reach 145.28 trillion rupiah ($9.7 billion) in the first quarter, Indrawati said. The “serious disruption” in demand and supply will also threaten the economy and financial-system stability, she said.

Indonesia also has seen a spike in bad debt, with the ratio of gross non-performing loans rising to 2.77% as of March from 2.53% in December, said Wimboh Santoso, chairman of the Financial Services Authority.

Indonesia’s Economy Hit by Virus Domino Effect, Indrawati Says

Like other emerging economies, Indonesia has been hit by swings in sentiment that have roiled markets and put the currency under pressure. The rupiah is down 7% against the dollar this year, although it has rallied over the past month to be the best performer in Asia.

Still, Bank Indonesia Governor Perry Warjiyo insisted the currency remains “fundamentally undervalued,” and pledged to intervene in the market if needed to maintain stability.

The central bank does see room to cut the benchmark rate again, Warjiyo said Monday, adding that further easing is contingent on market stability.

Bank Indonesia left its benchmark rate unchanged last month after two consecutive cuts. It also has adjusted macroprudential rules to boost liquidity and has been ramping up its direct intervention in markets to smooth volatility.

©2020 Bloomberg L.P.

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