Indonesia Set for First Recession Since Asian Financial Crisis

Indonesia is set to record its first recession since the Asian financial crisis more than two decades ago as the economy buckles under the weight of Southeast Asia’s worst coronavirus outbreak.

Data due Thursday will likely show that gross domestic product fell 3.2% in the third quarter from a year earlier, according to the median forecast of 27 economists surveyed by Bloomberg. A second straight quarter of contraction would signify a technical recession.

Indonesia Set for First Recession Since Asian Financial Crisis

The worst may well be past for Southeast Asia’s largest economy: It likely bottomed out in the second quarter, when stringent curbs on movement dragged GDP to a 5.32% decline, the sharpest since 1999. “The rebound is expected to be shallow and uneven, with Indonesia still struggling to contain the spread of the pandemic,” said Mohamed Faiz Nagutha, an economist at BofA Securities Inc. in Singapore.

Here are some key issues economists are watching for Indonesia’s recovery:

Virus Strategy

The Covid-19 outbreak continues to impede efforts to spur consumption and investment as Indonesia exceeds 420,000 total infections. The government sees an eventual vaccine as key to fully reopening the economy; in the meantime, it’s investing in vaccine-storage facilities and holding simulations to prepare for a massive inoculation campaign among the 270 million-strong population.

Until then, the economy’s performance hinges on the success of Covid-19 containment, with the threat of lockdowns looming over Jakarta and other virus hotspots, PT Bank Permata economist Josua Pardede said.

The government must accelerate relief programs, with about half of its 695.2 trillion rupiah ($48 billion) pandemic recovery budget still unspent, Pardede said. The economy could contract again in the fourth quarter if consumption, which accounts for about 60% of GDP, remains sluggish, he added.

Investment Revival

A new law aimed at creating jobs and luring investment has improved sentiment, rekindling foreign inflows into Indonesian stocks and bonds. The rupiah was Asia’s second best-performing currency in October, gaining 1.7% to pare its year-to-date loss to 4.8%.

Analysts are waiting to see government guidelines for implementing the law so they can gauge how effective it will be at attracting foreign direct investment. The reform could be stalled by workers’ protests and a planned legal challenge.

FDI began to rebound in the third quarter, rising 1.6% from a year ago, as outlying islands in the sprawling archipelago benefit from smelter projects.

Policy Intervention

Low inflation could give policy makers room to cut interest rates and boost lending to consumers and businesses hit hard by the pandemic. Bank Indonesia Governor Perry Warjiyo has pledged to keep monetary policy accommodative through 2021, when the central bank expects the economy to grow 4.8% to 5.8%.

The central bank could cut its benchmark interest rate by another 50 basis points this year, according to Barclays Bank Plc economist Brian Tan, who expects 2020 GDP to undershoot the government’s forecast of a 0.6% to 1.7% contraction.

“Our broad view remains that the central bank will eventually press on with rate cuts as GDP falls short of projections,” Tan said.

©2020 Bloomberg L.P.

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