Indonesia Unveils Fresh Stimulus to Counter Virus Impact

(Bloomberg) -- Indonesia unveiled an emergency fiscal stimulus plan worth 22.92 trillion rupiah ($1.55 billion) as it seeks to protect Southeast Asia’s largest economy from the coronavirus crisis.

The package announced Friday, which includes a raft of tax breaks, would help push the budget deficit to 2.5% of gross domestic product, from an initial target of 1.76%, Finance Minister Sri Mulyani Indrawati said. “These won’t be the last measures,” she said.

The new package, which follows $745 million in stimulus announced last month, comes amid a deteriorating outlook for Indonesia’s economy. Despite only 34 confirmed cases of the virus in a population of about 270 million, the country has been hit hard by the risk aversion sweeping global markets, with Indonesia’s stock index now in bear territory and the currency down about 7.5% in the past month.

As the virus continues its rapid spread beyond China, governments around the world are boosting stimulus and taking other steps to protect their economies. Central banks are also stepping up action with emergency rate cuts aimed at countering the economic fallout.

Indonesia Unveils Fresh Stimulus to Counter Virus Impact

In Indonesia, policy makers are turning to measures deployed during the global financial crisis more than a decade ago. Bank Indonesia, which cut interest rates by 25 basis points last month, is under pressure to lower them again at next week’s policy meeting.

The bank bought 6 trillion rupiah of government bonds Friday to prop up financial markets and stem a rout in the currency, adding to the 8 trillion rupiah of bonds it bought Thursday.

Growth Warning

The government previously has warned that economic growth may slow to 4.7% in the first three months of the year, which would be the worst quarter in more than a decade. It now expects the budget deficit to widen by 0.8 percentage points, amounting to 125 trillion rupiah. The total value of stimulus to date, including two fiscal packages, is 160 trillion rupiah, Coordinating Minister for Economic Affairs Airlangga Hartarto said Friday.

As a result of this crisis, Indonesian authorities hope “there could be a mechanism that creates global leadership which will lead to synchronized measures to mitigate this,” Indrawati said. “We at the economic ministries will keep trying to mitigate this, but at the end of the day the bottom line is this is a health issue.”

Tourism bore the initial brunt of the virus’s economic fallout, but Indrawati said the impact is spreading to other areas. While last month’s package aimed to support the tourism sector and low-income households, the new stimulus targets manufacturers.

As part of the state’s non-fiscal response, rules will be relaxed governing restructuring of bank loans to small and medium-sized companies, certification processes for exporters will be simplified and the government will make it easier to import raw materials.

Highlights of Friday’s package include:
  • Import tax waived for 6 months on some goods
  • Corporate tax reduced by 30% for 6 months for 19 sectors
  • Income tax waived for workers in some manufacturing industries with annual gross income below 200 million rupiah
  • Measures to take effect April 1

“It’s definitely better than the first package, but it’s not enough,” said Enrico Tanuwidjaja, an economist at PT Bank UOB Indonesia. “We need to safeguard consumer confidence and spending with real stimulus that is on top of the normal expenditure and revenue adjustments,” he said, adding there’s an “underlying special need for more significant fiscal measures.”

The government should consider cash transfers, Tanuwidjaja said. He also called it “an opportune time” to look at amending the law that limits Indonesia’s budget deficit to 3% of GDP.

©2020 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.