Indonesia bets on $100B state spend to revive growth

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Trains travel along railway tracks near Tanah Abang station in Jakarta, Indonesia, on Aug. 4. -- Dimas Ardian/Bloomberg

Indonesia’s government will spend aggressively in the coming months to support a nascent economic recovery after measures to contain the coronavirus pandemic sent Southeast Asia’s largest economy into its first contraction in more than two decades.

State spending will total about 1,476 trillion rupiah ($101 billion) in the six months through December, Finance Minister Sri Mulyani Indrawati said during a briefing in Jakarta on Wednesday. A ramp up in government spending will sustain the recovery momentum seen with the easing of mobility restrictions, she said.

“We are accelerating spending mostly for social protection and supporting businesses,” Indrawati said. “We’re also pushing ministries and institutions. With all these steps taken, we expect them to stimulate economic activity in the months ahead.”

With the economy sliding 5.32% in the second quarter, the worst performance since 1999, and private consumption and investment remaining sluggish, officials are turning to fiscal measures to reignite growth and prevent a full-year contraction. But a failure to contain the pandemic and with more lockdown measures looming, efforts to resume full economic activities may falter in the world’s fourth-most populous nation. The government has spent less than 25% of the almost $50 billion in fiscal stimulus, official data show.

“Reversing this under-spending will be crucial for reviving growth,” Joseph Incalcaterra, HSBC Holdings Plc’s chief Asean economist, said in a report. “While Indonesia’s GDP may not contract as sharply as other regional economies, the recovery will nonetheless be shallower, and policy support may be needed for a sustained period of time.”

Growth will remain subdued in the third quarter as well, with HSBC expecting the economy to contract 0.9%. While fiscal policy is expected to do the short-term heavy lifting, conventional monetary policy support will continue into 2021 with the central bank expected to lower interest rates by 50 basis points by the end of first quarter next year, Incalcaterra said.

Retail sales in the consumption-reliant economy have taken a knock amid the pandemic, while manufacturing continues to contract, as the latest purchasing managers index shows. Indonesia’s exports, dominated by commodities such as coal and palm oil, have shown some improvement in recent months.

The government has lowered its growth forecasts several times already and now sees GDP in a range of -0.4% to 1% for the year. The central bank has cut its own estimate to 0.9%-1.9% growth. Indrawati said a second wave of virus cases in various countries and lack of clarity about vaccine availability are adding to the global uncertainties.

Bank Indonesia will continue to strengthen synergies with the government and related authorities through its policy mix to ensure various measures initiated are more effective in strengthening the economic recovery, it said in a statement.

With Indonesia’s capital Jakarta and its suburbs delaying further easing of mobility restrictions due to a surge in virus cases, a revival in private consumption, the bedrock of growth, is going to be gradual in the second half, according to Sung Eun Jung, an economist at Oxford Economics Ltd. in Singapore.

“We forecast a slow recovery path with annual growth still contracting in the second half before returning to positive territory in 2021, amid a lingering virus outbreak and an overstretched healthcare system,” Sung wrote in a report. “Exports, however, should benefit to some degree from the turnaround in Chinese import demand.”

Indonesia didn’t impose a nationwide lockdown like many of its neighbors, and began easing some of the restrictions put in place to contain the pandemic from June. Confirmed cases have almost quadrupled since then with the cumulative tally reaching 116,871 on Wednesday and fatalities totaling 5,452, the highest in Southeast Asia.

Without effective measures to contain the pandemic, a full economic recovery may be elusive, according to Capital Economics Ltd., which expects Indonesia’s GDP to contract 3% this year.

“Fear of catching the virus means people will be reluctant to fully resume their normal lives. Social distancing will need to last for longer,” Gareth Leather, an economist at Capital Economics, wrote in a note. “Indonesia’s policy response has been underwhelming.” — Bloomberg