Prospects for Indonesia's Economic Recovery in the Midst of Vaccination Drive | Bahasa
Indonesia, 25 May 2021 - The Covid-19 pandemic has been raging across the globe for more than a year and has left a significant impact on the economy, triggering recessions in various countries. However, DBS Bank is still optimistic that Indonesia and several other Southeast Asian countries will see an economic recovery this year as the vaccination programmes are running smoothly.
2020 was a challenging period for Asian and even global economies. The number of Covid-19 cases increased from March 2020 to February 2021 in several countries in Southeast Asia, such as the Philippines, Malaysia, and Indonesia. Various countries have started to introduce mobility restrictions to curb the spread of Covid-19.
Mobility restrictions have directly affected the economy. According to DBS Asian Insights research, Indonesia’s gross domestic product (GDP) contracted by 2.1% year-on-year in 2020. Several other countries in the region suffered a similar fate. Malaysia’s GDP contracted by -5.6%, Singapore by -5.4 %, the Philippines by -9.5%, and Thailand by -6.1%.
However, this year, DBS Bank predicted that Indonesia’s economy will improve with a growth of 4.0% and 4.5% in 2022. In general, DBS Bank projected ASEAN’s GDP growth at 5.2% year-on-year in 2021 compared to a -4.3% contraction last year.
DBS economist Radhika Rao said countries with a high burden of Covid-19 are on the way to recovery after a soft start in the first quarter of 2021.
Vaccination programmes have started in many countries at different speeds. In Southeast Asia, Indonesia and Singapore started the vaccination drive earlier, in mid-January 2021, Radhika wrote in DBS Asian Insights entitled “ASEAN-6 Chartbox: Turning- Corner”, Monday (3/5).
According to the Covid-19 Situation data released by the Covid-19 Response Team in Indonesia, as of early May 2021, more than 12.6 million doses of vaccines have been distributed across the country, prioritising frontline workers and health workers, followed by civil servants and the elderly in the second phase.
The vaccination programme is aimed at keeping Covid-19 cases under control so that public mobility can return to normal, thus opening up opportunities for economic recovery this year.
Moreover, there are several indicators of improvement in the economy, such as the growing trend in manufacturing activity in developing countries in Asia. DBS Bank data shows that the Purchasing Managers’ Index (PMI) has continued to increase since July 2020 to an expansion level from a contraction at the beginning of the pandemic or March 2020.
DBS Bank also sees that global economic recovery and China's economic resilience could be the driving force for exports for countries in the region. However, a number of risks, such as the volatility of the global bond market and global crude oil prices, should be well monitored.
The Covid-19 pandemic also has a major impact on Indonesia's fiscal conditions and debt level. The law on state finance caps the state budget deficit at a maximum of 3% of GDP and government debts at a maximum of 60% of GDP.
DBS Bank compared Indonesia's condition to other countries such as India, the Philippines, Thailand, and Malaysia that consistently experience budget deficits and that are one or two levels above sub-investment.
DBS Bank said that compared to other countries, Indonesia's fiscal deficit and debt have indeed increased, albeit still well managed or still below the maximum limit of GDP. In the past decade, Indonesia's deficit has been below 2.5%, lower than India’s deficit, at 7%, and Malaysia’s deficit, at 4%.
Meanwhile, in 2020-2022, nearly all developing countries, including Indonesia, widened the budget deficit cap to provide financial flexibility in dealing with the impact of the pandemic.
Indonesia’s government debt has continued to increase in the past few years although still far below the permissible threshold and lower than other countries, said Radhika.
This was confirmed by Fitch Ratings, which affirmed Indonesia's Sovereign Credit Rating at BBB (investment grade) with a stable outlook on March 19, 2021, according to a release issued by the Indonesian Ministry of Finance on Wednesday (24/3).
Government policy
Although Indonesia's fiscal track record is better than other countries in the region, there is still a lot of work to do to boost revenue, including through structural improvements to increase fiscal revenue, according to Radhika. Currently, tax revenues contributes the bulk of Indonesia's revenues.
“Efforts to increase non-commodity revenues and overall revenues are a government priority. Several new measures have been introduced, including the tax amnesty program, updating the database and expanding the new tax base for e-commerce or digital businesses,” said Radhika.
The government also strengthened the institutional backbone to encourage economic recovery from the Covid-19 pandemic, including by establishing a Sovereign Wealth Fund (SWF) or the Investment Management Institution (LPI), which was derived from the Job Creation Law (UU).
The LPI is expected to attract more foreign investment to finance national infrastructure development.
Earlier, Finance Minister Sri Mulyani expressed optimism about economic growth this year. The government projected an economic growth of 4.5% to 5.3% this year, a significant improvement from a -2.07% contraction in 2020.
According to Sri Mulyani, there have been indicators of economic improvement in the country, such as growing exports and imports, thus increasing the consumption of cement and steel and the demand for commercial vehicles.
“We will continue to encourage these indicators so that the recovery momentum will continue in the second quarter,” said Sri Mulyani at a Stakeholder Meeting for the Acceleration of National Economic Recovery in Semarang, Thursday (25/3).
A stable outlook assigned to Indonesia by several rating agencies confirmed her statement. According to Sri Mulyani, the rating should be appreciated, especially in view of the fact that during the pandemic, many rating agencies downgraded the ratings of a number of countries.
This is because the pandemic has a huge impact, especially on fiscal conditions. Meanwhile, rating agencies consider Indonesia's debt rating quite good and relatively manageable with a stable outlook. However, the government must remain vigilant and improve structural factors.
On the other hand, efforts to control Covid-19 have remained a challenge although mass vaccinations have been underway. The public must maintain self-discipline and follow the health protocols to keep the infection rate under control. This is to help the government avoid taking extreme measures that could disrupt the economy.
To that end, Covid-19 handling remains a key strategy in encouraging economic recovery this year. The government is supported by Bank Indonesia, which will provide funding. In addition, the government will leverage the economy by providing stimuli, especially to boost the economy.
The government and financial authorities will closely monitor the situation and are prepared to adjust policies according to dynamics.
“In addition to the state budget and monetary instrument as well as the OJK, we also carry out structural reforms through the Job Creation Law so that the economy will not only recover but will also grow stronger and better,” she added.
2020 was a challenging period for Asian and even global economies. The number of Covid-19 cases increased from March 2020 to February 2021 in several countries in Southeast Asia, such as the Philippines, Malaysia, and Indonesia. Various countries have started to introduce mobility restrictions to curb the spread of Covid-19.
Mobility restrictions have directly affected the economy. According to DBS Asian Insights research, Indonesia’s gross domestic product (GDP) contracted by 2.1% year-on-year in 2020. Several other countries in the region suffered a similar fate. Malaysia’s GDP contracted by -5.6%, Singapore by -5.4 %, the Philippines by -9.5%, and Thailand by -6.1%.
However, this year, DBS Bank predicted that Indonesia’s economy will improve with a growth of 4.0% and 4.5% in 2022. In general, DBS Bank projected ASEAN’s GDP growth at 5.2% year-on-year in 2021 compared to a -4.3% contraction last year.
DBS economist Radhika Rao said countries with a high burden of Covid-19 are on the way to recovery after a soft start in the first quarter of 2021.
Vaccination programmes have started in many countries at different speeds. In Southeast Asia, Indonesia and Singapore started the vaccination drive earlier, in mid-January 2021, Radhika wrote in DBS Asian Insights entitled “ASEAN-6 Chartbox: Turning- Corner”, Monday (3/5).
According to the Covid-19 Situation data released by the Covid-19 Response Team in Indonesia, as of early May 2021, more than 12.6 million doses of vaccines have been distributed across the country, prioritising frontline workers and health workers, followed by civil servants and the elderly in the second phase.
The vaccination programme is aimed at keeping Covid-19 cases under control so that public mobility can return to normal, thus opening up opportunities for economic recovery this year.
Moreover, there are several indicators of improvement in the economy, such as the growing trend in manufacturing activity in developing countries in Asia. DBS Bank data shows that the Purchasing Managers’ Index (PMI) has continued to increase since July 2020 to an expansion level from a contraction at the beginning of the pandemic or March 2020.
DBS Bank also sees that global economic recovery and China's economic resilience could be the driving force for exports for countries in the region. However, a number of risks, such as the volatility of the global bond market and global crude oil prices, should be well monitored.
The Covid-19 pandemic also has a major impact on Indonesia's fiscal conditions and debt level. The law on state finance caps the state budget deficit at a maximum of 3% of GDP and government debts at a maximum of 60% of GDP.
DBS Bank compared Indonesia's condition to other countries such as India, the Philippines, Thailand, and Malaysia that consistently experience budget deficits and that are one or two levels above sub-investment.
DBS Bank said that compared to other countries, Indonesia's fiscal deficit and debt have indeed increased, albeit still well managed or still below the maximum limit of GDP. In the past decade, Indonesia's deficit has been below 2.5%, lower than India’s deficit, at 7%, and Malaysia’s deficit, at 4%.
Meanwhile, in 2020-2022, nearly all developing countries, including Indonesia, widened the budget deficit cap to provide financial flexibility in dealing with the impact of the pandemic.
Indonesia’s government debt has continued to increase in the past few years although still far below the permissible threshold and lower than other countries, said Radhika.
This was confirmed by Fitch Ratings, which affirmed Indonesia's Sovereign Credit Rating at BBB (investment grade) with a stable outlook on March 19, 2021, according to a release issued by the Indonesian Ministry of Finance on Wednesday (24/3).
Government policy
Although Indonesia's fiscal track record is better than other countries in the region, there is still a lot of work to do to boost revenue, including through structural improvements to increase fiscal revenue, according to Radhika. Currently, tax revenues contributes the bulk of Indonesia's revenues.
“Efforts to increase non-commodity revenues and overall revenues are a government priority. Several new measures have been introduced, including the tax amnesty program, updating the database and expanding the new tax base for e-commerce or digital businesses,” said Radhika.
The government also strengthened the institutional backbone to encourage economic recovery from the Covid-19 pandemic, including by establishing a Sovereign Wealth Fund (SWF) or the Investment Management Institution (LPI), which was derived from the Job Creation Law (UU).
The LPI is expected to attract more foreign investment to finance national infrastructure development.
Earlier, Finance Minister Sri Mulyani expressed optimism about economic growth this year. The government projected an economic growth of 4.5% to 5.3% this year, a significant improvement from a -2.07% contraction in 2020.
According to Sri Mulyani, there have been indicators of economic improvement in the country, such as growing exports and imports, thus increasing the consumption of cement and steel and the demand for commercial vehicles.
“We will continue to encourage these indicators so that the recovery momentum will continue in the second quarter,” said Sri Mulyani at a Stakeholder Meeting for the Acceleration of National Economic Recovery in Semarang, Thursday (25/3).
A stable outlook assigned to Indonesia by several rating agencies confirmed her statement. According to Sri Mulyani, the rating should be appreciated, especially in view of the fact that during the pandemic, many rating agencies downgraded the ratings of a number of countries.
This is because the pandemic has a huge impact, especially on fiscal conditions. Meanwhile, rating agencies consider Indonesia's debt rating quite good and relatively manageable with a stable outlook. However, the government must remain vigilant and improve structural factors.
On the other hand, efforts to control Covid-19 have remained a challenge although mass vaccinations have been underway. The public must maintain self-discipline and follow the health protocols to keep the infection rate under control. This is to help the government avoid taking extreme measures that could disrupt the economy.
To that end, Covid-19 handling remains a key strategy in encouraging economic recovery this year. The government is supported by Bank Indonesia, which will provide funding. In addition, the government will leverage the economy by providing stimuli, especially to boost the economy.
The government and financial authorities will closely monitor the situation and are prepared to adjust policies according to dynamics.
“In addition to the state budget and monetary instrument as well as the OJK, we also carry out structural reforms through the Job Creation Law so that the economy will not only recover but will also grow stronger and better,” she added.
[END]
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