Indonesia faces technical recession; partial lockdown to hit Q2 GDP

Pearl Bantillo

06-May-2020

SINGAPORE (ICIS)–Indonesia may slip into a technical recession as second-quarter performance will be hit hard by a partial lockdown adopted to contain the novel coronavirus pandemic in southeast Asia’s biggest economy.

For January-March 2020, its economic output shrank by 2.41% from the previous quarter, with year-on-year growth easing to 2.97%, the lowest recorded in nearly two decades.

“Q1 GDP data supports our view that the economy will enter a technical recession in H1 2020,” said Sung Eung Jung of Oxford Economics in a research note.

A technical recession is defined as two consecutive quarters of GDP contraction.

“We expect a notably worse growth performance in Q2 with strict social distancing measures further dampening domestic demand,” Sung said.

Indonesia’s annualized economic growth in the March quarter substantially eased from 4.97% the previous quarter and was also lower from the 5.07% expansion rate recorded in the same period last year.

“We forecast a slow recovery path with [year-on-year] contraction in Q2 and Q3 before returning to positive territory in Q4 amid a lingering virus outbreak and an overstretched healthcare system,” Sung of Oxford Economics said.

Indonesia, which has the second-highest number of coronavirus infections in southeast Asia next to Singapore, implemented a partial lockdown on 10 April in the capital Jakarta which was subsequently expanded to other cities.

Social-distancing measures are expected to remain in the country until the end of May.

As of early Wednesday, Indonesia has more than 12,000 confirmed coronavirus cases with 872 deaths, according to World Health Organisation (WHO) data.

Its virus-related death toll was the highest in east Asia outside China, where the deadly flu-like virus outbreak began in late 2019.

In a bid to contain the spread of the deadly pandemic, the country has temporarily banned the usual travels at the end of the Muslim fasting month of Ramadan, which started on 23 April.

Indonesia is a predominantly Muslim nation of 260m people.

For the full year, Oxford Economics projects the Indonesian economy to contract by 0.8%, while Singapore-based UOB Global Economics and Markets Research has a more optimistic 2.1% growth forecast.

The International Monetary Fund (IMF), in its April 2020 World Economic Outlook, forecast the emerging economy to at least post a 0.5% growth, joining the ranks of China and India, which will witness a sharp deceleration in 2020 growth but avoid a full-year contraction.

In 2019, the economy posted a 5.0% expansion rate.

“Overall, we are in uncharted territory which making it difficult to forecast Indonesia’s economy going forward,” UOB economist Enrico Tanuwidjaja said in a research note.

“Nevertheless, despite disruptions in overall economic activities, we now hold a cautiously optimistic view that the economy could still grow at 2.1% for 2020,” Tanuwidjaja said.

Indonesia is “is likely to face the worst economic recession since the Asian financial crisis” in 1997 despite the government’s massive fiscal response as cushion against the economic fallout of the coronavirus pandemic, Oxford Economics said.

The research firm expects the Indonesian central bank to cut policy interest rates by 50 basis points in the second quarter, to ensure adequate liquidity in its financial markets.

“Domestic activity was largely normal in the first two months; before the first [coronavirus] case announced in early March, leading to large scale social restrictions,” Tanuwidjaja of UOB said.

First-quarter growth in household consumption, which accounts for more than half of Indonesia’s economy, slowed to 2.84% year on year from 4.97% in the fourth quarter of 2019, while investment spending rose at a much slower rate of 1.70% from 4.06% in the previous quarter.

The global recession caused by pandemic-induced lockdowns will hit the country’s exports.

“While the return to economic normalcy in China bodes well for Indonesia, the massive economic fallout in other parts of the world is likely to result in a sharp drop in external demand,” Sung of Oxford Economics said.

China was first to implement city lockdowns to contain the coronavirus outbreak, which nearly paralyzed its economy in February. It gradually re-opened its economy from March.

Focus article by Pearl Bantillo

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