GDP declined 5.32% in the 2Q from a year ago, its deepest contraction since the 1st 3 months of 1999

JAKARTA • Indonesia’s economy contracted for the first time since the aftermath of the Asian Financial Crisis more than two decades ago, as movement restrictions to contain the coronavirus outbreak took a toll on South-East Asia’s largest economy.

GDP declined 5.32% in the second quarter (2Q) from a year ago, data from the statistics bureau showed yesterday, its deepest contraction since the first three months of 1999. The median estimate in a Bloomberg survey of economists was for a 4.72% slump. GDP fell 4.19% compared to the previous quarter, worse than the 3.65% drop expected.

“You know a blow is coming and you’ve been bracing yourself for it, but when it comes it’s still going to hurt — a lot,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp in Singapore. “While we still see a recovery in the second half, the path is made all the more uncertain by global developments.”

Indonesia’s benchmark stock index closed 1% higher, rebounding from a 0.3% drop after the data release. The yield on benchmark 10-year government bonds dropped two basis points (bps) to 6.821%, while the rupiah rose 0.5% against the US dollar.

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 (PMI) shows. Indonesia’s exports, dominated by commodities such as coal and palm oil, have shown some improvement in recent months.

Consumption Slump

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.

President Joko Widodo has said the economy is showing signs of recovery, with household consumption, purchasing power and

money circulation in rural areas rebounding recently. However, the country’s virus outbreak — the worst in South-East Asia — shows no signs of abating and could weigh on that outlook.

Other details of yesterday’s release, compared to year-earlier figures:

• Private consumption declined 5.51%.
• Gross fixed capital formation was down 8.61%.
• Exports declined 11.66%.
  
• Government spending fell 6.9%.

“Household consumption and investment are the biggest sources of our GDP growth, so we should put much more effort for these components to perform better in the next quarters,” Suhariyanto, head of the Indonesia Statistics Agency, said in a briefing.

“The sharp contraction in Indonesia’s economy in 2Q is likely to have been the low-point. Even so, declines in 3Q and 4Q cannot be ruled out, as Covid-19 restrictions in some form will need to remain in place until a remedy is widely available. Whether Indonesia can reopen substantially further and return to positive growth by 4Q would hinge on fatalities remaining relatively low,” said Tamara Mast Henderson, Bloom- berg’s Asean economist.

In a separate briefing, Coordinating Minister for Economic Affairs Airlangga Hartarto noted recent improvement in the PMI, car sales and retail sales as harbingers of revival.

“We believe the economy starts showing a reversal from its bottom in the 2Q,” he said.

Recession Risk

Josua Pardede, an economist at PT Bank Permata Tbk, said the data show a rising risk of recession and called on the government to boost its fiscal support. The government has disbursed only 141 trillion rupiah (RM40.63 billion), or 20% of the 695.2 trillion rupiah it has allocated for stimulus.

“Steps to stimulate the economy through accelerating the stimulus of government spending are crucial, by continuing to encourage productivity, which has a multiplier effect on public demand and consumption,” he said. “Economic performance in the 3Q of 2020 is expected to be a turning point.”

Bank Indonesia has cut interest rates by 100bps this year and agreed to finance the widening budget deficit by buying billions of dollars of sovereign bonds directly from the government.

Wisnu Wardana, an economist at Bank Danamon Indonesia, said he doesn’t see scope for much more central bank easing.

“We are of the view that monetary policy has been stretched, especially under the recent burden-sharing scheme,” he said. — Bloomberg