Indonesian economy contracted 2.01% year to date (Sept. 2020), entering the recession, as the COVID-19 crisis took a huge toll on the economy. But it has advanced 5.05% in the third quarter Q3 (q/q), after a 4.19% contraction in Q2. This was the first quarterly growth since Q3 2019 and the strongest on record, as the economy recovered from the fallout triggered by the COVID-19 crisis. Would it continue to grow in Q4 this year and next year?
Private consumption grew 4.7% in Q3 after contracting 6.53% in Q2, and fixed investment grew 8.45% in Q3 after contracting 9.71% in Q2. At the same time, government spending slowed as it grew 16.93% in Q3, compared to 22.33% growth in Q2. There was a strong upturn in exports as it grew 12.14% in Q3, compared to minus -12.83% in the previous quarter, with imports falling much less (-0.08% vs. -14.18%).
Finance Minister Sri Mulyani expects the economy to remain facing a contraction (1.7%) in Q4 this year, with household consumption to post minus 2.1% to minus 1%. She noted that the investment remains weak but starts to recover as reflected by some indicators such as building activity, import of capital goods, and commercial vehicle sales.
Asian Development Bank (ADB) projected that Indonesia’s economy would post minus 1% growth this year, but it would grow 5.3% next year along with the recovery of the economy. The IMF, meanwhile, predicts the Indonesian economy to post minus 0.23% this year but to grow 6.1% next year. The World Bank projected that Indonesia’s economy would post zero growth this year, but it would grow 4.8% next year. Meanwhile, the OECD projected that Indonesia’s economy would post a minus 2.8% growth this year and grow 5.2% next year.
Sri Mulyani said, for 2021, the economy is projected to grow by 4.5% to 5.5%, but it depends on the forecast for COVID-19 and how it affects the Indonesian economy. To withstand the negative impact of the pandemic on the economy, the Government will continue to take extraordinary policy steps to maintain and restore the community’s health, socio-economic conditions, and the business world.
Bank Indonesia (BI) said domestic economic growth is rebounding in line with increasing fiscal stimulus realization and greater public mobility together with stronger global demand. Higher stimulus realization and greater public mobility have gradually increased domestic demand in terms of consumption and investment.
Meanwhile, export performance has also improved on the back of global demand, in the United States and China in particular. Positive developments in several indicators also confirmed ongoing domestic economic gains during Oct. 2020, including public mobility, non-food and online retail sales, manufacturing PMI and private income.
BI expects economic growth to continue accelerating in 2021 in line with further global economic improvements, faster realization of the central and local government budgets, progress in terms of the loan restructuring program, and ongoing monetary and macroprudential stimuli issued by BI.
Sri Mulyani said the Indonesian economy is expected to contract by 1.5% this year, better than South Korea’s 1.9% contraction and Russia’s 4.1% contraction. China’s economy is expected to grow by 1.9% this year. Indonesia, South Korea, Rusia, and China are members of G20 countries.
Sri Mulyani explained that all countries took countercyclical support through state budget or fiscal policy to maintain economic resilience amid the ongoing pandemic impact, although it results in the growing debt. The change in deficit policy aims to support the economy and to spend on health.
For 2021, the budget deficit is set at 5.7% or Rp1,006.4 trillion, smaller than the 6.34% budget deficit for 2020 (Rp1,039 trillion). Government sets spending for 2021 at Rp2,705 trillion (up 0.4% from 2020), focusing on handling the pandemic. The budget for education in 2021 reaches Rp550 trillion or 20% of the total budget, and the budget for social protection reaches Rp408.8 trillion.
The success of government efforts, including implementing the Omnibus Law on Job Creation and vaccine for COVID-19, will affect the economic prospect in 2021. Business players’ optimism must be developed, while the political and social noises would affect the investment climate. Noting that some 80% of the country’s GDP depends on the domestic economy, which has a weak demand side. Government sets funding for stimuli at Rp356.7 trillion for next year. This would support the country’s economy.
The Government needs to boost economic recovery program funds next year for social protection, the micro-small-medium segment, and corporate. The sectors with positive prospects in 2021 include mining, technology, food and beverage, and financial.