Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
The economic recovery in Indonesia is underway with support
from government spending and exports.
Further economic momentum will be dependent on private
consumption, but if consumer inflation and labor market data are
any indication, households are not yet ready to carry the economy
and may feel the economic recovery is passing them by.
The government and central bank have largely tapped out their
options for pushing the economic recovery along, after implementing
significant stimulus measures in 2020.
The Indonesian economy contracted 0.74% year on year (y/y) in
the first quarter of 2021, up from a 2.2% y/y contraction the
previous quarter, supported by ramped up government spending, a
stronger recovery in fixed investment, and healthy exports. Lagging
in the recovery was private consumption.
The first quarter GDP result was peppered with good news
including the government managing to roll over programs as part of
the National Economic Recovery stimulus program (known locally as
PEN) which had underspent versus plan in 2020. This allowed
government consumption spending to expand at a faster-than-usual
pace at the start of the fiscal year. It is understood that PEN
spending through 30 April 2021 reached 22.3% of its 699.4 trillion
Indonesian rupiah (USD 48.4 billion) 2021 budget, with spending on
corporate support programs, business incentives, and social
assistance programs accounting for much of the spending and
providing an extra boost to growth.
Fixed investment activity also beat expectations during the
first quarter with real (inflation-adjusted) spending on machinery
and equipment and transportation both returning to year on year
growth after machinery and equipment spending has contracted for
five consecutive quarters and transportation investment has
contracted since the first quarter of 2019. Building activity
remained subdued, contracting 0.7% y/y as costly and
labor-intensive construction projects likely faced delays.
Also positive for the economy, exports of goods in real terms
surged to 11.8% q/q, or the strongest expansion since a one-off
surge in the third quarter of 2017, and prior to that 2011. The
recovery was led by stronger demand from mainland China and major
advanced economies boosting demand for a wide range of Indonesian
commodities including oil and gas exports.
Unfortunately, the COVID-19 pandemic continued to weigh heavily
on private consumption during the quarter. Firstly, there was a
progressive scaling up of COVID-19 containment measures in the
first quarter. It should be noted that the measures are far from
full lockdown and vary down to the micro (neighborhood) level
dependent on the prevalence of COVID-19 infections, but they did
limit mobility and availability of work. Additionally, semi-annual
data on employment from Statistics Indonesia indicates that as of
February 2021, 1.62 million people have lost their formal sector
jobs and 15.7 million people are working reduced hours, implying
reduced household incomes and hence, spending capacity.
As a result, private consumption spending remained weak across
all major spending categories during the first quarter with only
marginal easing of year-on-year contractions for transportation and
communication and restaurant and hotel spending supporting the
minor improvement in the headline private consumption figure.
Meanwhile, private consumption spending on food and beverages
weakened further contracting 2.3% y/y, down from the fourth
quarter's 1.4% y/y contraction.
Unfortunately, headline consumer price inflation for April
hinted at sustained weak consumer demand as it held steady at 1.4%
y/y for a third consecutive month according to Statistics Indonesia
and core inflation (which excludes government-controlled and
volatile food prices) hovered for a second consecutive month at the
record-low 1.2% y/y. There was minor upward pressure on food prices
during the month, which may pick up modestly further as Eid al-Fitr
is celebrated in May; otherwise, price increases were relatively
modest across the other major components of the Consumer Price
Index (CPI) indicating limited demand pressures.
Further economic momentum will be slow to build, especially as
households remain on the sidelines due to containment measures,
reduced incomes and the uncertainty caused by the persistence of
the COVID-19 virus in the country. The vaccination campaign is
rolling out as fast as it can with 22 million doses administered as
of 9 May. However, this is not fast enough for a campaign that aims
to vaccinate 180 million people by March 2022, and may not be
sufficient to allow COVID-19 containment measures to be relaxed
soon.
The government has also cut the length of the Eid-al-Fitr
holiday this year and has prohibited travel back to hometowns,
dampening a typical period of high consumption for the country.
Therefore, IHS Markit projects Indonesia's GDP growth will come in
around the high-3% range for 2021. Aside from concerns about the
recovery for private consumption, our pessimistic outlook is driven
by concerns that the policy space is shrinking for additional
stimulus measures.
On the fiscal side, the government has significantly ramped up
its PEN spending for this year and expects to return a fiscal
deficit on the order of 5.7% of GDP, but there are limits on the
administrative capacity front for this level of spending.
Additionally, with foreign demand for Indonesian government debt
subject to risk of vacillating investor risk aversion, higher
fiscal deficits are out of the question. On the monetary side, Bank
Indonesia's capacity to cut the policy interest rate further- after
150 basis points worth of cuts since the start of the pandemic- is
hampered by the need to maintain rupiah stability. Instead, the
central bank will continue using moral suasion to urge lenders to
lower their lending rates while seeking to ease other
macroprudential regulations where possible to boost lending.
Posted 13 May 2021 by Bree Neff, Director, News & Research Management, Economics & Country Risk, S&P Global Market Intelligence