Indonesia: Steep Covid-19 surge and extended containment measures will hinder the economic recovery
Indonesia continues to feel the impact of the worst Covid-19 wave in the country since the start of the pandemic. On 12 July, the peak was not yet in sight as soaring daily cases reached a country record number of 40,000. As a result, the ‘emergency community activity restrictions’ implemented in Java (most populated island) and Bali (top tourist destination) have been extended to other regions probably at least until the end of July.
As the country is faced with the second highest number of Covid-19 cases in Southeast Asia, the situation is severely pressuring the health sector. Consequently, Indonesia is no exception in imposing and expanding stricter lockdown measures to contain the current wave. However, the government keeps rejecting a nationwide lockdown in order to mitigate the negative economic impact. The economy is nevertheless expected to continue to suffer from the pandemic. Although the pace of vaccination has been accelerating over the past weeks (13% of the population had received one dose by 12 July), there are huge logistics hurdles, such as a challenging access to vaccines and the large population being scattered over thousands of islands. After its first annual negative GDP growth
(-2.1% in 2020) since the Asian crisis was mitigated by softer containment measures, this year’s economic rebound – expected at 4.3% by the IMF in April 2021 – will probably be revised down due to the Covid-19 surge. Business and consumer confidence will indeed remain weak for a longer period, which will harm investments and consumption – key GDP growth drivers. This poor trend also applies to the tourism sector, which accounted for 8% of total current account receipts prior to Covid-19. The recovery of the sector will remain constrained by travel restrictions and the prolonged pandemic.
In compensation, government policies are likely to remain accommodative this year. The fiscal deficit could therefore remain around 6% of GDP in 2021 before gradually declining in the future. Hence, public debt might swell further from 30.6% in 2019 to more than 40% of GDP in 2021. Besides, Indonesia’s important commodity sector (e.g. palm oil, oil and gas, copper, etc.) could somewhat continue to benefit from sustained global demand and higher prices in the next 12 months. The rapid spread of the Delta variant and China’s reduced commodity demand could nonetheless mitigate this evolution. Moreover, slower government reforms and weaker capital inflows represent extra downside risks as long as Covid-19 is around.
Despite the current Covid-19 surge, the short-term outlook is stable for the business environment risk (in E/G), notably characterised by a stable rupiah on an annual basis and low inflation, and for the short-term political risk (in 2/7). For the latter, the resilience of the robust foreign exchange reserves is expected to maintain the reserves at comfortable levels covering over 6 months of imports and more than twice the short-term external debt.
Analyst: Raphaël Cecchi – email@example.com