Economic Update Indonesia: the Worst Has Passed But the Near-Term Future Is Full of Challenges
Although in some respects Indonesia has exited the COVID-19 crisis (for example, the economic recession ended in Q2-2021, and the number of new COVID-19 cases and deaths eased significantly), the road ahead is uncertain and full of challenges.
Again, we saw international institutions cut their forecasts for Indonesia’s economic growth in full-year 2021. The Asian Development Bank (ADB) cut its projection from 4.5 percent year-on-year (y/y) to 3.5 percent (y/y). A significant downgrade that is attributed to a much slower and gradual recovery than earlier predicted. And indeed the tighter social and business restrictions that the Indonesian government imposed in early July 2021 play a role too as they undermine economic activity. The ADB also points at ongoing global challenges with upticks in new COVID-19 cases in several nations as well as financial pressure. Meanwhile, the ADB also cut its projection for Indonesia’s economic growth in 2022 from 5.0 percent (y/y) to 4.8 percent (y/y).
At Indonesia Investments we certainly agree with this downgrade because we have been emphasizing since (almost) the start of the pandemic that the recovery cannot be fast but will be very gradual. With many parts of the economy still being idle (such as tourism, household consumption, and investment), economic progress seems to depend, largely, on exports and government spending.
Similarly, the Organization for Economic Cooperation and Development (OECD), has also cut its forecast for Indonesia’s economic growth in both 2021 and 2022. Earlier, this institution expected Indonesia’s gross domestic product (GDP) to expand by 4.7 percent (y/y) in 2021. However, this outlook has been slashed by one percent to 3.7 percent (y/y), while the outlook for full-year 2022 was cut from 5.1 percent (y/y) to 4.9 percent (y/y).
Meanwhile, a number of external uncertainties linger. Global financial markets are on high alert for a number of reasons. Firstly, Chinese property giant Evergrande, which reportedly is the world’s most indebted real estate developer, is facing a huge debt crisis (with tens of millions of dollars for bond interest payments). Secondly, the US government is facing an unprecedented debt default if US lawmakers do not act to raise the federal limit on borrowing and enable the US Treasury department to pay government commitments already approved by US Congress. Thirdly, the US Federal Reserve plans to wind down (taper) its monthly bond-buying program. Such tapering is unlikely to cause the shocks that were seen in the Fed’s previous tapering cycle in 2013-2014. But still, it keeps markets on their toes.
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