Update COVID-19 in Indonesia: 70,736 confirmed infections, 3,417 deaths (9 July 2020)
6 July 2020 (closed)
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Despite (modestly) accelerating economic growth since 2016, concerns about Indonesia's gross domestic product (GDP) expansion persist. Indonesian Coordinating Minister for Economic Affairs Darmin Nasution said he expects Indonesia's economic growth to slow in the first quarter of 2018 (compared to Q1-2017) as the peak of the nation's big harvest is expected to occur in the second quarter this year (while last year it fell in the March/April period). Meanwhile, credit growth has remained bleak in Indonesia.
The shift of Indonesia's big harvest to a later period also means that the Indonesian government will have to carefully monitor price movements of agricultural products and respond immediately before inflation peaks (for example by allowing more imports of certain products). Nasution added that the contribution of the agriculture sector to Indonesia's GDP will be somewhat undermined in the first quarter of 2018 due to the different timing of the big harvest period.
However, with the big harvest shifting from last year's March-April period to the second quarter in 2018 also implies that Indonesia's GDP should get a boost in Q2-2018.
Meanwhile, Nasution is pessimistic about credit growth in Indonesia in 2018. While the central bank targets to see a rebound from a credit growth pace of 8.3 percent (y/y) in 2017 to the range of 10-12 percent (y/y) in 2018, Nasution expects to see a similar growth pace as seen in 2017. Last week Indonesian President Joko Widodo had gathered key directors and commissioners of four state-owned banks, 27 regional development banks, 75 private banks, and eight branches of foreign banks at the Presidential Palace in Jakarta and urged them to leave their "comfort zone" and become more willing to boost credit growth even though it would come at the risk of rising non-performing loans and a lower capital adequacy ratio, both of which are at safe levels currently. Rising credit growth would boost economic activity, hence helping Indonesia to reach the government's GDP growth target of 5.4 percent (y/y) in 2018.
Bhima Yudhistira, economist at Indef, said Indonesia's economic growth will ease to 4.95 percent (y/y) in the first quarter of 2018 as household consumption, investment, and export are all not growing at significant levels, while these three indicators are vital for Indonesian economic growth. For example, the 1.8 percent drop in domestic retail sales in January 2018 is a bad sign. This is partly caused by a delay in the disbursement of the government's social assistance program, while food inflation was high in January 2018.
Also regarding direct investment Yudhistira is pessimistic as the government has still not finalized its new online single submission (OSS) system, part of the investment licensing reform agenda. Meanwhile, regarding export Yudhistira said Indonesia faced a trade deficit in the first two months of 2018.
But a positive factor is that government spending has already reached 8.8 percent of the full-year target by February (up from 7.5 percent in the preceding year). Disbursement of government funds should give a boost to the local economy.
Meanwhile, Project Consultant of the Asian Development Bank Eric Sugandi said Indonesia's GDP growth is likely to fall below the government's target of 5.4 percent (y/y) in 2018. He expects a growth rate of 5.3 percent (y/y), but would not be surprised if it would fall below his prediction.