“Despite Indonesia’s strong macroeconomic fundamentals, the COVID-19 outbreak has changed the course of the economy, with the external environment deteriorating and domestic demand weakening,” said ADB’s Country Director for Indonesia Winfried Wicklein in a press release on Friday, April 3, 2020.
“If decisive actions to contain the health and economic impacts of the outbreak, particularly to safeguard the poor and vulnerable, can be effectively implemented, the economy is expected to gradually return to its growth trajectory next year,” he stated.
According to ADB’s flagship annual economic publication, Asian Development Outlook (ADO) 2020, the covid-19 pandemic, along with lower commodity prices and volatile financial markets, will have severe implications for the global economy and Indonesia this year, with the country’s key trading partners expecting negative impacts on their economies. Domestic demand is expected to weaken, as business and consumer sentiment wanes. As the global economy recovers next year, Indonesia’s growth is expected to gain momentum, with recently introduced investment reforms providing additional impetus.
Inflation, which averaged 2.8 percent last year, is forecast to edge up to 3.0 percent in 2020, before declining to 2.8 percent in 2021. Inflationary pressure from tight food supplies and currency depreciation is expected to be partially offset by lower prices for non-subsidized fuel, as well as additional subsidies for electricity and food. Meanwhile, export earnings from tourism and commodities are forecast to decline, putting the current account deficit at 2.9 percent of gross domestic product in 2020. As exports and investment resume in 2021, higher volumes of imported capital goods will keep the current account deficit at the same level as 2020.
The government and financial authorities have deployed well-coordinated, targeted fiscal and monetary measures to mitigate the impact of the covid-19 pandemic on the economy and people’s livelihoods. These measures include timely disbursement of social transfers for the poor and vulnerable, as well as tax cuts and loan-payment relief for workers and businesses.
Externally, risks to Indonesia’s economic outlook include an extended outbreak of covid-19, further declines in commodity prices, and increased finance market volatility. Domestically, the outlook will depend on how quickly and effectively the spread of the pandemic can be contained. Constraints in the health-care system, along with the challenges of imposing social distancing, could worsen the impact on the economy.