Indonesia Slashes Growth Forecast by More Than Half on Virus

Arys Aditya and Karlis Salna
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Indonesia Slashes Growth Forecast by More Than Half on Virus

(Bloomberg) -- Indonesia slashed its growth forecast by more than half as the coronavirus pandemic takes a toll on Southeast Asia’s biggest economy, prompting the government to adopt a series of emergency measures.

The economy is now projected to grow 2.3% this year, compared to an initial estimate of 5.3%, Finance Minister Sri Mulyani Indrawati said in Jakarta Wednesday. Under a worst-case scenario, the economy could contract 0.4%, she said.

Indonesia is scrapping fiscal limits as it ramps up its response to the virus outbreak. President Joko Widodo on Tuesday took a number of emergency measures, including cutting corporate taxes, temporarily removing the budget-deficit cap and allocating 405 trillion rupiah ($24.8 billion) to fight the pandemic.

The new growth forecast is part of sweeping revisions to previous budget estimates announced by the finance minister Wednesday:

Fiscal deficit to widen to at least 5.07% of GDP in 2020 from original target of 1.76%Debt-to-GDP ratio to remain at about 60%Revenue to decline by 10%Annual inflation projected in range of 3.9%-5.1% compared to a previous estimate of 3.1%The rupiah, already down almost 13% in the past month, may tumble to as low as 17,500 per U.S. dollar. Under the worst-case scenario, the currency may plunge to 20,000

Indonesia Scraps Deficit Ceiling as It Ramps Up Virus Response

Indrawati said the spread of the novel coronavirus had created a humanitarian and financial crisis that has lead to high volatility and global panic. “We must improve our response,” she said, adding that authorities think the outbreak in Indonesia may peak as early as this month.

Like many other countries, Indonesia is confronting a crisis on two fronts, with a spike in Covid-19 virus cases stretching the health system to near-breaking point and the economy rapidly deteriorating.

The budget deficit cap of 3% of GDP, introduced in 2003 in the wake of the Asian financial crisis, will be removed immediately, allowing the government to significantly ramp up its stimulus. The government will revert to the 3% cap in 2023.

“Getting the outbreak under control should be the first priority, as successful containment is key for any economic recovery,” said Mohamed Faiz Nagutha, an economist with Bank of America Securities in Singapore. “More support is likely still needed given the downside risks to growth, but the government now at least has the option of doing more.”

Job Losses

There are worries of widespread job losses in a nation where about 70 million of its 270 million population work in informal employment. Tuesday’s steps follow two previous stimulus packages announced since late February.

A decree signed by the president Tuesday also paved the way for the central bank to participate in the auction of sovereign bonds to help the government meet its larger budget financing needs. Bank Indonesia may directly buy the notes to ensure there’s no abnormal spike in yields and only if the market fails to absorb additional supply, Governor Perry Warjiyo said Wednesday. The central bank may be asked to buy the securities as a last option, Indrawati said.

The yield on 10-year rupiah sovereign bonds rose 3 basis points on Wednesday to 7.93%, after rallying 96 basis points in March, the biggest monthly gain since 2013.

(Updates with comment from economist in eighth paragraph.)

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