Indonesian market

SINGAPORE, December 1, 2021 – Indonesian economy has regained traction and is on track to a firm recovery as a result of the government’s effective containment of the Delta variant outbreak and ongoing policy supports, amid strong external demand. Sustaining the recovery momentum in the near-term while accelerating structural reforms to strengthen the country’s resilience and growth potential would be crucial in the post-pandemic new normal. This is according to the preliminary assessment by the ASEAN+3 Macroeconomic Research Office (AMRO) after its virtual Annual Consultation Visit to Indonesia from October 25 to November 19, 2021.

The AMRO team was led by Lead Economist, Dr. Sumio Ishikawa. AMRO Director, Mr. Toshinori Doi, and Chief Economist, Dr. Hoe Ee Khor participated in the policy meetings. The discussions focused on the impact of the COVID-19 pandemic on the economy and policy responses, risks and vulnerabilities, as well as policy challenges moving forward.

Economic developments and outlook

“The Indonesian economy is expected to rebound by 3.8 percent in 2021, and accelerate further to 5.6 percent in 2022,” said Dr. Ishikawa. “Growth has regained momentum as the Delta variant outbreak was rapidly contained, allowing the relaxation of mobility restrictions. In light of continued pandemic uncertainty, the pace of vaccination should be ramped up further and policy measures should be geared toward supporting a sustainable recovery.”

Economic recovery has been boosted by robust exports and stronger domestic consumption. Stellar export performance and an increase in foreign direct and portfolio investment inflows underpinned Indonesia’s strengthened external position as reflected in a stable rupiah and elevated gross reserves of USD145.5 billion, equivalent to 8.5 months of imports, as of October 2021.

Policy responses

Bank Indonesia (BI)’s policy mix has continued to support economic recovery. BI’s policy rate has been kept at a record low of 3.5 percent following six rate cuts since the pandemic. Ample liquidity has been sustained with quantitative easing measures, including BI’s purchase of government bonds in the primary market. As the banking sector’s soundness remains intact, macroprudential regulations on automotive and property loans have been further relaxed, in sync with the government’s tax incentives on car and home purchases to boost domestic demand, as part of the integrated policy package coordinated by the Financial System Stability Committee (KSSK)[1]. Efforts on digitalizing payment systems and enhancing financial inclusion have been also stepped up.

Fiscal policy remains supportive. The government has increased the fiscal support package to about 4.6 percent of GDP in 2021 to combat the impact of the Delta variant outbreak. After a burden sharing scheme introduced for 2020, BI and the government have entered another agreement where BI would contribute to the financing of healthcare spending and humanitarian aids related to the COVID-19 pandemic by purchasing government bonds through private placements in 2021-2022. Debt management measures, including increased usage of cash reserves, have also been adopted. The 2022 Budget is designed to sustain the recovery momentum in view of the continuing uncertainty surrounding the pandemic.

The loan restructuring program, applicable to loans affected by the pandemic, has been extended until March 2023 to provide continued support to businesses and banks.

To support medium-term fiscal consolidation and restore fiscal disciplines post-pandemic, the government has succeeded in pushing through Parliament a comprehensive tax reform package, including an increase in the value added tax rate and a new carbon tax, a signal of their commitment to climate change agenda.

Risks and vulnerabilities

Risks to the near-term outlook continue to stem from possible COVID-19 resurgences and subsequent containment measures that could weigh on Indonesia’s recovery prospects and deepen the disparity across sectors.

Shifting sentiments among global investors, triggered by a sudden and sharper-than-expected Fed tightening, could lead to capital flow reversals and increased volatility in the domestic financial markets. However, a moderating foreign holding of government bonds, strengthened external position and low inflation, should help mitigate possible spillovers.

Tighter financial conditions globally following Fed tightening could increase interest rates and the government debt service burden.

Higher interest payments would, in turn, reduce the room for the government to finance the much-needed capital spending when the fiscal rule of a maximum budget deficit of 3 percent of GDP is restored in 2023.

Fiscal-monetary synergy has been strengthened in response to the ongoing pandemic with the new agreement to finance additional healthcare spending and humanitarian aids until 2022. That said, further extension of the arrangement into the post-pandemic period may create concerns in the markets.

Policy recommendations

Continued vaccination ramp-up and enhanced healthcare capacity are crucial for mitigating the risk of a resurgence in infection. Accelerated disbursement of the fiscal support package and fine-tuning of targeted support will speed up economic recovery.

The authorities may consider adopting a tighter monetary policy stance supported by triple interventions, should the Fed tapering trigger increased volatility in financial markets. External resilience will be supported by BI’s continuous engagement in bilateral, regional, and multilateral financial cooperation.

AMRO welcome the tax reform package as the additional revenue will help support infrastructure spending amid fiscal consolidation post-pandemic. Policy initiatives to improve debt management should continue. Effective communication on a credible exit strategy is crucial.

Ongoing structural reforms, particularly efforts on financial deepening and inclusion, enhancement of the investment climate, and digitalization of the economy, will help boost growth and productivity. Efforts to mitigate the country’s impact on climate change will contribute to the achievement of Indonesia’s sustainable development goals.

The AMRO team would like to thank the Indonesian authorities and other counterparts for their thoughtful comments and candid views. Due to the ongoing COVID-19 pandemic, all meetings for this year’s consultation took place virtually. AMRO wishes to express its appreciation for the authorities’ support and coordination for this arrangement.

[1] KSSK consists of Ministry of Finance, Bank Indonesia, Financial Services Authority, and Deposit Insurance Agency.

Top Row (from L to R): AMRO Director Toshinori Doi, AMRO Chief Economist Hoe Ee Khor, and IMOF Head of Fiscal Policy Agency Febrio Nathan Kacaribu
With participation from the AMRO Indonesia team and IMOF colleagues

Top Row (from L to R): AMRO Director Toshinori Doi, AMRO Chief Economist Hoe Ee Khor, and BI Deputy Governor Dody Budi Waluyo
With participation from the AMRO Indonesia team and BI colleagues

About AMRO

The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization established to contribute towards securing macroeconomic and financial stability of the ASEAN+3 region, comprising 10 members of the Association of Southeast Asian Nations (ASEAN) and China; Hong Kong, China; Japan; and Korea. AMRO’s mandate is to conduct macroeconomic surveillance, support the implementation of the regional financial arrangement, the Chiang Mai Initiative Multilateralisation (CMIM), and provide technical assistance to the members.