Emerging

A modest recovery

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Eco Emerging // 2 quarter 2021  
economic-research.bnpparibas.com  
7
INDONESIA  
A MODEST RECOVERY  
Having contracted by 2.1% in 2020, the Indonesian economy is likely to see only a modest recovery in 2021. Domestic  
demand is struggling to recover. Consumer sentiment remains weak and any resurgence in the pandemic could un-  
dermine the recovery, at a time when a very low percentage of the population has been vaccinated. Moreover, despite  
the highly expansionary monetary policy, bank lending has continued on its downward trend. The financial position  
of Indonesian companies prior to the Covid-19 crisis was more fragile than those of ASEAN peers, and they are likely  
to seek to consolidate their positions rather than invest in an uncertain future. The banking sector remains solid and  
well-placed to deal with an expected increase in credit risk.  
A MODEST RECOVERY IN 2021  
FORECASTS  
Real GDP contracted in 2020 (by 2.1%) for the first time since 1998.  
Besides, the recovery in 2021 is likely to be modest and below potential.  
2019  
2020e  
2021e  
2022e  
In the fourth quarter of 2020, economic activity still contracted by 2.2%  
compared to the same quarter in 2019 and, in the first two months  
of 2021, it was still smaller than it was at the end of 2019. Domestic  
demand, which is the main engine of growth, remains fragile. Retail  
sales were still 24% below their pre-crisis level and the increase in oil  
prices could hold back the recovery, even though in February, consumer  
price inflation, at 1.4% year-on-year, was well below the monetary  
authorities’ target of 3% +/-1 pp.  
Consumer confidence remains depressed. Consumers havebeenhit hard  
by the crisis due to health measures and the loss of income resulting  
from the fall in employment, with a substantial share of the population  
having no social protection. The Indonesian central statistical agency  
estimates informal employment at more than 60% of the total. In  
addition, the latest surveys of both consumers and corporates showed  
that the situation in the labour market has remained fragile through  
the early months of 2021.  
Business leaders seem to be more confident than consumers. The  
manufacturing sector PMI index was above 50 in March, for the  
fifth month in a row. The increase in imports (excluding oil and gas)  
in February, and particularly that in capital goods, confirmed the  
recovery in industry. That said, investment is unlikely to recover to any  
significant degree until the second half of this year. Although business  
leaders view financial conditions as better than before the Covid-19  
crisis, the terms of lending appear less flexible. In addition, capacity  
utilisation rates, whilst rising, remain below their long-term average.  
The recovery could, however, be undermined by another epidemic wave,  
although since the beginning of February it seems to have lost intensity.  
Vaccination levels remain far too low to protect the population from a  
possible new wave. By the end of March, only 2.4% of the population  
had received a first dose of the vaccination.  
Real GDP growth (%)  
5.0  
2.6  
-2.1  
2.0  
4.2  
1.6  
4.6  
2.1  
Inflation (CPI, year average, %)  
Gen. Gov. balance / GDP (%)  
Gen. Gov. debt / GDP (%)  
-2.2  
30.7  
-2.7  
36.0  
122  
7.1  
-6.2  
40.7  
-0.4  
39.4  
129  
7.3  
-5.8  
43.5  
-1.0  
40.0  
134  
7.4  
-4.5  
45.8  
-2.1  
40.2  
142  
7.6  
Current account balance / GDP (%)  
External debt / GDP (%)  
Forex reserves (USD bn)  
Forex reserves, in months of imports  
e: ESTIMATES & FORECASTS  
TABLE 1  
SOURCE: BNP PARIBAS GROUP ECONOMIC RESEARCH  
DOMESTIC DEMAND IS STRUGGLING TO RECOVER  
Retail sales  
Motorcycle sales  
Car sales  
Based 100 = Dec 2019  
60  
1
140  
1
1
20  
00  
8
0
60  
4
2
0
0
0
2
017  
2018  
2019  
2020  
2021  
CHART 1  
SOURCE: BI  
Against this background, the Indonesian central bank cut its policy  
rate by 25 basis points (bp) to 3.5% in February, in order to bolster  
the economy, at a time when other central banks were raising their A BUDGET TO SUPPORT RECOVERY  
rates. This took the total cut in rates since February 2020 to 150bp.  
In 2021, the Indonesian economy will benefit from a 7% increase in  
The relaxation of monetary policy could, however, be disrupted by  
an increase in oil prices and the rise in US long-term rates. This has  
resulted in capital outflows and downward pressure on the rupiah,  
which has lost 4.3% against the dollar over the first three months of  
1
public spending relative to 2020 . In particular, the finance ministry  
plans to increase infrastructure investment by 47.3%, alongside  
increases in spending on social security and health, education, and  
new generation IT and communication equipment. To help finance  
infrastructure spending, a sovereign wealth fund has been created  
with an initial contribution of USD5 billion from the government, which  
2
021.  
1
Over the first two months of 2021, spending increased by 1.2%.  
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Eco Emerging // 2 quarter 2021  
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hopes that this will be topped up to USD20 billion by a mix of private  
and public investment.  
BANK LENDING CONTINUES TO CONTRACT  
Despite economic growth recovering to between 4.5% and 5%, the  
finance ministry estimates that the increase in government revenues  
will be a modest 6.7%.  
Thus, the government expects only a limited reduction in its fiscal  
deficit, taking it from 6.2% of GDP in 2020 to 5.5% in 2021. Moreover,  
the government’s target of cutting its deficit to 3% of GDP by 2023  
looks difficult to achieve, unless with a drastic cut in spending, as  
reductions in company tax rates and various other tax cuts included in  
the ‘Omnibus Law’ will affect government receipts.  
Against this background, the government’s debt will rise by around  
three points of GDP in 2021, taking it to 43.5%. This will nevertheless  
be lower than in other ASEAN countries, such as Malaysia. There are,  
however, two remaining areas of concern: interest payments will  
account for more than 21.4% of receipts, whilst the domestic bond  
market will be unable to cover the government’s entire financing  
needs. Moreover, since March 2020, foreign investors have limited  
purchases of rupiah-denominated Indonesian debt. By January 2021,  
they held 24.9% of the total stock, down from 38.6% at the end of 2019.  
To address this issue and control borrowing costs, the central bank will  
continue to purchase government bonds on the primary market, as it  
did in 2020.  
Banking credit  
Credit to private companies  
Household credit  
y/y, %  
1
5
0
5
0
5
1
-
-
10  
2017  
2018  
2019  
2020  
2021  
CHART 2  
SOURCE: BI  
At the end of 2020, asset quality remained more than satisfactory:  
the non-performing loan ratio was just 3.2% in February 2021 (from  
2.8% a year earlier). However, this ratio varies from one segment to  
the next (it is nearly 4.9% in retail) and in all likelihood is understated;  
banks can wait until 31 March 2022 before categorising loans as non-  
performing. Meanwhile, according to S&P, loan restructuring increased  
by 18% in 2020.  
VERY EXPANSIONARY MONETARY POLICY  
The central bank helped support the economy through 2020 by adopting  
a very expansionary monetary policy. In addition to policy rate cuts,  
it injected the equivalent of IDR 750.4 trillion (4.9% of GDP), not only  
through purchases of government bonds for a total of IDR 473.5 trillion  
At the same time, the position of companies, which was already  
fragile before the Covid-19 crisis , has further deteriorated following  
(
3% of GDP), but also through substantial cuts in statutory reserve  
2
requirements for banks, which increased liquidity across the sector by  
IDR 155 trillion. As a result, the liquidity coverage ratio hit 226.2% in  
Q2 2020.  
a contraction in revenue. According to the central bank, the interest  
coverage ratio (a measure of the number of times a company could  
make the interest payments on its debt with its EBIT) was only 0.5  
on average in Q2 2020. The ratio was below 1 in all economic sectors  
apart from mining. This is a trend that threatens a sharp rise in credit  
risk.  
Overall, however, banks still have the capacity to deal with the expected  
deterioration in the quality of their assets. They have increased  
provisions (the provisioning rate jumped to 66.3% in Q3 2020, from  
In February 2021, to help support a recovery in lending, the central  
bank also removed the deposit requirement on mortgages and car  
loans (for banks with a non-performing loan ratio of less than 3.5%).  
However, the fall in the average lending rate has been limited. Rates on  
lending for investment have come down by only 90bp on average, and  
those for consumer lending by just 50bp.  
The economic policies adopted jointly by the government and central  
bank have helped support the actors most affected by the crisis, in  
particular small and medium-sized enterprises, which have benefited  
from debt restructuring and government-guaranteed loans. Despite  
this, overall bank lending has contracted. In January 2021, lending to  
business was still 4% lower than in January 2020, whilst lending to  
households had risen by only 0.6%. Banks remain extremely cautious in  
their lending policies.  
5
3.3% at the end of 2019) and their capital adequacy ratio remained  
very comfortable in December 2020, at 23.8%.  
Completed on 9 April 2021  
CREDIT RISK REMAINS UNDER CONTROL  
The banking sector has remained solid so far, despite a fall in  
profitability. Returns on assets and returns on equity fell to 1.5% and  
1
2
0.2%, respectively, by the end of 2020 (from 2.5% and 16% at end-  
019).  
2
According to the IMF’s Article IV report in March 2021, the financial position of Indonesian companies was more fragile than in other ASEAN countries at the end of 2019. The IMF  
estimates that at end-2019, debt stood at 27% of assets, against 22% in the rest of the ASEAN zone. Moreover, for 56% of companies (compared to less than 40% in Malaysia), profits were  
less than twice their interest costs.  
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