Emerging

A violent shock hits a solid economy

EcoEmerging// 2nd quarter 2020  
13  
economic-research.bnpparibas.com  
Indonesia  
A violent shock hits a solid economy  
The Covid-19 crisis will have a huge impact on an economy that was already weakened slightly by the slowdown in global trade in  
019. Yet Indonesia’s macroeconomic fundamentals are strong: its public finances are solid, the banking sector is robust and both  
2
companies and households have very little debt. The country has sufficient foreign reserves to cover its short-term financing needs.  
Yet the rupiah is bound to remain under fierce downward pressure: the current account deficit is only partially financed by foreign  
direct investment, and capital outflows have reached unprecedented levels since 31 January.  
Growth  
1- Forecasts  
GDP growth slowed to 5% in 2019 from 5.2% in 2018. This is mainly  
due to the downturn in corporate productive investment in the midst  
of a sharp slowdown in global trade and falling commodity prices  
2
018  
2019 2020e 2021e  
Real GDP growth (%)  
5.2  
5.0  
1.0  
5.4  
Inflation (CPI, year average, %)  
Fiscal balance / GDP (%)  
3.3  
2.8  
2.3  
2.7  
(
attributable to US-China trade tensions). In Q1 2020, economic  
-1.8  
-2.2  
-5.1  
-3.0  
indicators suggest that growth will continue to slow. Industrial output  
contracted in January, and the ongoing decline in capital goods  
Current account balance / GDP (%)  
-2.9  
-2.7  
-2.2  
-2.0  
e: BNP Paribas Group Economic Research estimates and forecasts  
th  
imports (for the 14 consecutive month) does not augur well for a  
rebound in investment. Retail sales also contracted in February for  
the third consecutive month, while automobile and motorcycle sales  
plunged.  
2- PMI manufacturing index: strong decline in March  
PMI manufacturing  
New orders  
Output  
Indonesia will not be spared from the economic fallout of the  
COVID-19 pandemic. At least it is less exposed to the slowdown in  
global trade than the other ASEAN countries like Malaysia, because  
it is not very integrated in global supply chains. The COVID-19 crisis  
will affect the economy via several channels: 1) the contraction in  
tourism, 2) the drop-off in commodity prices, and 3) the decline in  
domestic demand (especially as confinement measures are  
enforced).  
6
5
5
0
5
0
45  
The pandemic’s impact on tourism revenues will not be as strong as  
for the other ASEAN countries like Thailand, since tourism accounts  
for only 1.4% of GDP. Even so, a 50% decline in tourism revenues  
would generate a 0.7 percentage point (pp) decline in GDP growth.  
4
0
2
014  
2015  
2016  
2017  
2018  
2019  
2020  
Source: Markit  
however, growth could contract at -0.4% according to the ministry of  
finance.  
A 2 pp slowdown in world trade would trigger an 11% decline in  
Indonesian exports (which account for 20.7% of GDP), resulting in a  
2
.3 pp decline in GDP growth. Commodity prices fell sharply in Q1,  
 Support measures  
with oil prices down 60%; palm oil, -22%; rubber, -6%; coal, -21%;  
and copper, -22%. This trend is expected to continue in Q2, placing  
a tight squeeze on corporate earnings and investment.  
Since the beginning of the crisis, the monetary authorities have  
lowered the policy rate by 50 bp to 4.5%. However, the central bank  
kept its key interest rates steady in April in order to sustain the  
rupiah.  
So far, the population has not been in lockdown, but if the  
coronavirus were to spread, stricter confinement measures would  
have to be introduced. A lockdown would have severe economic  
and social consequences that would be hard to alleviate given the  
importance of informal employment (55% of the labour market). In  
Monetary authorities also lowered the required reserve ratios for  
commercial banks from 8% to 2%. Swap operations will be carried  
out every day to meet USD liquidity needs. As to fiscal policy, the  
government announced three economic stimulus packages for a  
total of nearly IDR 436 trillion (2.7% of GDP). Moreover, the  
government temporarily scrapped the fiscal deficit ceiling of 3% of  
GDP.  
2019, household consumption contributed more than 54% to growth.  
Assuming household consumption contracts in Q2 before  
rebounding thereafter in Q3, and assuming investment projects  
(
29% of GDP) are postponed by companies until Q4 and by the  
government until 2021, then growth could slow by 4 pp to 1% before  
rebounding in 2021. If the coronavirus were to spread far and wide,  
Key measures include the exemption of manufacturing sector  
employees from income taxes and a 30% corporate tax rebate for  
EcoEmerging// 2nd quarter 2020  
14  
economic-research.bnpparibas.com  
six months starting in April. Food subsidies for low income  
households will be expanded to cover 15.2 million individuals on  
3- Significant capital outflows since January 31  
1
April.  
Equity flows  
USD million per week :  
Debt flows  
Public finances remain solid  
4
000  
Indonesia’s public finances are very solid. In 2019, the fiscal deficit  
and government debt were limited to 2.2% and 30.1% of GDP,  
respectively. Yet the slowdown in domestic activity and the  
contraction in foreign trade will strain government revenues. In the  
first two months of 2020, the fiscal deficit has already widened by  
3 000  
2
1
000  
000  
0
15% compared to the same period last year. The fiscal deficit is  
-1 000  
projected to reach 5.1% of GDP in 2020 but it could exceed this new  
target if the pandemic lasts for more than six months. The public  
debt ratio is also mild at 30.1% of GDP, but more than 60% is held  
by non-resident investors, and nearly 38% is denominated in foreign  
currencies, the vast majority in USD. Even so, from a 2020 horizon  
the refinancing risk is small because debt servicing amounts to only  
USD 10.2 bn, equivalent to 8.1% of foreign reserves.  
-
2 000  
-
3 000  
2017  
2018  
2019  
2020  
Source: IIF  
The rupiah is under fierce pressure  
Indonesia is vulnerable to an external shock because commodities  
(excluding food) account for 51% of exports. It also depends on  
non-resident portfolio investments to finance the current account  
deficit (2.7% of GDP in 2019), because foreign direct investment  
Refinancing risks are small  
In Q3 2019, the debt ratio of households and non-financial  
companies was moderate at 17.8% and 22.7% of GDP, respectively,  
according to BIS data. According to the central bank, the situation of  
non-financial companies was satisfactory in 2019, even though it  
was weakened by the slowdown in global trade and declining  
commodity prices. In June 2019, the debt-to-equity ratio was still  
moderate at 0.58. Corporate assets covered commitments  
(
FDI) is insufficient (1.8% of GDP in 2019). Since 31 January,  
however, portfolio investment outflows have swelled to USD more  
than 11 bn according to IIF, compared to net inflows of USD 12 bn  
in 2019. In the short term, the rupiah is likely to remain under strong  
downward pressure, even though the current account deficit is  
contracting due to the decline in oil imports and the slowdown in  
domestic demand. Indonesia had foreign reserves of USD 113 bn at  
the end of March, which will largely suffice to cover the country’s  
short-term financing needs.  
1
.86 times and the liquidity ratio was 1.21. Companies had  
satisfactory coverage of their debt servicing charges, with a debt  
coverage ratio of 70.5%, while earnings were 2.9 times interest  
payments alone. Yet the situation varies widely depending on the  
sector. Companies in the agricultural sector, and to a lesser extent  
the water, gas and electrical power utilities, were considered to be  
more fragile at year-end 2019.  
Depreciation of the rupiah will automatically revalue the country’s  
foreign currency debt. Since the beginning of the coronavirus  
outbreak, the rupiah has depreciated by more than 18% against the  
US dollar. Yet only 51% of corporate debt is denominated in foreign  
currencies. According to the IIF, international corporate bonds  
reaching maturity amount to only USD 5.3 bn in 2020 and  
USD 6.4 bn in 2021. International loan payments are much higher,  
estimated at an average of USD 17 bn in 2020 and 2021. On the  
whole, however, Indonesian companies can meet their payments on  
international debt denominated in foreign currency. The monetary  
authorities adopted strict regulations requiring companies to cover  
their foreign exchange risk as of 2015 (which were strengthened in  
2016). In Q3 2019, the central bank estimated that 88% of  
companies had covered 90% of their positions. The most fragile  
companies are in construction, real estate, media and retailing,  
sectors that do not generate foreign currency revenues.  
Lastly, the banking sector is also solid and has the capacity to  
handle an increase in credit risk. The doubtful loan ratio was only  
2.5% of total loans outstanding at year-end 2019. Solvency ratios  
were very satisfactory, with a capital adequacy ratio (CAR) of 23.3%.  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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