Indonesia set for first economic contraction since 1998 crisis

Finance minister says Southeast Asia’s largest economy could shrink by 1.7 percent this year as virus cases surge.

Jakarta To Reimpose Restrictions As Coronavirus Cases Rise
Indonesian private consumption, investments and exports are all set to decline this year, leading the economy to contract in the third and fourth quarters, Finance Minister Sri Mulyani Indrawati says [File: Ed Wray/Getty]

Indonesia’s economy is set to contract for the first time since the Asian financial crisis more than two decades ago as the country struggles to get virus cases under control.

Gross domestic product is forecast to decline 0.6% to 1.7% this year, Finance Minister Sri Mulyani Indrawati said Tuesday at a briefing in Jakarta. The government previously had estimated the economy could grow 0.2% or shrink by as much as 1.1%.

“The recovery is still very early and fragile, so it must be maintained,” Indrawati said.

Southeast Asia’s largest economy is struggling to contain the coronavirus pandemic as the number of new cases each day continues to set records. The worsening outbreak prompted the renewal of social-distancing curbs in the capital, measures that had battered growth in the second quarter.

State Spending

Consumption, investments and exports are all set to decline this year, pushing the economy to contract in the third and fourth quarters, Indrawati said. The government is maintaining its 2021 forecast for growth of 4.5%-5.5%.

Government consumption is set to be the only component showing positive growth of 0.6% to 4.8% this year as the government accelerates spending, she said. However, “it cannot be done alone, it must be accompanied by a recovery in the private consumption and business sectors,” she added.

Other key items from the briefing:

  • State spending as of August was up 10.6% from a year earlier, even as revenue declined 13.1%
  • The government stepped up disbursement of its national economic recovery budget, with 36.6% of the total 695.2 trillion rupiah ($47 billion) rolled out
  • Indrawati said Indonesia needs to learn from other countries in avoiding prolonged deflation, as inflation slowed in August
  • Consumption is seen contracting 2.1% to 1%, investment is expected to fall 5.6% to 4.4% and exports are set to decline 9% to 5.5% this year
Source: Bloomberg