Indonesia Has an Opportunity to Boost Growth

IMF News, March 3, 2021

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Indonesia’s GDP fell 2.1 percent in 2020.
The downturn in 2020 was smaller than other countries in the Asia-Pacific region, reflecting less stringent containment measures and lower dependence on highly impacted sectors like tourism.
Economic activity began to rebound in July 2020 following easing of containment measures and strong government support, driven by government consumption and net exports.
The recovery is expected to be gradual over the current year amid uncertainty over the pandemic’s evolution and slow rollout of vaccinations.
Initial recovery drivers: policy support and an improving global economy; later drivers: greater mobility and confidence as the vaccination program advances.

The National Economic Recovery Program focused on strengthening health care capacity and providing financial support to vulnerable households and businesses.
The central bank purchased government bonds in the primary market as an exceptional, temporary measure to ensure financial market stability.
Indonesia temporarily suspended its pre-pandemic budget deficit ceiling of 3 percent of GDP until 2023.
Recommendation: Return to the deficit ceiling should be gradual and complemented by a well-specified, medium-term fiscal strategy.

The government introduced extraordinary support measures for businesses, including a large-scale loan restructuring program and interest subsidies for the most affected sectors, such as hospitality.
These measures helped avert mass bankruptcies, but credit growth to Indonesian firms remains weak.
Weak credit growth likely reflects a combination of weak loan demand and risk aversion by banks amid underlying corporate vulnerabilities.
Authorities should be vigilant and ready for bolder actions if credit growth remains sluggish, since weak credit would be a drag on economic growth.
The banking system weathered the initial shock due to strong capital positions and regulatory relief measures (temporary relaxation of loan classification standards and liquidity coverage requirements).
Banks should use the window to prepare against possible credit losses through active provisioning and close monitoring of restructured loans.
Supervisors should continue to strengthen crisis management and resolution frameworks to address potential bank failures efficiently.

Sustain financial support for viable firms to underpin the recovery and facilitate restructuring of hard-hit industries.
Prioritize strengthening government revenues: Indonesia’s government revenue (as a share of GDP) is substantially lower than most other emerging countries, including others in the region.
Higher revenues would enable increased spending on:
- education,
- infrastructure,
- health,
- social safety nets.
Additional fiscal resources would also help Indonesia tackle climate change challenges and support the transition to a greener economy.
Appropriate reforms and policy actions can lead to a greener and more inclusive recovery.

By Minsuk Kim and Robin Koepke; IMF, Asia and Pacific Department; March 3, 2021.