Moody’s lauds Indonesia’s economic response but virus containment efforts lag

06-Apr-2020 Intellasia | JakartaPost | 6:02 AM Print This Post

Indonesia’s response to contain the COVID-19 outbreak has been slower compared with some other countries in the region despite policies to limit the economic and financial shock being introduced in a relatively coordinated manner, a credit rating agency has said.

“Indonesia’s response to contain the coronavirus outbreak has lagged some other countries in the region. But its policies to limit the related economic and financial shock have been introduced in a relatively coordinated manner,” Moody’s Investor Service wrote in a research note published on Friday.

An unprecedented increase in the deficit ceiling by the government would allow for more fiscal headroom, although the effectiveness with which additional budgetary space was used would determine the extent of support for domestic demand, according to Moody’s.

“We expect that such measures will at best buffer the impact of the [economic] shock rather than reverse or resolve it,” the research note reads.

President Joko “Jokowi” Widodo signed on Tuesday a government regulation in lieu of law (Perppu) that, among other things, allows the government to widen the state budget deficit to beyond the 3 percent of GDP legal limit as it plans to add Rp 405.1 trillion (US$24.3 billion) to its spending this year to provide more funds for the healthcare system, social welfare safety nets and business-recovery programmes.

The government expects the country’s economy to grow by 2.3 percent this year under the baseline scenario, which would be the lowest level since 1999, or contract by 0.4 percent in the worst-case scenario as the pandemic hits business activity.

Moody’s forecasts Indonesia’s GDP growth to slow to 3 percent, the lowest rate since the 1998 Asian financial crisis, before recovering to 4.3 percent in 2021.

“Although growth in the first quarter will only slow modestly, partial shutdowns across Jakarta and other parts of Java the epicenter of Indonesia’s economic activity indicate that the deceleration will be relatively rapid,” Moody’s vice president Anushka Shah said.

“Meanwhile, the 20 percent drop in the rupiah against the dollar since early February and the spike in bond yields will have economy-wide effects, particularly if prolonged,” Shah added.

The government’s and Bank Indonesia’s (BI) various economic scenarios also include the rupiah exchange rate weakening to between Rp 17,500 and Rp 20,000 per US dollar, which will surpass the Rp 16,950 level recorded during the 1998 crisis.

The local currency, already the worst performer in Asia, traded at Rp 16,430 per US dollar as of 4.42 p.m. in Jakarta, according to Bloomberg data. It has depreciated more than 18 percent since the beginning of the year. The 10-year government bond yield, meanwhile, stood at 8.37 percent on Friday, an increase of more than 100 basis points (bps) since the start of the year.

Sizeable nonresident investment in Indonesia exposes the country to swings in capital inflows, which are then amplified during episodes of global financial market stress, Moody’s says.

“This has economy-wide effects, particularly for the fiscal and external accounts, but also for local businesses. Weaker corporate credit profiles due to higher debt servicing and roll-over costs hurt bank asset quality.”

Indonesia’s capital outflows have reached a total of Rp 145.1 trillion (US$8.78 billion) in the bond and stock markets since the beginning of the year, BI data show.

Jokowi has declared a public health emergency that imposes large-scale social restrictions in an effort to contain the highly contagious COVID-19 disease. As of Friday afternoon, more than 1,900 people in the country were infected with 180 deaths, according to official data.

https://www.thejakartapost.com/news/2020/04/03/moodys-lauds-indonesias-economic-response-but-virus-containment-efforts-lag.html

 


Category: Indonesia

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