Jakarta – Southeast Asia's largest economy is now projected to grow just 3.6 percent this year, far below the government's original estimate of about 5 percent, as the impact of the COVID-19 pandemic is expected to severely hurt trade and manufacturing over the next six months. according to the think-tank.
The Institute for Development of Economics and Finance (Indef) has revised down Indonesia's gross domestic product (GDP) growth projection for the year, with Indef macroeconomics researcher Rizal Taufikurohman estimating that major contributors to economic growth such as household consumption, investment and exports would drop significantly.
According to Indef's economic growth scenario, the pandemic is likely to disrupt the Indonesian economy for up to three to six months, with all provinces affected and Jakarta to be the hardest hit, it said.
The revised Indef projection estimates household consumption dropping 4.8 percent to become the major contributing factor in dragging down the economy.
Indonesia's overall exports would decline 3 percent, while direct investment would drop around 2.4 percent, according to the negative growth projection.
In terms of industrial sectors, Indef projects that processed animal products would see the biggest downturn of 7 percent, followed by electricity at 6 percent.
"The COVID-19 pandemic will cause a doom loop in supply and demand, with the economy disrupted on both sides," said Indef economist Andry Satrio Nugroho.
Indef has also urged the government to impose a lockdown on hot zones across the country to curb the spread of the virus and resolve the public health crisis as quickly as possible.
"A lockdown will greatly affect the economy's supply and demand, which will inevitably bring Indonesia to a recession. But it's a bitter pill that we have to swallow to gain a larger economic benefit in the long run," he said.
Andry also urged the government to invest more in the public health sector, as doing so would increase Indonesia's capacity to combat the outbreak while creating demand for medical equipment.
"We should turn government spending in the public health sector into the main economic driver during the COVID-19 pandemic," he said.
Finance Minister Sri Mulyani Indrawati has announced that the government would reallocate Rp 62.3 trillion (US$3.9 billion) in government spending from the 2020 budget to tackle the outbreak in the country.
She also estimated that the state deficit could widen to between 2.2 and 2.5 percent of GDP this year, taking into account the government's Rp 120 trillion emergency stimulus package to buoy the economy during the health crisis.
While the government seems open to the possibility of increasing the cap on the budget deficit above 3 percent of GDP, Indef senior economist Dradjad Wibowo cautioned against it as a preemptive measure.
"Deficit relaxation should only be a last resort. We should focus on budget reallocation first," he stressed.
The government has prepared a few scenarios on the outbreak's long-term effects on the Indonesian economy.
"If the issue worsens, [and] the COVID-19 outbreak lasts more than six months, international trade falls by 30 percent and the aviation industry faces a shock [drop] of 75 percent, economic growth could reach as low as 2.5 percent or even zero percent," Sri Mulyani said after a limited Cabinet meeting on March 20.
"We hope there will be a vaccine and antiviral [soon]. If these can be developed quickly, the [economic] impacts will surely be of a shorter term," she added. (mpr)