Triyan Pangastuti, Dion Bisara, Jakarta – A second wave of Covid-19 would derail Indonesia's path to recovering its economy by next year, with unemployment and income losses holding back growth, a study showed.

The government has been keen on reopening shopping malls, offices and manufacturing plants gradually this month to save the economy, ignoring the fact that the number of Covid-19 cases in the country has kept climbing.

"[A]s reopenings gather pace, the focus is now on how big any second wave is likely to be and the implications theses increases may have on the domestic demand recovery," global investment bank Morgan Stanley wrote in a note to clients released on Friday.

The latest report from the Organization for Economic Cooperation and Development (OECD) also did not lend much confidence to the largest economy in Southeast Asia.

The multilateral organization estimated Indonesia's gross domestic product (GDP) would contract by 2.8 percent this year, or by 3.9 percent if a global second wave of Covid-19 infections occurs later in 2020.

In 2021, Indonesia's economy would grow by only 5.2 percent or by 2.6 percent, depending on the second wave scenario.

The projection would result in what economists call a U-shaped recovery – when an economy fails to return to its original trajectory after a shock.

A V-shaped trajectory, on the other hand, means the economy can brush off the shock and grow at a faster pace to return to its original path.

"The recovery will be subdued, with employment and income losses holding back private consumption," the OECD said in its report published on Thursday.

"The socio-economic consequences of the recession will be severe, notably for lower-middle-class groups, which are at great risk of falling back into poverty," the report said.

The outlook was the most condemning of the Indonesian economy so far. The government's worst-case scenario was for a 0.4 percent contraction in 2020.

Masyita Crystallin, a special advisor to the finance minister, said the government remains cautious in maintaining the growth momentum.

"The estimation of economic growth will depend on the effectiveness of the Covid-19 outbreak containment and the extent the new normal can revive economic activity," Masyita said.

So far, the government has expanded its deficit spending, allocating Rp 599 trillion for its so-called national economic recovery (PEN) programs, providing support for the poor, unemployed and small-medium enterprises as well as bailing out state-owned enterprises.

Bank Indonesia, the country's central bank, has slashed its benchmark interest rate, while the Financial Services Authority (OJK) has issued regulations for loan restructuring.

While lauding Indonesia's "swift and substantial" policy response, the OECD urged the country to continue on its path to reform.

"The pandemic emergency reinforces the importance of meeting the long-run targets of eradicating poverty and escaping the middle-income trap through inclusive growth," the OECD said.

Source: https://jakartaglobe.id/business/indonesia-bound-for-ushaped-recovery-report