Adrian Wail Akhlas, Jakarta – Household spending in Indonesia, a major contributor to the country's gross domestic product (GDP), is expected to tank this year as more people lose their jobs during the COVID-19 pandemic that has upended business activities, Fitch Solutions projects.
Fitch Solutions researchers said growth in household spending, which accounts for 57.4 percent GDP, would slow to just 1.2 percent this year from 5 percent last year.
"We believe that private consumption will eventually collapse later this year as employment conditions continue to worsen," Fitch wrote in a research note. "Employment conditions are currently in contractionary territory, but individuals expect the situation to remain weak over the next six months."
The government estimates that around 2.9 million to 5.2 million workers could lose their jobs, while around 1.1 million to 3.78 million people could fall into poverty.
Fitch said the current containment measures adopted by the government would disrupt spending but would not lead to an immediate stoppage. Indonesians will ramp up purchases of foodstuffs and discretionary items ahead of the Ramadhan and Idul Fitri period that will begin this week and continue until the end of May, it added.
Fitch Solutions has downgraded Indonesia's economic growth projection to 2.8 percent, down from its initial projection of 4.2 percent, as spending and investment are expected to slow. That compares with the government's 2.3 percent GDP growth projection for this year, the lowest rate in 21 years, with a worst-case scenario of an economic contraction of 0.4 percent.
"We assess that the contraction in the economy could be deeper if the outbreak is not contained over the next quarter, and as such further downward revisions to our 2020 growth forecast should not be discounted," the researchers added.
The government has unveiled a Rp 436.1 trillion budget for COVID-19 stimulus packages, equivalent to 2.5 percent of Indonesia's GDP, primarily for healthcare, social safety net and business recovery programs.
"While the government and the central bank have made aggressive moves to stimulate the economy, we believe that these efforts will not be enough to offset the devastating effects the COVID-19 pandemic will have on employment and public health," the researchers wrote.
The United States-based institution expects that investment growth, as a contributing factor to GDP, will slow to 1.5 percent in 2020, a drastic decrease from the 4.5 percent booked throughout 2019.
"We believe that the segments that will be hit the most during the COVID-19 outbreak will be retail and construction, and as such investments in these sectors will likely contract," Fitch said. Key infrastructure projects could be at risk over the short to medium term as the state budget will be directed to financing the COVID-19 fight and preventing economic meltdown.
Fitch, however, noted there are two factors that could provide a cushion for growth this year namely a small positive net export contribution and expansionary fiscal and monetary policies that could bolster government spending, Fitch noted.
"While we forecast exports to contract 4.0 percent in 2020 compared with 0.9 percent in 2019, imports are expected to fall at a faster rate of 6.5 percent," Fitch said. "Government spending is forecast to grow 4.9 percent to reflect the administration's efforts to ramp up fiscal stimulus via cash handouts and tax breaks for businesses."
Meanwhile, global research firm and consultancy McKinsey & Company projected Indonesia's economic growth to decline by up to 2.7 percent in the second quarter, with a potential to return to pre-crisis levels at the end of the year.
"A more pessimistic scenario, however, would see real GDP fall by more than 4 percent this quarter, followed by a recovery in the middle of 2021," McKinsey wrote in its briefing note.