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Indonesia to post first annual GDP contraction in over two decades

  • The government has pledged to improve stimulus distribution this year and also expanded its 2021 relief budget.
Published February 3, 2021

JAKARTA: Indonesia is expected to post its first annual contraction in gross domestic product (GDP) since 1998 after the pandemic battered business activity and consumption last year, according to a Reuters poll on Tuesday.

The median forecast of 17 economists polled was for a 2% contraction in GDP for 2020, compared to 5.02% growth in 2019.

For the fourth quarter, the median forecast of 19 economists was also for a 2% drop from a year earlier, compared to a 3.49% contraction in the third quarter.

Indonesia's Finance Ministry had predicted a GDP contraction of between 2.2% to 1.7% last year.

"In the fourth quarter, there have been some improvements in mobility, consumer confidence, middle-class spending," Bank Central Asia economist David Sumual said, while noting the pandemic would continue to weigh on the economy this year.

Indonesia has suffered the worst COVID-19 outbreak in Southeast Asia, with its case load accelerating in recent months and reaching more than 1 million cases in January.

Bank Danamon economist Wisnu Wardana, who expects a 1.78% contraction in 2020 GDP, said Indonesia's economy held up better than initially anticipated thanks to an improvement in government stimulus distribution.

The government accelerated spending in the fourth quarter to boost consumption, but by year-end had only distributed 83.4% of its 695.2 trillion rupiah ($49.59 billion) stimulus, which was partially funded by the central bank.

Bank Indonesia cut its benchmark policy rates by 125 basis points last year and injected liquidity into the financial system, but warned that cautious commercial banks and weak demand were hampering the recovery amid slow credit growth.

The government has pledged to improve stimulus distribution this year and also expanded its 2021 relief budget.

"In 2021, economic activity is expected to improve, mainly due to the vaccination programme," said Josua Pardede, an economist at Bank Permata, referring to the inoculation drive launched last month and predicting growth in the 3-4% range.

The median forecast of 16 economists in the poll was for 4.5% growth in 2021. Bank Indonesia sees between 4.8% to 5.8% growth this year.

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