Economy: Fitch Ratings (Fitch) has affirmed Indonesia’s Sovereign Credit Rating at BBB with a stable outlook. According to Fitch, key factors that support the affirmation are a favorable medium-term growth outlook and a low government debt/GDP ratio. On the other hand, Fitch underscores challenges including a high dependence on external financing, low government revenue, and lagging structural features such as governance indicators and GDP per capita compared with ‘BBB’ category peers.
In its assessment, Fitch projects that economic activity in Indonesia to contract in 2020, largely attributable to the impact of the Covid-19 pandemic. The contraction is exacerbated by the effect of social distancing measures on consumption and investment, a temporary deterioration in Indonesia’s terms of trade and the sudden stop in foreign tourism inflows. The strong, broad-based impact of the pandemic on economic activity was illustrated by the 5.3% (year-on-year) contraction in 2Q20. However, Fitch forecasts a rebound of 6.6% in 2021. Economic growth momentum is predicted to continue in 2022, at 5.5%, supported in part by the government’s renewed focus on infrastructure development.
Monetary: Indonesia’s central bank kept its policy interest rate unchanged on 19 August, prioritizing market stability but loosened some lending rules to spur consumption in the pandemic-hit economy. The decision came after the economy shrank 5.32% in the second quarter amid a rising number of coronavirus cases in the country. Bank Indonesia (BI) kept the 7-day reverse repurchase rate at 4.00%, already the lowest since at least 2016, when it started using the rate as its benchmark, as expected by the majority of economists in a Reuters poll. BI has trimmed the key rate four times this year, totaling 100 basis points (bps), in response to the pandemic. These have come on top of cuts totaling 100 bps in 2019 to support economic growth.
In addition, BI has introduced the following measures: (1) Maintaining rupiah exchange rate stabilization policy in line with the currency’s fundamental value and market mechanisms; (2) Strengthening the monetary operations strategy in order to accelerate monetary policy transmission; (3) Lowering the minimum limit of down payment on green automotive loans/financing from 5-10% to 0%, in compliance with prudential principles, effective 1st October 2020; and (4) Strengthening synergy with the banking industry, FinTech, Government and relevant authorities to accelerate digitalization.
Trade: Indonesia recorded the biggest trade surplus in nine years in July as exports rose for a third consecutive month while demand for imports remained weak amid the pandemic. Exports jumped 14.33 percent month-on-month (mom) in July to US$13.73 billion, continuing the upward trend since May. The highest export growth was agriculture and manufactured goods despite the figure being 9.9 percent lower than in the same month last year. Imports stood at $10.47 billion in July, 32.55 percent lower annually and 2.73 percent lower than June, as domestic demand for consumption and raw materials remain subdued amid the pandemic.
The rise in exports and fall in imports led to a US$3.26 billion trade surplus, the highest since August 2011. “It is impossible for exports to immediately return to positive [annual growth] after an economic slump caused by COVID-19, but the [monthly] improvement is an encouraging sign,” according to the Head of Central Statistics Agency (BPS). Going forward, BPS see import growth will remain weaker than export growth due to suspensions in some domestic investment projects and production activities amid the COVID-19 pandemic. The situation might result in a narrow current account deficit.
Business: The retail industry – joined in the Indonesian Retailers Association (Aprindo) – announced its designed mitigation scheme for boosting people purchasing power which comes as a backup plan for the government’s future stimulus for the industry. According to the Aprindo, the association’s mitigation will be broken down into two strategies, which involve adapting to consumer’s purchasing power and improving services and most of all, offering innovations.
The retailers will continue to adapt to the conditions of consumers are in, such as adjusting the value of items and the consumers’ capacity by formulating the upstream sector. Moreover, innovations will come in the form of delivery services, better-utilizing app services, and making available drive-through services. Aprindo revealed that Indonesia’s retail industry is under immense pressure due to the deflation that nearly reaches 2 percent, dropping prices due to weak buying power, and infrastructures hampered by the rules stated under the government’s Covid-19 large-scale social restriction (PSBB).