Economy: S&P Global Ratings lowered economic forecast for Indonesia for 2021 to 3.4% from 4.4% earlier, while 2022 growth will be higher on base effects at 5.6% from 5.2% earlier. A Covid-19 resurgence is exacerbating downside pressures for Indonesia’s economy and credit conditions, A delayed economic recovery will drag on revenue for banks, most corporate sectors, and the government budget, it said in its report entitled “Indonesia’s Covid-19 struggle”. Existing credit buffers on Indonesian ratings will be chipped away if ongoing lockdowns are prolonged. The ongoing Covid-19 wave is more severe than earlier outbreaks in the country and could have material implications on the operating capacity of the economy due to mitigation measures and voluntary social distancing.

The rating agency said its downside forecast for 2021 is 2.3%, under a more onerous set of assumptions. Movement restrictions reinstated on July 3 may be lifted in a month. However, the degree of uncertainty is high, given extremely contagious variants (such as Delta), limited vaccine coverage in the population, and vaccine shortages. A weaker economic recovery will weigh on the government’s fiscal performance this year, keeping deficits high for longer. It forecasts the general government’s deficit at 6.0% of GDP in 2021, versus the government’s budgeted 5.7% shortfall. A&P also has a negative outlook on its long-term “BBB” sovereign rating for Indonesia.

Automotive: South Korean automaker Hyundai is the first company to announce a plan for EV production in Indonesia, having already set up a US$1.5 billion factory in the West Java town of Cikarang. The company even said its first EV made in Indonesia will roll out as soon as March next year. The factory is currently developing two models of conventional gasoline cars, those with internal combustion engine (ICE). For next year, Hyundai plans to launch two ICE models and an EV model. Around March 2022, we will launch completely-knocked-down EV in Indonesia. The West Java factory has a capacity of up to 200,000 units a year, according to Hyundai.

Hyundai believes that global EV sales will increase dramatically from 2 million units last year to 30 million by the next decade. While Japanese automotive giants appear to be less enthusiastic in EV development, they have pledged new investments in hybrid car production in Indonesia. Meanwhile, in March this year Toyota pledged to add investment by Rp 28.3 trillion, Honda promised Rp 5.2 trillion, Suzuki agreed Rp 1.2 trillion, and Mitsubishi vowed Rp 11.2 trillion until 2024. The Indonesian government seeks to become electric vehicle production hub in the region, aiming for an output of 600,000 electric cars and 2.5 million electric motorcycles by 2030. The country also is preparing an ambitious plan to become a key player in the global supply chain of lithium-ion battery in line with the EV industry.

Finance: Fitch Ratings said that a wave of Covid-19 infections threatens the pace of Indonesia’s economic recovery and heightens risks for the country’s banks and non-bank lenders. Fitch recently lowered its 2021 GDP growth forecast for Indonesia (BBB/Stable) to 4.8%, from 5.3%, due to the risk from rising infections. However, more Covid-19 cases and deaths pose downside risks to this forecast; we expect restrictions recently announced by the government to curb the spread of infections, to dampen economic activity further. Fitch lowered the operating environment (OE) mid-point score for Indonesian banks in March 2020 to ‘bb+’ from ‘bbb-‘ with a stable outlook, as we anticipated weaker operating conditions and heightened downside risks as a result of the pandemic.

Fitch believes the swell in Covid-19 cases is likely to boost the number of borrowers seeking restructuring extensions from banks and non-bank lenders, delaying their return to normal repayment schedules. It also raises the prospect of an extension of regulatory forbearance on loan restructuring to beyond the current planned closing date of end-1Q22 for banks and April 2022 for non-banks. Indonesia’s banks are generally well-placed to cushion the blow. Indonesian bank net interest margins (NIM), which stood at 4.6% at end-1Q21, remain among the highest in the region. Moreover, banks continue to be well-capitalized; the industry average common equity Tier 1 ratio of 22.2% at end-1Q21 was the highest among Fitch-rated markets in Asia. Meanwhile, non-bank lenders’ prudent provisioning and reduced leverage, which stood at 2.0x in 1Q21, underpins the sector’s loss-absorption capacity.

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