Ralph van Doorn

Acting Lead Economist

Towards a Secure

and Fast Recovery

Indonesia Economic Prospects, December 2020

Download the Report atwww.worldbank.org/iep

#IEPBankDunia

Fast

Jobs

Fiscal reforms

COVID-19

Sustainable

Reco

very

Equitable

Contact tracing

Vaccine

Firms

Households

Targeted supportHealth

Structural

reforms

Secu

re

Inco

mes

Long-term growth

How well is Indonesia recovering?

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Indonesia and the global economy went

through difficult times this year

After a sharp contraction in Q2, the economy appears

to be slowly turning around

Contribution to GDP growth, yoy

Source: BPS, World Bank staff calculation

5.1

3.0

-5.3

-3.5

-8

-4

0

4

8

Average 2017-2019 Q2 2020

Change in inventories Stat. discrepancy

Net exports Investment

Government consumption Private consumption

Q1 2020 Q3 2020

• Mobility restrictions were

gradually lifted during Q3

• Unprecedented

macroeconomic and fiscal

policy support helped mitigate

the impact of the crisis

Portfolio capital flows and the rupiah

have also recovered from their weakest levels this year

Source: IIF, CEIC, World Bank staff calculations.

Net capital inflows, in USD billionNominal exchange rate, USD per IDR

(index, Jan 1, 2020 = 100)

Q4 2019 Q1 2020 Q2 2020 Q3 2020

-8

-6

-4

-2

2

Oct

-19

Dec-

19

Feb

-20

Ap

r-20

Jun

-20

Au

g-2

0

Oct

-20

Rupiah appreciates

80

84

88

92

96

100

104

Oct

-19

Dec-

19

Feb

-20

Ap

r-20

Jun

-20

Au

g-2

0

Oct

-20

But several sectors that employ many Indonesians

are still in deep contraction, though bottoming out

Source: BPS, Sakernas, World Bank staff calculation

0

20

40

60

80

-40

-30

-20

-10

0

10

20Q2 Q3 Telework (RHS)

GDP growth in Q2 and Q3 2020, in percent yoy - LHS

The share of jobs that can be done remotely, percent - RHS

Unemployment and underemployment have increased

due to the crisis

Source: SAKERNAS round August 2020, and World Bank staff calculation

0

3

6

9

12

15

18

Unemployed Exiting the labor

force

Temporarily not

working

Reduced working

hours

Male Female Urban Rural

People of working-age affected by the COVID-19 crisis, in millions

Data as of August 2020

People have been able to return to work,

but many are earning less

Source: World Bank Indonesia High-frequency monitoring of COVID-19 Impacts Survey (2020), Round 3 conducted between July and August 2020Note: the bars show the share of household breadwinners’ sector of employment, work status and evolution of earnings in July-August 2020

0

10

20

30

40

50

60

0

4

8

12

16

20

Ag

ricu

ltu

re

Manu

fact

uri

ng

Co

nst

ruct

ion

Oth

er

ind

ust

ries

Tra

de, ho

tel &

rest

au

rants

Tra

nsp

ort

, sto

rag

e

an

d c

om

mu

nic

ati

on

Oth

er

serv

ices

Stopped working (LHS) working but earning less (RHS)

Percent of household breadwinners, as of July-August 2020

The government’s fiscal package is mostly spent on

income support and revenue measures

Source: International Monetary Fund (June 2020), World Bank staff estimates. Note: The “other spending” category includes the foregone revenues and tax incentives. Data for Indonesia’s fiscal package is based on the restructured scheme of the package, published in the October 2020 monthly budget report (APBN Kita).

Size of fiscal package, in percent of GDP - LHS;

Percent composition of fiscal package - RHS

4.3

0%

20%

40%

60%

80%

100%

0

2

4

6

8

10

12

14 Other spending

Loans, equity and

guarantees

Extra health-

related spending

Extra spending on

income support &

revenue measures

Total fiscal support

... but with varying degrees of execution rates

Source: Ministry of Finance, World Bank staff estimates. Notes: *Data as of September 21; **Data as of October 14, ***Data as of November 18

Percent of approved budget

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Jun Jul Aug Sep* Oct** Nov***

Health Social Protection Sectoral and SNG spending

Support to MSMEs Tax Incentives for firms

Monthly average

The government has relied on Bank Indonesia to

finance the deficit this year

Source: IMF Global Financial Stability Report (October 2020), and World Bank staff calculations for Indonesia’s bond purchases

0 2 4 6 8

Colombia

India

Turkey

Malaysia

Philippines

Thailand

Indonesia

Sovereign primary market

Sovereign secondary market

Average of emerging markets

1.7 percent of GDP

Central bank purchases of local currency government bonds,

in percent of GDP as of August 2020

1.8Indonesia, slightly above

the average of emerging markets

Non-performing loans are low, but loans at risk

have reached above 20 percent in June

Percent of loans

Source: Financial Services Authority (OJK), and World Bank staff estimates from Bank Indonesia’s Financial Stability Review (Sep 2020)Note: Loans at risk (LAR) ratio is defined as the sum of NPLs, restructured loans and special mention loans

3.1 3.111.6

20.7

0

5

10

15

20

25

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20

Non performing loans (NPL),

LHS

Loans at risk (LAR),

RHS

What is the economic outlook for Indonesia?

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The Indonesia’s economy is projected to be in

recession in 2020 and start rebounding in 2021

Baseline ScenarioActual Projection

2019 2020 2021 2022

Real GDP (Annual percent change) 5.0 -2.2 4.4 4.8

Consumer price index (Annual percent change) 2.8 2.0 2.3 2.8

Government budget balance (Percent of GDP) -2.2 -6.0 -5.5 -4.3

Central government debt (Percent of GDP) 30.2 37.5 40.9 43.0

Current account balance (Percent of GDP) -2.7 -0.7 -1.4 -2.0

Source: BPS, Bank Indonesia, Ministry of Finance, and World Bank staff estimates

And Indonesia will face budget and financing constraints

Source: Ministry of Finance, and World Bank staff projections

Percent of GDP

-7

-6

-5

-4

-3

-2

-1

0

Fiscal

balance

1.0

1.3

1.6

1.9

2.2

2.5

2.8

Interest

expenditure

Percent of GDP

Post-pandemic, fiscal space will be tight …

4

5

6

7

8

9

10

Gross

financing

needs

Percent of GDP

… financing the fiscal deficit

will be more challenging

A surge of new COVID cases, both in domestic and abroad,

that could trigger a tightening of mobility restrictions

Deeper scars from the pandemic shock, where potential and

actual output could take longer to recover

Slower global recovery that could weaken trade and

commodity prices

... and risks are severely skewed to the downside

Under these assumptions, Indonesia’s GDP growth could drop to

-2.5 percent in 2020; 3.1% in 2021; and 3.8% in 2022

How to secure and accelerate the recovery?

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Recommended policy priorities to secure and accelerate the recovery

1Prioritize public health to improve testing

and contact tracing, and to widely administer

an effective and safe vaccine once approved

2

Monitor and continuously improve the

adequacy, targeting and implementation of

the support to affected households and

firms

3Develop a well prioritized fiscal reform plan to

help finance the crisis response and improve

fiscal space

4Advance structural reforms to help lift potential

growth

19

Thank YouIndonesia Economic Prospects, December 2020

Download the Report atwww.worldbank.org/iep

#IEPBankDunia

Portfolio outflows, the Rupiah and bond yields

have also recovered from their weakest levels this year

Source: IIF, BI, BIS, World Bank staff calculations. Note: October 2019 =100 for NEER and 10 -year bond yield

-8

-6

-4

-2

2

4

80

85

90

95

100

105

110

115

120

Capital flows Exchange rate 10-year bond yield

Q4 2019 Q1 2020 Q2 2020 Q3 2020

Exchange rate and bond yield, index – LHS; Capital flows, USD billion – RHS

Rupiah depreciated,

Bond yields surged