Amidst a potentially destructive global economic downturn, Indonesia鈥檚 macroeconomy and financial system seems to be holding strong with indicators showing a respectable resilience against further capital outflows.
As with all nations in the world, Indonesia is facing a potentially destructive economic downturn. The COVID-19 pandemic threatens to sharply slow world economic growth, with the IMF predicting a 3% contraction globally, as well as a 1% contraction among emerging markets.
Despite the bleak sentiment, fears of a return of the Asian Financial Crisis of 1998 has not prevailed it seems for Indonesia. Its currency did spiral downward to its lowest point of Rp 16,575 per US dollar on March 23. However, thanks to government intervention, the currency has bounced back, reaching nearly pre-COVID-19 levels at Rp 14,881 against the greenback on April 30.
Meanwhile the Jakarta Composite Index is slowly bouncing back, having lost nearly 28% of its value throughout the first few months of 2020. The JCI closed at 4,716 by the end of the trading day on Thursday, April 30, 2020, having fallen to below 4,000 late in late March from 6,299 at the end of 2019.
These two indicators serve as a larger picture of how Indonesia is holding its ground against the economic threats of the deadly pandemic. Aside from implementing various disaster management policies to mitigate the spread of COVID-19 in the archipelago, the government of Indonesia has also issued numerous policies to ensure the stability of the country鈥檚 financial system - such as by striking a US$60 billion repo facility deal with the Fed - as well as to ensure a speedy economic recovery once the COVID-19 pandemic subsides, such as by exempting the poor and middle class from income taxes and by lowering income tax for business to 22% from 25% previously. These efforts are funded by lifting the legal state budget deficit cap to 5% from the prevailing 3%.
In terms of stabilizing the Indonesian economy, these policies appear to be having the desired effect. According to data from Bank Indonesia (BI), as of the fourth week of April, 2020, inflation is being held steady at 0.18% (m-o-m) or 2.78% (y-o-y), much lower than the previous month of March (2.96% y-o-y) and February (2.98% y-o-y). The Indonesian central bank expects inflation to remain under control at between 3 and 1% by the of year.
All in all, BI has spent Rp 386 trillion (around US$24.5 billion) in the first quarter of the year as a form of quantitative easing, and it is planning to spend an additional Rp 117.8 trillion in May by reducing bank鈥檚 minimum statutory reserves (GWM) and revoking their obligation to fulfill the intermediary macroprudential ratio (RIM). In this regard, BI has also been given the power to purchase state bonds from the primary market in order to ensure liquidity. And while these policies have had the indirect effect of strengthening the rupiah, BI鈥檚 position is that the currency is still undervalued when taking into account the potentially lower current account deficit (less than 1.5% of GDP) in the first quarter of 2020.
Financial System Stability
Meanwhile, according to the state financial services authority (Otoritas Jasa Keuangan or OJK), financial services companies in Indonesia continue to grow. Credits from banks grew 7.95% (y-o-y), while the accounts receivables of financing companies grew by 2.49% (y-o-y). Third party funds in banking grow 9.54% (y-o-y), though the insurance industry contracted by 7.51% (y-o-y).
Data from the OJK further shows a balanced risk profile among financial services companies as gross NPL (Non-Performing Loan) rate remains under control at 2.77% (net: 0.98%) and NPF (Non-Performing FInancing) ratio at 2.75%. For banks, non-core deposit is at 112.90%, far above the 50% threshold. Their capital adequacy ratio is at 21.77%, while the risk-based capital of the life insurance and general insurance industries are reported at 643% and 297%, respectively 鈥� far above the requirement of 120%.
In this regard, banks are still able to support the government鈥檚 policy of extending the financing of those affected by the COVID-19 pandemic. As of April 26, 65 banks have provided credit relaxation in the value of Rp 113.8 trillion. As for financing services, as of April 27, as many as Rp 13.2 trillion worth of credit relaxation has been granted.