Prospects in the Indonesian economy for the third and fourth quarter of 2021 remains promising with COVID-19 infection rates reduced to record lows as of mid-September. The government reveals two GDP growth scenarios for the rest of the year: 鈥渉eavy鈥� and 鈥渕oderate鈥�.
Indonesia鈥檚 COVID-19 infections rate has recently dropped to 6% of its peak and falling as of late September. The reproduction rate of COVID-19 infection has dropped to 0.98 and the country has relaxed its lockdown policy, known as PPKM, from the previously highest level of 4 to 3 for a large part of the archipelago. This means that its citizen can now resume economic activity, further increasing the prospects of the Indonesian economy for the rest of the year.
Indonesia鈥檚 trajectory towards recovery was already apparent from the numbers reported for the second quarter of 2021 when, as reported by The Indonesian Central Bureau of Statistcs (BPS), Indonesia鈥檚 economic rebounded with a year-on-year growth rate of 7.07%. This number was partly due to the 鈥榣ow base effect鈥� after Indonesia had hit rock bottom in the same quarter last year in 2020 followed by significant increase in consumption due to the momentum of Eid Al Fitr - a big holiday season and a catalyst for consumption in Indonesia. Indonesia鈥檚 GDP was recorded at Rp 2,684 trillion (US$187.7 million) in the first quarter of 2021 and Rp 2,772 trillion in the second quarter of 2021. In other words, Indonesia was seen as quelling the recession from 2020 when GDP contracted by just over 2% by the end of that year.
Additionally in this period, Bank of Indonesia highlighted that all economic sectors expanded, with the Manufacturing Industry, Trade, Transportation and Storage as well as Accomodation and Food Services sector leading the expansion. Looking deeper towards the composition of foreign trade, exports and imports of Indonesia in the second quarter of 2021 remains relatively unchanged. Exports are still dominated by raw commodities such as mineral resources and precious metals, while imports of the capital goods that consist of machinery and electronic products covered 25% of the total import contributor.
Given the bullish trend in the second quarter, the second wave of COVID-19 cases in July caused by the spread of the Delta variant had resulted in the general public and businesses being on guard for consumption. During this time, the Indonesian government implemented a 鈥榩ush and brake鈥� strategy between handling the health crisis and the economy. Furthermore, as of July 3, 2021, the Indonesian government imposed stricter social and business restrictions known as PPKM. Given that these restrictions only began to be eased from the second half of August 2021, the effects will be felt well into the Indonesian economic third quarter performance.
鈥淔ollowing the imposition of emergency restrictions in Java and Bali, Indonesia's third-quarter economic growth forecast has been revised downwards to a range of 3.7% - 4%. Public consumption constitutes the biggest component of the GDP (national gross domestic product). So, when it is restricted, it will more or less affect economic performance,鈥� said Coordinating Minister for Economic Affairs Airlangga Hartarto, as quoted by Bisnis Indonesia daily.
Two Growth Scenarios
Indonesia鈥檚 economic growth in the third and fourth quarters of 2021 will depend heavily on the implementation of the Emergency PPKM to control the pandemic. Indonesia鈥檚 Minister of Finance Sri Mulyani provided two GDP growth scenarions for Q3-2021: (1) the 鈥渉eavy鈥� scenario with a growth range set at 4.0% to 4.6% year-on-year with a gradual recovery economic activity starting from mid of August; and (2) the 鈥渕oderate鈥� scenario with a GDP growth range set at 5.4% to 5.9% year on year with gradual recovery economic activity starting from September.
A cursory glance at Indonesia鈥檚 industrial output shows that the economy is set to expand again in the third quarter. The manufacturing industry, which led the economic expansion in the previous quarter, had shown a drastic decline of up to 40.1% in July 2021, as reported by the BPS. However, a subsequent report in August 2021, also from the BPS, showed that imports of raw materials and capital goods rose by 8.39% and 16.44% respectively on a month-to-month basis. These two commodities support 74.2% of Indonesia鈥檚 total imports in that month with a value of US$1.68 billion 鈥� an increase of 10.35% compared to July 2021 and 55.26% compared to August 2020.
鈥淭his situation indicates that industrial demand is strong, and capital goods imports reflect the need for increased production capacity," said the BPS Chief Margo Yuwono, as quoted by Kontan daily.
One take-away from this report is that Indonesia鈥檚 PPKM policy, alongside the country鈥檚 vaccination campaign, may have indeed been effective in reducing new COVID-19 cases while at the same giving reasons for optimism as lockdown policies are eased and economic activity are again allowed to reopen. However, Indonesia must remain vigilant in further reopening following the upcoming Christmas and ear end holiday season that could cause another surge of COVID-19 infections and affect the economic growth again. Not far from its borders, despite having more than 80% of its population vaccinated against the COVID-19 virus, Singapore is experiencing a rise in cases following the relaxation of some COVID-19 measures. Currently, Indonesia has decided to reopen its borders to tourists 鈥� though it has also limits the ports from which international visitors can arrive 鈥� while also allowing non-essential businesses to resume Work-From-Office activities at 50% capacity. This gradual reopening must be vigilantly monitored so as to prevent a third wave from happening in the country.