Indonesia sees risks to growth on virus curbs, natural disasters

Indonesia sees downside risks for economic growth in the first quarter as the government imposed more restrictions to curb a worsening coronavirus outbreak, said the finance minister.

The first quarter is “very tough,” Finance Minister Sri Mulyani Indrawati said in an interview with Bloomberg Television’s Haslinda Amin on Saturday. “We hope in February and March we can still catch up despite the January which is going to be very tough because of Covid and natural disasters.”

She expects the full-year 5% growth target to still be achievable as the mass vaccination program gives “hope and optimism.”

President Joko Widodo expected the economy to rebound as soon as the start of this year, calling 2021 as the year when the country can see a turnaround after last year plunging into its first recession in two decades. But surging numbers of coronavirus cases and deaths prompted the government to limit people’s movement in key economic centers of Java and Bali.

The government also had to contend with a string of natural disasters, including recent floods in Kalimantan, earthquakes in Sulawesi and erupting volcanoes in Java, though the impact on the budget so far is still manageable, Indrawati said.

The country is grappling with the largest coronavirus outbreak in Southeast Asia and is still reporting record-high numbers every few days. It’s banking on a mass inoculation program that’s been slow to pick up. Since Jokowi kicked off the campaign on Jan. 13, more than 132,000 people have received their first doses as of Friday, about 22% of the government’s target for January. Indonesia aims to vaccinate more than 180 million people by the end of the year.

Government’s Homework

Indonesia had to boost its budget deficit to 6.09% of gross domestic product last year, double the regulated ceiling of 3%, to afford stimulus packages including cash handouts, free electricity and credit guarantees to buffer the impact of the pandemic. This year, the government expects to be able to narrow the gap to 5.7% as it can draw on unspent money from last year to buy vaccines and reallocate spending toward more urgent needs, Indrawati said.

After approving a massive overhaul of investment rules through the so-called omnibus law in 2020, the government now seeks to reform the financial sector. Many existing rules for banks and capital markets are outdated as they were set up in the early 2000s, after the Asian financial crisis, the finance minister said.

She is also focused on raising tax ratios, while improving the way capital flows toward actual investments in the country, such as through the new wealth fund.

Indonesia has a lot of potential to offer, “at the same time we also recognize we have a lot of homework to do to improve our investment climate,” Indrawati said. “In this very extraordinary situation we also communicate very clearly in the most credible way how we respond to that extraordinary situation with extraordinary policy.”