Indonesia's recovery depends on effective vaccine roll-outs, fiscal stimulus: economists

HIGH infection rates and tightened social restrictions in Indonesia could weigh down the pace of rebound for Indonesia's economy, a senior economist at the ASEAN +3 Macroeconomic Research Office (AMRO) said on Thursday.

Thi Kim Cuc Nguyen, speaking at "Policy Synergy to Support Economic Recovery in Indonesia", a press briefing organised by AMRO, said this will be further exacerbated if delays or weaker-than-expected vaccine efficacy trigger further lockdowns in major economies.

AMRO's chief economist Hoe Ee Khor said: "The pandemic has proven to be much more difficult to contain. Indonesia's infection rate is still very high.

"(But) Indonesia has been proactive in securing the vaccines and has started the programme, and things seem to be on track."

Currently, rapid vaccine developments have lifted Indonesia's economic outlook for 2021, with most of the downside risk stemming from ongoing uncertainties over the long-term pandemic trajectory.

Dr Nguyen said: "Indonesia targets to achieve herd immunity early next year. In this regard, a swift and effective vaccination programme will certainly facilitate a strong recovery for Indonesia."

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Meanwhile, economic recovery for Indonesia is underway, thanks to a prompt recalibration of the policy mix as well as the enactment of large stimulus measures. This includes the provision of substantial liquidity support through quantitative easing and conducting triple interventions in the spot foreign exchange, domestic non-deliverable forward and secondary government bond markets, to provide cushions against volatility shocks while maintaining currency flexibility.

Dr Hoe said that Indonesia has been able to preserve its credibility through the measures rolled out. "When we compare Indonesia with other emerging markets around the world and in the region, Indonesia has done exceptionally well. Economic downturn has been relatively shallow, and the coordination between the fiscal agency and the central bank has been transparent and clear," he said.

Fiscal packages have been implemented to support household and businesses affected by the pandemic, and 84.3 per cent of the packages had been disbursed as at the end of December. More fiscal packages have been approved for the 2021 Budget to continue supporting households and businesses.

In order to suspend the fiscal deficit ceiling of 3 per cent of GDP between 2020 and 2022, a regulation allowing Bank of Indonesia (BI) to purchase government bonds in the primary market has been issued.

BI has also agreed to finance the public goods package through private placements, absorb the entire interest cost of this package and share part of the interest cost of the non-public goods package related to corporate support.

"Domestic consumption has gradually rebounded in the second half of last year, in tandem with resumed mobility and policy support measures. For the whole of 2020, real GDP contracted by 2.1 per cent, which is quite moderate compared to some other regional peers," said Dr Nguyen.

In the longer run, efforts will be invested in financial deepening and broadening the domestic investor base in particular, to enhance the resilience of the bond market against capital flow volatility shocks.