Indonesia could recover with 6.1% growth in 2021: report

INDONESIA could see a recovery of 6.1 per cent growth in 2021, said Fitch Solutions Country Risk and Industry Research in a Nov 6 note, revising their expectation up from an earlier forecast of 3.3 per cent growth.

This was even as they kept their view for a 1.3 per cent contraction in 2020.

Still, with the pandemic far from over, recovery could be bumpy and uneven, the report cautioned.

In the third quarter of 2020, Indonesia's economy contracted 3.5 per cent year on year, tipping it into technical recession for the first time since the Asian Financial Crisis.

But quarter on quarter, the economy grew 5.1 per cent from Q2's 4.2 per cent contraction, "suggesting that fundamentals remain resilient", said the report.

Net exports boosted Q3 growth the most, contributing 1.7 percentage points, while government consumption added 0.7 percentage points.

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Private consumption and gross fixed capital formation saw slowing contraction. On a quarterly basis, all key categories returned to positive growth, apart from imports which contracted 1 per cent.

The analysts expect private consumption growth to be 4.7 per cent in 2021, from -2.2 per cent in 2020, but noted that they were "most cautious" about this category as sentiment has been hardest hit there.

Consumer confidence continued to deteriorate in September, according to Bank Indonesia's latest consumer expectation survey, with consumers remaining worried about economic conditions in the coming six months.

Fitch Solutions' forecast of recovery in 2021 assumes that a Covid-19 vaccine will be made available to emerging markets in the second half of that year.

Fixed capital formation is expected to see 8.7 per cent growth in 2021, from -5.7 per cent in 2020. Bank Indonesia's business survey in Q3 found a significant improvement in sentiment, with sectors such as manufacturing, utilities and construction "becoming more optimistic about the so called 'new normal' in the economy".

Net exports are expected to contribute positively to growth as well, with export growth supported by China's ongoing recovery. Exports are forecast to grow 6 per cent, from -6.5 per cent in 2020, and imports to grow by 5 per cent, from -16.2 per cent.

Import growth in 2021 is likely to be driven mainly by demand from industry and infrastructure development, rather than private consumption, said the report. "Imports could also remain less favoured in Indonesia as the government tries to ramp up consumption of domestically produced items - for instance, media reports have suggested that Indonesia is looking to reduce its imports of asphalt, a key component in road building."

Finally, government consumption is expected to grow 4 per cent in 2021, from 3 per cent in 2020, with the government having said that stimulus measures will remain in place well into 2021.

Fitch Solutions said risks to its outlook are balanced, with much depending on the pandemic's development. If a vaccine is made available earlier than expected, upside risks will emerge; while if vaccine development is delayed and renewed lockdowns occur worldwide, downside risks will surface.