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Indonesia Economic Snapshot

Economic Forecast Summary (June 2020)

The economy contracted sharply in the first half of 2020 and GDP is set to shrink by 2.4% this year, the first recession since 1998. The 2021 rebound, provided containment measures are lifted, will be only partial. With lingering concerns about the health situation and consumer and business confidence remaining low, growth is projected to remain below trend in 2021, with severe consequences on incomes and living standards, before picking up to 5% in 2022. Trade prospects, however, are supportive, as key Northeast Asian markets recover and new agreements including the Regional Comprehensive Economic Partnership (RCEP) come into force.

In a few months, the pandemic reversed some hard-won advances in well-being, with poverty, malnutrition, and even hunger rising fast. The credibility built up by the central bank over the years through wise use of its independence – a fragile achievement that must be preserved – has permitted an unconventional policy mix of rate easing, liquidity injection and asset purchases. Fiscal policy has been relaxed, within the structural limits of extremely low tax revenue. The policy imperative is to protect citizens from sudden further shocks: devote more resources to assistance programmes, improve targeting and monitoring, and establish a proper unemployment insurance system. In the longer run, further improvements in well-being and growth require ambitious reforms to boost human capital formation. Reform momentum is returning, as shown by the Omnibus Bill on Job Creation passed in early October.

 

Economic Survey of Indonesia

Indonesia is Southeast Asia's largest economy, rich in all types of natural resources as well as cultural diversity. A young and dynamic democracy, it is urbanising and modernising rapidly. In contrast with most OECD countries and many emerging economies, around half of the population is under 30 years old, and the working-age population ratio is set to rise during the next decade (United Nations, 2017).

Two decades after the 1998 Asian Financial Crisis, and one decade after the Global Financial Crisis, Indonesians’ living standards are far higher than before, and their economy is more resilient. GDP per capita has risen by 70% during the past two decades. The end of the commodity price boom weighed on incomes and government revenues, yet GDP growth has remained around 5%, and per capita income has increased by almost 4% annually. Poverty rates have fallen in both rural and urban areas (Figure 2, Panel A). Distribution has also improved of late: the Gini coefficient on consumption has been declining since 2015. Confidence in the national government is higher than in any OECD country (Panel B). Prudent macroeconomic policies and progress in structural reforms have been recognised by credit rating agencies, and Indonesia has climbed up international rankings of competitiveness and the business environment. Since 2015 Indonesia has leapt 34 places in the World Bank’s Ease of Doing Business ranking to 72nd.

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