Indonesia — COVID-19 adds to economic and financial pressures

Indonesia, the world’s fourth most populous country and Australia’s 12th largest export market, has reported a substantial rise in COVID-19 infections. Reported COVID-19 cases stand at 8,882 including 743 deaths as of April 27. Lockdowns across the entire archipelago, from Jakarta to Bali, will result in sharply weaker private consumption and tourism. Lower global demand for Indonesian commodities, such as coal and gas, will dent goods exports. The IMF forecasts Indonesia to grow just 0.5% in 2020, the weakest rate of expansion since the Asian financial crisis in 1998-99.

The Indonesian rupiah (IDR) has been one of the weakest performing emerging market currencies in 2020. The IDR declined to a 22-year low of IDR16,400 per US dollar on April 4, before paring some losses to stand at IDR15,600 on April 27 (Chart). Global financial market turmoil, twin fiscal and current account deficits, high foreign ownership in local bonds and high reliance on market-based external financing have prompted sharp capital outflows and contributed to IDR depreciation. Lower export commodity prices and prospects for further monetary easing add to currency depreciation pressures.

Indonesia’s response to the crisis includes additional government spending of US$24 billion (2.4% of GDP) and monetary measures including lower interest rates, lower bank reserve requirements, liquidity injections and currency intervention. Such measures will help cushion but not offset the economic and financial shock. Economic woes and currency depreciation will hurt Indonesian demand for Australia’s exports, which amounted to A$8.4 billion in 2018-19 and included mostly crude petroleum, wheat, live animals, coal and tourism and education services.