Indonesian economic growth likely to slow down further in Q2 2020, BI to cut rates further by 50 bps

The Indonesian economic growth is expected to ease further in the second quarter of this year. According to an ANZ research report, the GDP growth is likely to slow down to 0.8 percent year-on-year, in line with the several COVID-19- related social distancing protocols that were carried out. Even if the economy is expected to rebound in the second half of 2020, the rate and depth of growth might be hindered by many headwinds, such as soft consumer and business sentiment, low prices for commodity exports, rising job and income losses, especially in the services sector.

Inflation is greatly a background issue for policymakers currently. It is likely to remain within the central bank’s target band of 2-4 percent in 2020 and 2021 in spite of the possibility of increased food prices. A weak growth environment coming from soft demand might lead to core inflation also treading on the weak side, said ANZ.

The fall in import growth is expected to lead to larger trade surplus as well as a positive contribution from ‘net trade’ in the GDP accounts. This might likely be the case in spite of exports also being affected by soft price realizations and weak global trade. In all, goods trade is expected to lead to a narrower current account deficit of 1.5 percent of GDP, even if the services balance is impacted due to a slump in tourism.

After the relaxation of the State Budget deficit policy, the 2020 budget deficit is now officially expected to rise to 5.1 percent of GDP in 2020. This includes three relief packages announced by the government so far, to the tune of 2.6 percent of GDP.

“We expect Bank Indonesia to continue to provide support on the monetary side, via rate cuts as well as ensuring sufficient rupiah and foreign currency liquidity in the system. Complementing the 50bps of rate cuts since February, we expect two additional rate cuts worth 25bps each (in May and June) bringing the overall policy rate to 4.00 percent in 2020, or 100bps of policy rate support”, said ANZ.

In all, a narrowing current account deficit and BI’s triple intervention might likely keep the rupiah stable in the near term.

“However, risk sentiment will continue to be impacted by how quickly the outbreak is contained domestically. Active cases are yet to peak which will continue to shroud the pace of economic recovery as well the rebound in market sentiment”, added ANZ.