Our economic activities have improved and should be maintained by implementing health protocols. Fiscal instruments will continue to support the policy on the health sector as well as economic recovery and public protectionJakarta (ANTARA) - The global economy is gradually starting to rebound as economic gains in China and the United States are driving global improvements, while economies in Europe, Japan, and India continue to languish.
Positive developments in China and the United States are consistent with a flattening of the COVID-19 curve, which has increased global public mobility towards equilibrium in the new normal era, coupled with the impact of extraordinary monetary and fiscal stimuli.
Several early indicators in August 2020 signaled a favorable global economic recovery outlook, including increasing mobility, the current expansionary manufacturing and services, the Purchasing Managers' Index (PMI) trends in the US and China, as well as consumption gains recorded by several indicators.
World trade volume and international commodity prices are rising in the second semester of 2020 in response to a stronger global economy that could potentially surpass earlier projections.
Higher exports in various countries as well as global container indexes point to increasing global trade activity in the third quarter of 2020.
High uncertainty in the global financial markets stems from geopolitical issues between China and the United States, China and India, as well as in the UK. Such inauspicious developments have eroded capital flows to developing economies, except China, and perpetuated currency pressures in such countries, including Indonesia.
The domestic economy is also recovering, albeit gradually in line with public mobility in August 2020, Executive Director of the Bank Indonesia (BI) Communication Department Onny Widjanarko stated.
Export performance improved during the reporting period on the back of higher global demand from the US and China, in particular, for several commodities, including iron and steel, pulp and waste paper as well as crude palm oil (CPO).
Meanwhile, household consumption recorded limited gains in line with ongoing fiscal stimuli in the form of social aid program (bansos) disbursements as well as 13th-month salary compensation for civil servants.
Several early indicators have also improved, such as retail sales, the consumer confidence index, and manufacturing PMI.
Regionally, economic gains were recorded in several regions outside Java endowed with export commodities.
Moving forward, Widjanarko noted that the domestic economic recovery outlook will predominantly be influenced by public mobility in line with the enforcement of COVID-19 protocols in several regions, the speed of realization of central and local government budgets, progress in terms of loan restructuring and guarantees, as well as expansion of the digital economy and finance, with focus on SME empowerment.
Through its policy mix, BI will continue to bolster synergy with the government and other relevant authorities to ensure that the various policies adopted are effective in stimulating economic recovery.
External sector resilience has remained solid in the third quarter of 2020 despite a rebalancing of foreign capital flows in domestic financial markets during the month of September.
A narrower current account deficit is expected, as exports continue to gain momentum coupled with lower imports due to compressed domestic demand, Widjanarko stated.
In August 2020, the trade balance maintained a US$2.33-billion surplus after amassing a US$3.24 billion surplus a month earlier.
In the third quarter of 2020, foreign portfolio investment recorded a net inflow of US$0.13 billion at the end of August 2020 before experiencing a net outflow, totaling US$0.75 billion, in the first two weeks of September 2020 in response to increasing financial market uncertainty, given the global and domestic factors.
On the other hand, the position of reserve assets increased to US$137.0 billion at the end of August 2020, equivalent to 9.4 months of imports or nine months of imports and servicing government external debt, which is well above the international adequacy standard of three months.
Moving forward, BI projects a low current account deficit below 1.5 percent of the GDP in 2020, thus reinforcing external sector resilience.
Inflation remains low
Inflation remained low on the back of weak domestic demand and adequate supply, Widjanarko stated.
In August 2020, the Consumer Price Index (CPI) recorded a deflation of 0.05 percent (mtm), thus bringing CPI inflation for the year to 0.93 percent (ytd).
Annually, low headline inflation was recorded at 1.32 percent (yoy), down from 1.54 percent (yoy) in the previous period.
He remarked that core inflation also remains low on weak demand, policy consistency by BI to anchor inflation expectations, as well as maintained exchange rate stability.
In addition, inflationary pressures on administered prices are mild in response to lower airfares, while volatile foods experienced deflationary pressures in the reporting period as a result of sluggish demand, adequate supply during the harvesting season, and uninterrupted distribution.
BI projects inflation for 2020 and 2021 to remain under control within the 3.0 percent ±1 percent target corridor.
BI has continued to uphold its commitment to funding the 2020 state budget through SBN purchases in the primary market in accordance with Act No. 2 of 2020 through market mechanisms and private placements under the efforts to accelerate the national economic recovery program while maintaining macroeconomic stability, Widjanarko stated.
As of Sept 15, BI had purchased Rp48.03 trillion of SBN in the primary market through mechanisms pursuant to the Joint Decree of the Minister of Finance and Governor of BI issued on April 16, 2020, through auction schemes, green shoe options (GSO), and private placements.
Meanwhile, funding realization and burden sharing to fund public goods in the State Budget by BI through private placements based on the Joint Decree of the Minister of Finance and Governor of BI issued on July 7, 2020, currently stood at Rp99.08 trillion.
Through BI's commitment to purchasing SBN in the primary market, the Government can focus on accelerating state budget realization in order to stimulate national economic recovery.
In addition, BI has realized burden sharing with the Government to finance Non-public Goods-SME totaling Rp44.38 trillion in accordance with the Joint Decree of the Minister of Finance and Governor of BI issued on July 7, 2020.
Accelerated state spending
Finance Minister Sri Mulyani Indrawati has made assurance that accelerated state expenditure realization till the end of 2020 will aid in building the momentum for economic recovery and prevent a further contraction.
“The government has utilized its budget, as can be observed in the 14-percent increase in government expenditure in August 2020, including acceleration of expenditure for economic recovery,” Indrawati stated.
The minister believes the realization of government expenditure will boost economic growth in the short term despite projections of negative growth in the third quarter of 2020.
The increase in government expenditure and the positive movement of the economy indicated a significant recovery. Expenditure realization will continue to be expedited and is expected to bolster growth in the third quarter, Indrawati explained.
However, the minister admitted that government consumption expenditure has not yet fully propped up economic growth, as household consumption, investment, and exports are yet to recover completely.
"Our economic activities have improved and should be maintained by implementing health protocols. Fiscal instruments will continue to support the policy on the health sector as well as economic recovery and public protection," Indrawati added.
The minister also revised Indonesia's economic growth projection for 2020 from the earlier range of minus 1.1 percent to 0.2 percent to a range of minus 1.7 percent to minus 0.6 percent.
The only expenditure component that would still positively contribute to Indonesia's economy by the end of 2020 is government consumption that is expected to grow by 0.6 percent to 4.8 percent, she stated.
While household consumption by the end of 2020 is expected to record a negative growth of minus 2.1 percent to minus 1 percent, gross fixed capital formation (PMTB) is expected to contract 5.6-4.4 percent, and exports by 9-5.5 percent.
Under such circumstances, it is almost certain that Indonesia’s economy will enter a recession or record negative growth akin to other nations affected by the COVID-19 pandemic.
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Editor: Fardah Assegaf
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