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Indonesia warned of risks of economic recovery withdrawing too quickly

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Southeast Asia’s largest economy recorded its first full-year contraction since 1998 last year, as gross domestic product (GDP) fell 2.07% on the back of lower consumption and investment. a conservative budget deficit ceiling of 3% of GDP by 2023 Finance Minister Sri Mulyani Indrawati has repeatedly stuck to the timetable, even due to low tax revenues and the reduced window of cut rates, saying they are optimistic that the economy can grow 5% this year.

“People live off tax support,” said former finance minister Chatib Basri, who argues Indonesia’s 28 million poor needed more support and that COVID-19 restrictions would continue to weigh on saving over the 15 months to vaccinate 182 million. people.

“This means that in 2022 we have to further increase public spending and the deficit has to increase,” he said.

Indonesia’s budget deficit reached 6.1% of GDP in 2020 and this year is expected to stand at 5.7%, with Sri Mulyani nearly doubling the 2021 stimulus budget to over $ 49 billion.

Yet the deficits of emerging markets like Brazil and South Africa have been over 10%.

Earlier this month, Sri Mulyani raised concerns about the early withdrawal of credit rating agency stimulus measures and said Indonesia is constantly evaluating its approach to the pandemic to avoid a severe impact on the credit system. health and economy.

“It’s not just the size of the deficit, but the design … and the efficiency of spending,” she told foreign correspondents last week.

Andrew Wood, sovereign analyst at S&P Global Ratings, said Indonesia’s stimulus withdrawal plans were “difficult” and that healthy economic and income growth would be needed “to achieve a consistent and significant reduction in its budget deficits over the next few years ”.

Meanwhile, the Bank of Indonesia (BI) has pledged to keep interest rates low and liquidity loose for as long as inflation allows, while pricing pressures could emerge in the fourth quarter.

BI, which injected more than $ 50 billion in cash last year, is expected to make its sixth rate cut during the pandemic on Thursday.

Satria Sambijantoro, economist at Bahana Sekuritas, said Indonesia has the option of keeping rates low and warned that “the economic damage caused by the normalization of loose monetary policy too soon … would be much greater than the negative repercussions of tolerating higher than normal inflation. ”

(1 USD = 13,995,000 rupees)

By Tabita Diela and Gayatri Suroyo

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