Coping with negative growth
Indonesia has already seen the painful impact of the pandemic on its economic growth. For the first time since the Asian Crisis in 1998, when the economy declined by 14%, in Q2 2020, Indonesia's economy declined by 5.32%. In the four months since the official announcement of the first case of Covid-19, the Indonesian government has struggled to fight the pandemic through mobility restrictions (semi-lockdown), and by implementing the new Covid-19 protocols of wearing masks, maintaining physical distance as well as hand sanitizing. Yet the new cases continue to increase, even as of this writing.
The mobility restrictions impacted mostly the transportation sector, hotels and restaurants, and manufacturing, as well as other sectors. During Q2 2020, the worst months were April and May, a time that is usually the peak season of the yearly economic cycle, the Ramadan period. In June, mobility restrictions were loosened gradually so that economic activity started to hum again. However, since the decline in economic activity was so severe, for the entire second quarter the Indonesian economy really felt the pinch of negative growth.
The depressed situation of the economy helped the Indonesian current account for that quarter. While in Q1 2020, the current account deficit reached $3,749 million or 1.36% of GDP, the current account deficit in Q2 2020 declined to $2,896 million or 1.18% of GDP. Since the financial and capital account in the balance of payments recorded a large surplus, the overall balance of payments reported a surplus of approximately $9,245 million, which led the foreign exchange reserves of the Central Bank to increase significantly, to $131,718 million from $120,969 million at the end of March 2020. In July, the foreign exchange reserves of Bank Indonesia jumped to $135,077 million, a record high.
The Central Board of Statistics also released the balance of trade data for July 2020. Exports increased by 14.33% M/M to reach $13,729.8 million, while imports declined by 2.73% to reach $10.466.8 million, resulting in a large trade surplus of $3,263.0 million.
The Central Board of Statistics' inflation report showed deflation for the month of July 2020 at 0.10%. With that performance, Y/Y inflation stood at 1.54%, a level below the target corridor of the Central Bank. The Central Bank was also charged to stimulate the economy to reverse the negative momentum of the effects of the coronavirus on the economy. In the so-called “burden sharing”, Bank Indonesia agreed to purchase government securities in the primary market of almost Rp.400 trillion. This burden-sharing agreement was initiated by the private placement of four series of government securities with a coupon of the 3-month reverse repo rate in the amount of Rp.82.1 trillion during the first week of August 2020.
Bank Indonesia also kept the benchmark rate at 4% at its monthly meeting on August 19, 2020.
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