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Indonesia Encounters Sharp Contraction

Indonesia’s economy is currently under its gravest turmoil as its GDP contracted in Q2 2020, the first time in the last two decades. While the contraction in Q1 1999 is widely caused by the Asian Financial Crisis, the one that Indonesia is facing today is prompted due to the Covid-19 pandemic. The movement restrictions to contain the Covid-19 has shut down major parts of the country, wreaking havoc on businesses and causing lay-offs on millions of workers. According to a survey by Reuters, the GDP decline reached a staggering 5,32%, despite the government's estimate of a 4.3% contraction and several prominent economists' consensus of a 4.6% contraction. The number reflected the massive impact of Covid-19 towards the Indonesian economy, as consumer purchasing power declined and MSMEs froze despite its 60 percent towards the GDP. Data from the National Development Planning Agency (Bappenas) had indicated that 3.7 million workers have been laid off with a predicted 6.3 million until the end of this year. Investments also plunged by 8.61%, compared to the 4.55% increase in the same period last year. The pandemic has truly paralyzed Indonesia’s economy, as its private consumption declined 5.51%, the gross fixed capital formation was down 8.61%, exports declined 11.66% and government spending fell 6.9%. In the end, the government can only expect a full-year growth at a mere 1% at best, or a 0.4% contraction at worst, depending on the severity and nature of the impairment caused by the pandemic

On (8/5) Sri Mulyani denied the statement regarding Indonesia experiencing a technical recession. She stated that the contraction does not mean that Indonesia was experiencing a technical recession as the indicators indicated that the condition of Indonesia's economic growth in the second quarter of 2020 could not be interpreted as a form of a technical recession. Considering that the current contraction is still above the government's estimate for the second quarter of 2020, this is used as a reference by the government and OJK and Bank Indonesia to keep the third and fourth quarters not negative. Suhariyanto said that if Indonesia's GDP based on constant prices in the second quarter of 2020 amounted to Rp2,589.6 trillion, the contraction in Indonesia as compared to the first quarter -4.19% while the cumulative in semester 1/2020 reached 1.26%. On the other hand, Indonesia is optimistic to become the first to recover in Southeast Asia from the COVID-19 pandemic. As a fact, supported by the indicators presented by McKinsey, namely a decrease in real GDP, a projection of 2020 GDP growth, and recovery time to pre-pandemic time, Indonesia is still better than other countries.

Prior to the release of the second-quarter GDP data by BPS, the Jakarta Composite Index (JCI) opened in the green zone with a 0.17% increase to the level of 5,083.41 on Wednesday (8/5). Nevertheless, the increase was short-lived, with a 0.25% drop to 5,062.33 after just 5 minutes following the open of trading. As some parties expected the continuous downfall in the JCI following the late news, the reality hits different repeatedly as the market player responds oppositely, shown in the increase of JCI for 0.17% to the level of 5,083.557 at the close of trading on the same day. Analyst at PT Samuel Sekuritas Indonesia, Suria Darma, said that the increase in JCI was due to capital market players who had predicted a contraction in the number of GDP and the state's economic growth for the second quarter. "The GDP number is already inline with the market's expectation. Our prediction is even -6% YoY. The consensus figure is too low," he told CNBC Indonesia on Wednesday. PT MNC Sekuritas analyst Edwin Sebayang added that current market players have begun to predict an increase in economic growth in the third quarter, considering that economic activity has started to operate. Furthermore, other indicators, such as growth in bank lending, helped boost economic growth during this contraction. However, it is still quite jarring to see that the movement of Indonesia's capital market is disconnected to the macroeconomic conditions the country is facing.



CNBC Indonesia

The Jakarta Post

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