INDONESIA IN A COVID-19

WORLD
ECONOMICS AND STRATEGY
ARUP RAHA

Please refer to important information

at the end of this report
INDONESIA IN A COVID-19 WORLD

Summary and Conclusions

 This is an unique shock as it is both demand and supply, external and internal
• The first stage of shock was to external demand, value chains and tourism
• The second stage was to risk aversion; Indonesia worst hit
• The third stage was a domestic response
 Social, monetary, and fiscal
• The fourth stage involves collateral damage – firms exit, defaults, bankruptcies
 Scenarios:
• Base case involves lockdowns end by mid-May, limited collateral damage, slow recovery
• Modestly worse -- longer lockdown; slower in 2020; better in 2021
• W – shaped – the virus returns
 Asset prices
• Currency – watch outflows term bond yields
 Currency is the release valve
• Policy rates -- constraints
• Long term bond yields Growth, inflation; US yields (?); fiscal deficit; risk aversion
• Questions:
• Debt monetization – inflation; currency; BI independence;
• Will Indonesia need the IMF?
• Anything else?

2
HINTS FROM CHINA’S Q1 GDP PRINT

BNP Paribas Consensus 20 (% y/y ytd)

Actual
forecast forecast
10
GDP: Q1 y/y -6.8% -8.4% -7.7%
0
GDP: Q1 q/q -9.8% -12.4% -12.0%
-10
IP: Mar y/y -1.1% -10.0% -6.2%
-20
FAI: Mar y/y -16.1% -15.0% -15.0% FAI growth Manufacturing
-30
Infrastructure Property
Retail sales: -40
-15.8% -12.0% -10.0%
Mar y/y Jan-18 Jul-18 Jan-19 Jul-19 Jan-20

60 (% y/y, rolling 3mth)

15 (% y/y) (%) 50
50
10 40 40
30
5 30 20
10
0 20
Household disposable income 0

-5 Household consumption expenditure 10 -10

-20 Export to EU Exports to US
Saving propensity (RHS)
-10 0 -30 Exports to ASEAN
2014 2015 2016 2017 2018 2019 2020 2010 2012 2014 2016 2018 2020

3
 INDONESIA: SOME TRENDS
60% 100%
Contribution to Real GDP growth %y/y
50% %y/y 80%
12.0%
40%
10.0% 60%
30%
8.0% 20% 40%
6.0% 10% 20%
4.0% 0% 0%
2.0% -10%
0.0% -20%
-20%
-2.0% -30% Retail Sales (LHS) -40%
-4.0% -40% Imports of consumer goods (RHS) -60%
Sep-11

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Sep-18

Sep-19

Sep-20
Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

Mar-20

May-10
Sep-06

Apr-11

Sep-17
Jan-03
Dec-03

Jun-09

Jan-14
Dec-14

Jun-20
Nov-04
Oct-05

Feb-13
Jul-08

Nov-15
Oct-16
Aug-07

Mar-12

Aug-18
Jul-19
Consumption Fixed Investment Change in Stock
140% Net Exports GDP %y/y 20%
%y/y %y/y
120% 18% 10000 140,000
Capital goods imports (USD, %y/y) USD mn USD mn
100% 16%
Raw materials imports (USD, %y/y) 120,000
14% 5000
80% Real Investment (%y/y)
12%
60% 100,000
10% 0
40%
8% 80,000
20%
6% -5000
0% 60,000
4%
-20% 2% Monthly change in
-10000 reserves (LHS)
-40% 40,000
0%
FX Reserves (RHS)
-60% -2%
-15000 20,000
May-06

May-11

May-16
Jan-03

Jan-08

Jan-13

Jan-18
Nov-03
Sep-04

Sep-09

Sep-14

Sep-19
Nov-08

Mar-12

Nov-13

Nov-18
Jul-05

Mar-07

Jul-10

Jul-15

Mar-17

Jul-20

May-07
Apr-00
Jan-96

Sep-01

Apr-17
Sep-18
Jun-97

Dec-05

Jan-13
Jun-14
Nov-98

Feb-03

Oct-08

Nov-15

Feb-20
Jul-04

Mar-10
Aug-11
4
SCENARIOS

GDP growth under different scenarios

Base Case Slow Recovery Extra Lockdown W-Shaped

2020 2021 2020 2021 2020 2021 2020 2021

China 1.5 9.5 0.7 8.9 0.6 9.8 0.3 8.7

Indonesia 1 5.4 0 3.5 -2 3 -4 1.5

Malaysia -2 5 -3 3 -4 2.5 -5 2

Thailand -4 3 -5 2 -6 2 -8 3
Source: BNP Paribas, Macrobond

5
ASEAN: WHAT’S THE RELEASE VALVE FOR OUTFLOWS?
Domestic Debt (% of GDP)
External Debt Reserves % of short
(% of GDP) term debt Corporate Financial
Government Houshold Total
Sector Sector
Indonesia 21.3 1.9 21.3 22.6 8.7 17.7 70.3
Malaysia 32.5 0.9 54.1 67.9 30.6 68.4 221.0
Thailand 14.4 2.7 33.3 47.3 38.5 68.7 187.8

Indonesia
Event Policy Rates (bp) 10y rates (bp) USDIDR(%)
GFC 150 900 38%
Taper Tantrum 175 350 20%
China devaluation 0 280 17%
2018 175 260 14%
Covid -19 -50 150 14%
Malaysia
Event Policy Rates (bp) 10y rates (bp) USDMYR(%)
GFC -150 -110 3%
Taper Tantrum 0 70 6%
China devaluation 0 30 21%
2018 25 40 6%
Covid -19 -50 -20 7%
Thailand
Event Policy Rates (bp) 10y rates (bp) USDTHB(%)
GFC -250 -170 4%
Taper Tantrum -75 10 11%
China devaluation -50 0 12%
2018 0 50 6%
Covid -19 -50 -20 8%
Source: BNP Paribas, Macrobond

6
INDONESIA: 10 Y BOND YIELD

• In medium term, we expect bond

yields to remain volatile and
slowly come down

• Risk is rising global risk aversion

and hence outflows

• We expect the bond curve to

remain steep due to higher bond
supply to fund increased fiscal
deficit (>5% of GDP)

• Inflation is not a threat

Source: BNP Paribas, Macrobond

7
INDONESIA: 3 QUESTIONS

1. How will the current account deficit go?

 Two creative ways to look at it:
 Savings, Investment
 Capital Account and Reserves.
2. Could Indonesia go the IMF?
3. What are the implications of debt monetization?
 Inflation
 Instability
 Currency
 Central Bank Independence

8
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