Indonesia’s economy faces first annual slump in over 2 decades

Indonesia’s economy suffered its first full-year contraction in over two decades in 2020, shrinking slightly more than expected in the fourth quarter as the COVID-19 pandemic continued to hit consumption and business activities.

Southeast Asia’s largest economy shrank 2.19% on an annual basis in October-December, the statistics bureau data showed on Friday. Economists in a Reuters poll had expected a smaller 2% contraction after a 3.49% slump in the previous quarter.

Gross domestic product (GDP) fell 2.07% from a year earlier, the first full-year contraction since the 1998 Asian financial crisis, after growing 5% in 2019.

That was slightly bigger than the 2% contraction forecast in the Reuters poll, and roughly in the middle of the government’s forecast range for a 1.7%-2.2% fall.

“All sectors of spending in 2020 still posted contractions, except for the government spending ; but generally, not as deep as in Q3 or Q2, which indicates improvements,” the head of the statistics bureau Suhariyanto, who only goes by one name, told a virtual news conference.

Indonesia’s economy fell into recession last year as the country struggled to get its COVID-19 outbreak under control. It has the highest caseload and death toll from the respiratory disease in Southeast Asia. The government will focus on accelerating spending and attracting investment to further boost the economic recovery, Indonesia’s top economics minister Airlangga Hartarto said on Friday, giving a forecast for 1.6% to 2.1% growth in the first quarter of 2021.

The government also maintained its 5% growth target this year based on hopes that its vaccination campaign, which kicked off in January and aims to inoculate over 180 million people within a year, will boost business and consumer sentiment.

“The economy is counting on a vaccine pivot this year to allow normalisation to gain a foothold,” said Radhika Rao, a senior economist at DBS, adding that Indonesia’s coronavirus curve had not yet stabilised.

The data on Friday showed household consumption, which represents more than half of Indonesia’s GDP, shrank more slowly in the fourth quarter.

It contracted 3.6% after a 4.1% slump in the previous three months, partly due to a temporary easing of coronavirus restrictions.

Jakarta imposed a second round of coronavirus curbs between September and October, and restrictions were reinstated last month due to a spike in cases.

Investment fell 6.2% after 6.5% drop in the previous quarter. Government spending was up just 1.8%, well below the previous quarter’s 9.8% growth.

Wellian Wiranto, OCBC economist, revised down his bank’s outlook for 2021 GDP growth to 4.9% from 5.2% following the data and predicted stronger support from policymakers.

“Looking at the details of the data, momentum in key components appears to remain rather weak, signalling that the hope for a smooth-sailing recovery in the early months of 2021 may be challenged,” he said.

Finance Minister Sri Mulyani Indrawati said this week she would boost the government’s economic recovery budget in 2021 to nearly match the 692.5 trillion rupiah ($49.39 billion) allocated for pandemic relief programmes last year.

Bank Indonesia, which delivered 125 basis points of rate cuts last year and pumped $50 billion of liquidity into financial markets, has pledged to use all policy instruments to support the economic recovery in 2021.

Meanwhile, Indonesia will no longer permit mining waste to be disposed in the ocean to allay concerns about the environmental impact of processing nickel used in electric vehicle (EV) batteries, a government official and a corporate mining source said.

The Southeast Asian nation, the world’s biggest nickel producer, has not officially banned so-called deep sea tailings (DST) but by not issuing new permits it could delay planned projects and complicate efforts to dispose of waste.

Proponents of DST say it is cheaper and less harmful to pipe waste into the sea, especially on tropical islands where earthquakes or heavy rain limit storage, but critics says the impact of such marine disposal is poorly understood.

“There is no written regulation yet, but the policy is to not issue permits for deep sea tailing for any future projects,” Jodi Mahardi, a spokesman for the Maritime and Investment Affairs Coordinating Minister, told Reuters.

Up to now only one nickel mine in Papua New Guinea is using DST, according to global producer association the Nickel Institute.

Indonesia currently uses the disposal method at its second-largest copper mine, run by PT Amman Mineral Nusa Tenggara.

Indonesian nickel projects seeking permission for DST did not receive an outright rejection, but a lengthy wait meant that land tailings eventually become