Fitch Ratings revised down Indonesia’ economic growth forecasts from 5.1 percent to 4.8 percent in 2020 amid the COVID-19 outbreak, it said on Thursday (03/19) - Photo: Special

JAKARTA (TheInsiderStories) – Fitch Ratings revised down Indonesia’ economic growth forecasts from 5.1 percent to 4.8 percent in 2020 amid the COVID-19 outbreak, it said on Thursday (03/19). Last year, the Southeast Asia’ largest GDP expanded to 5.02 percent, down from 5.17 percent in 2018.

The agency rated, the pandemic places a heavy burden on the state budget and current account with Bank Indonesia’ monetary limit space to support the weakening Rupiah.

Fitch also noted, the virus outbreak will weigh down private spending and weaken the external sector amid disruptions to the trade of goods and services. While, the drop in global oil prices could limit the government’ ability to provide a substantial stimulus to bolster the economy.

Earlier, finance minister, Sri Mulyani Indrawati projected that the domestic economic growth might drop to 4.9 percent in the first quarter of this year, with potential to further plunge in the second quarter. While, Bank Indonesia also cuts Indonesian GDP from 5.0 – 5.2 percent to 4.2 – 4.6 percent and in 2021 5.2 – 5.6 percent, driven by the fiscal side, improvement of the investment climate and the central bank effort.

Fitch also expected Indonesia’ fiscal deficit to widen to 2.8 percent of gross domestic products (GDP) from the previous forecast of 2.5 percent, as the government is expected to cut spending later this year to keep the deficit within the constitutional limit of 3 percent.

The agency also revised up its forecast for current account deficit (CAD) from 2.6 percent to 3 percent of GDP for 2020. In BI’ views, the CAD in 2020 and 2021 are respectively in the range of 2.2 – 2.5 percent of GDP.

Global Economy

Fitch Rating also sees, the coronavirus crisis is crushing global GDP growth. The revision leaves 2020 global GDP US$850 billion lower than in the previous forecast.

“The level of world GDP is falling. For all intents and purposes we are in global recession territory. We have nearly halved the Fitch baseline global growth forecast for 2020 to just 1.3 percent from 2.5 percent in 2019,” said Brian Coulton, chief economist at Fitch Ratings in his latest report.

But, he asserted, the agency could very easily see an outright decline in global GDP this year if more pervasive lockdown measures have to be rolled out across all the Group of seven economies. Emergency macro policy responses are purely about damage limitation at this stage but should help secure a ‘V-shaped’ recovery in 2H20, although this assumes that the health crisis eases.

The shock to the Chinese economy has been very severe. GDP is likely to fall by over 5 percent (not annualized) in first quarter (1Q) of 2020 and to be down by 1 percent in annual basis. Falling GDP in China is virtually unprecedented and, in the near term at least, these numbers look worse than most previous hypothetical ‘hard-landing’ scenarios.

The good news is that the daily number of new COVID-19 cases in China has fallen very sharply, which should pave the way for a marked economic recovery in 2Q of 2019, high-frequency indicators already point to this starting in March.

Nevertheless, the delayed impact of supply-chain disruptions and lower Chinese demand on the rest of the world will continue to be felt profoundly for some time, particularly in the rest of Asia and the eurozone.

Moreover the rapid spread of the virus outside China has prompted sharp declines in travel and tourism, and the cancellation of business and leisure events worldwide as ‘social distancing’ takes hold. And some other large advanced countries – most notably Italy and Spain (and more recently in France, though after our forecast numbers were finalized) have engaged in aggressive official lockdown responses similar to those seen in China.

These countries are likely to see very size-able outright declines in GDP in the coming months. The interruptions to economic activity seen in China – and now in Italy – are on a scale and speed rarely seen other than during periods of military conflict, natural disasters or financial crises.

While there is huge uncertainty, quarterly declines in GDP of 3 to 5 percent (not annualized) in a full lockdown scenario look feasible. The risk is that we shortly see these abrupt interruptions happening simultaneously across all major economies as the global pandemic spreads.

“Our baseline global economic forecasts have been aggressively lowered. Even though we expect a recovery in China from 2Q20, Chinese growth is expected to fall just 3.7 percent for the year as a whole, down from 6.1 percent in 2019. We forecast Italian GDP to fall by 2 percent this year and Spanish GDP by almost 1 percent,” said Coulton.

The baseline forecasts do not yet assume that full-scale lockdowns take place in across all the major European countries or the United States (forecasts were finalized on March 16). But even on this basis we now expect Eurozone growth to be minus 0.4 percent this year.

The baseline forecast for US growth is 1 percent in 2020 compared with a pre-virus outlook of 2 percent and GDP is expected to fall by 0.5 percent (or 2 percent annualized) in 2Q. This reflects the likelihood that travel, tourism, and business and leisure events will be disrupted for months, the collapse in the equity market, lower business and consumer confidence, and other disruptions to US economic activity that are emerging as authorities seek to contain the virus.

“We expect global growth to fall to 1.3 percent in 2020 from 2.7 percent in 2019, which would be weaker than global downturns in the early 1990s and in 2001,” he adds.

The high risk of escalating lockdown responses across the major economies means that the chances of a weaker outcome are very substantial. A downside variant to our baseline forecast shows global GDP falling this year – an extremely rare occurrence in the post-war period – with GDP in Europe down by over 1.5 percent, US GDP down by nearly 1 percent and Chinese growth slipping to just over 2 percent.

Emergency macro policy responses are being announced on a massive scale, following a similar playbook to the global financial crisis. These include aggressive interest rate cuts, huge injections of central bank liquidity, macro-prudential easing and the creation of credit support facilities.

Large-scale fiscal stimulus packages and the unveiling of hundred billion dollar-scale sovereign credit-guarantee schemes are also being used to help the private sector withstand shocks from measures necessary to contain the health crisis.

“Rapid and large-scale macro policy responses are all about damage limitation in the near-term, but policy easing should help GDP normalize and recover quickly in the second half of the year on the assumption that the health crisis subsides,” said Coulton.

“However the uncertainties here are huge and we are really only at the beginning of the process of trying to understand the full impact of the crisis on the world economy,” he concluded.

Written by Staff Editor, Email: theinsiderstories@gmail.com