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Economy

Indonesia cuts key rate, buys bonds to soften coronavirus impact

Move aimed at supporting growth despite no cases confirmed in country

Bank Indonesia Gov. Perry Warjiyo presided over 100 basis points of cuts to its key rate last year.   © Reuters

JAKARTA -- Indonesia's central bank on Thursday cut its key interest rate for the first time in four months, as concerns grow over the impact of the new coronavirus on the economy.

Bank Indonesia lowered its benchmark seven-day reverse repo rate by 25 basis points to 4.75%. Sixteen of 28 analysts surveyed by Reuters had anticipated the move.

Gov. Perry Warjiyo said the central bank had purchased 27 trillion rupiah (nearly $2 billion) worth of government bonds to combat capital outflows related to virus fears. "That is our commitment to Rupiah stabilization. That is how BI stabilizes the rupiah [from the] impact [of] COVID-19."

The action follows easing moves by other Southeast Asian countries. The Thai and Filipino central banks lowered their benchmark rates earlier this month to support the economy in anticipation of the virus hurting their economies.

"The board discussions included how the occurrence of COVID-19 since the beginning of January until now [affects] not only China, but also globally and Indonesia," Warjiyo said at a news conference. "This is part of the assessment to take preemptive policy [measures]."

Warjiyo added that the economic impact will be short, with a V-shape recovery to come. Nevertheless, the bank marginally downgraded its GDP growth forecast for this year to between 5.0% and 5.4% from 5.1%-5.5%. Bank Indonesia expects the country to grow 5.2% to 5.6% in 2021.

He said that first quarter growth will be lower than 5%, but added that the bank expects growth to rebound in the third and fourth quarters.

Gareth Leather, senior Asia economist at Capital Economics, said the consultancy doubts the latest decision will mark the beginning of a prolonged easing cycle.

"Indonesia is not especially exposed to the downturn in China. Indonesia receives few Chinese tourists relative to the size of its economy," he said. "It also doesn't have much exposure to Chinese supply chains, so should not be too adversely affected by factory shutdowns in China."

Indonesia has yet to record any cases of the virus. All 238 Indonesians evacuated in January from Wuhan, the epicenter of the outbreak, tested negative after a two-week quarantine period. But with direct flights to and from mainland China suspended, the holiday island of Bali is suffering from hotel cancellations.

Bali welcomed 1.1 million Chinese visitors in 2019 -- around 20% of all arrivals, and more than twice the total in 2014. Tourism makes up 6% of Indonesia's gross domestic product.

The central bank said that the tourism sector stands to lose $1.3 billion in foreign exchange earnings should flight restrictions remain for two months and foreign tourist arrivals decline consecutively for six months.

China is Indonesia's main trade partner, and its impending virus-triggered slowdown is set to drag on the archipelago's economy. The Center of Reform on Economics, a local think tank, said in a report that a 1% fall in China's growth translates to 0.3% slide in Indonesia.

Indonesia was already suffering from decelerating growth. The country's real GDP grew 5.02% last year, down from 5.17% in 2018, despite the central bank lowering its key rate by a combined 100 basis points.

The country is relatively shielded from the global economic slowdown, as it lacks deep integration with international supply chains. But it is a resource exporter, and declines in commodity prices brought on by weaker global demand have hurt the economy. Data also show that growth in private consumption, which accounts for more than half of Indonesia's GDP, remains lackluster.

Heavy infrastructure spending by the government of President Joko Widodo has not been able to lift Indonesia's growth rate significantly, with the figure hovering around 5% during his first five-year term, which began in 2014. Some experts say the country needs an annual growth rate of around 6% to ensure there are enough jobs for people entering the labor market each year.

To boost economic growth, the government has put forward a draft omnibus law on job creation and investment, which packages a number of legal revisions into a single vote. Among the proposed changes is the opening up of almost all business sectors to foreign investment, and making it easier for startups to hire foreign talent.

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