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Indonesia economy shrinks in 2020 for first time in two decades

GDP plunged 2.07% last year as COVID-19 crippled business activity

A man walks in a quiet Jakarta business district on June 8, 2020.   © Reuters

JAKARTA -- Indonesia's economy contracted in 2020 for the first time in more than two decades as COVID-19 crippled business activity across the archipelago.

The gross domestic product of Southeast Asia's largest economy plunged 2.07% from a year earlier, according to data released Friday -- a marked downturn from 2019 when Indonesia recorded growth of 5.02%.

The median forecast of 17 economists polled by Reuters was for a 2% annual contraction, while Finance Minister Sri Mulyani Indrawati had previously forecast the economy would shrink between 1.7% and 2.2%.

Indonesia's last annual contraction was in 1998, when GDP fell 13.1% amid the Asia Financial Crisis, according to data from the Organization for Economic Cooperation and Development.

While the numbers show Indonesia fared far better than neighboring Philippines, which recorded an annual contraction of 9.5%, 2020 proved to be one of the toughest years Indonesia has endured in its history.

Indonesia never imposed a full-scale lockdown, but looser restrictions on social activities were implemented across the archipelago throughout last year, hampering businesses as well as ordinary families. Biannual unemployment numbers released last year showed that the country's open unemployment rate in August stood at 7.07%, the highest since 2011. Between February and August, 2.67 million people lost their jobs, data showed.

Household consumption, which makes up over half of Indonesia's GDP, dropped 2.63% year-on-year, after growth of 5.04% last year.

Meanwhile, fourth-quarter GDP shrank 2.19% year-on-year, from a contraction of 3.49% in the previous three month period. The archipelago has now endured three consecutive quarters of negative growth.

The government accelerated spending in the fourth quarter to boost consumption, but was only able to distribute 83.4% of its 695.2 trillion rupiah ($49.5 billion) stimulus package by the end of last year.

The finance minister said Wednesday that it will expand its COVID-19 recovery budget for this year to 619 trillion rupiah. The government had initially set a budget of 372.3 trillion rupiah, but lifted that to 553.09 trillion rupiah in late January.

The country is also hinging its hopes on its vaccination program for a speedy recovery, prioritizing those in the working age group, in the hope that they can kick-start economic activity faster.

The government said the improvement in the fourth quarter means the country's economy is headed for recovery.

"Indonesia's economic performance continues to show a direction of recovery and is already on the right track," the country's finance ministry said in a statement. "Going forward, the direction of this recovery will be pushed more quickly, especially with the start of the vaccination in a measured and well-planned manner."

Airlangga Hartarto, the country's chief economic minister, said at a press briefing on Friday that he expects GDP growth to return to positive territory in the three months ending in March, with a growth rate between 1.6% and 2.1%. For 2021, he expects GDP to grow between 4.5% and 5.5%.

The World Bank projects Indonesia will record 4.4% growth this year, but said it is contingent on the gradual easing of mobility restrictions and the wide availability of an effective and safe vaccine.

Sung Eun Jung, an economist at Oxford Economics, said in a memo that the company remains cautious about Indonesia's economic fortunes this year.

"The retightening of mobility restrictions in Java and Bali islands in January will lead to a further weakening of recovery momentum in private consumption," she said.

The economist added that stronger growth in the U.S. and China "present a more favorable" external condition, but "temporary renewed shutdowns to contain the virus may still occur around the world, adding uncertainty to the exports outlook."

Oxford Economics forecasts Indonesia's GDP to grow 4.7% in 2021.

Additional reporting by Ismi Damayanti

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