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Economy

Indonesia's central bank slashes growth forecast on outbreak

Bank Indonesia sees a 2.3% expansion in 2020 as it holds its key rate

The usually congested roads of the Indonesian capital Jakarta are deserted following the implementation of "large scale social restrictions" in the city.   © AP

JAKARTA -- Indonesia's central bank slashed its growth forecast for 2020 but kept its key interest rate on hold, as concerns continue to mount over the impact of the coronavirus outbreak on the country's economy.

Bank Indonesia said Tuesday it now expects the growth rate to come in at 2.3%, significantly lower than the 4.2%-4.6% it projected in its March meeting, and more in line with the forecasts of international institutions. The Asian Development Bank sees growth slowing to 2.5%, while the World Bank projects a fall to 2.1% in its baseline scenario.

"The decline in global economic growth and prevention measures for COVID-19 also have an impact on people's economic activities and impact on the domestic economy," Gov. Perry Warjiyo said. "Social restrictions have an impact on the decline in people's income and production including consumption and investment."

Earlier in the day, Sri Mulyani Indrawati, the country's finance minister, said in the worst case scenario of a prolonged outbreak, the economy could contract by more than 2% in the second quarter, followed by potential falls in following quarters. "Two contractions and we will enter a recession. We strive for this not to happen," she said.

The cut in Bank Indonesia's growth forecast comes as confirmed COVID-19 cases in the archipelago continue to mount. The country had 4,839 confirmed cases and 429 deaths as of Tuesday -- it did not have a single confirmed case at the start of March. The mortality rate of close to 10% is one of the highest in the world.

Jakarta, the country's capital and commercial center, began large-scale social distancing on Friday. With tighter restrictions on people's movements in place, the measure is set to significantly dent the country's economic prospects. Indonesia's tourism sector, which depends heavily on Chinese visitors, has been decimated by the outbreak.

While there are no lockdowns in place, Google's COVID-19 Community Mobility Report reported a 43% drop in mobility trends in retail and recreation facilities.

A total of 1.6 million people have been either laid off or have been given unpaid leave because of the coronavirus related business closures, according to the country's coronavirus task force.

The prospect of weaker growth had prompted Bank Indonesia to cut its benchmark seven-day reverse repo rate in its last two meetings.

The Indonesian rupiah has stabilized. In late March, the currency was trading at its weakest against the U.S. dollar since the Asian financial crisis in 1998, but in the past week or so, it has strengthened around 5% on the back of a slew of stabilisation measures that Bank Indonesia introduced at its last meeting, including aggressive market intervention.

The central bank decided against further cuts in the April meeting. Warjiyo cited "the need to maintain external stability including the exchange rate amid the uncertainty of the global money market."

However, he added, "Bank Indonesia still sees room to reduce interest rate with low inflation [in the country]."

The bank also said it will cut the reserve requirement ratio for banks from May 1 to increase liquidity into the financial system.

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