Coronavirus Update: Indonesia Cuts Interest Rates To Mitigate Impact Of Virus Outbreak

Indonesia, the largest economy in southeast Asia, has taken steps to mitigate the swelling economic impact of the coronavirus outbreak in China, one of the country’s most important trade partners.

On Thursday, Bank Indonesia, or BI, the country’s central bank, cut its benchmark interest rate, the seven-day reverse repo rate, by 25 basis points to 4.75% -- after four cuts totaling 100 basis points in 2019.

BI also slashed its deposit facility rate to 4% and its lending facility rate to 5.5%.

“Monetary policy remains accommodative and consistent with the projected inflation rate and is a pre-emptive measure to maintain the momentum of domestic economic growth amid a stagnated global economic recovery caused by the coronavirus,” BI Governor Perry Warjiyo said.

China is Indonesia's largest trading partner – bilateral trade reached $72.6 billion in 2018. Economists have predicted that the ongoing effects of the virus may reduce Chinese economic growth by up to 1 percentage point this year. This drop will have huge ripple effects across the rest of Asia.

“A drop of 1 percentage point in China’s economic growth will result in a drop of 0.3 to 0.6 percentage points in Indonesia’s [growth],” warned Indonesian Finance Minister Sri Mulyani Indrawati.

Indrawati also said the virus outbreak in China will put pressure on the Indonesian government’s revenue.

The Trade Ministry warned of a sharp reduction in exports, which already fell in January, placing Indonesia’s current account deficit at risk.

Indonesia’s economy had already showed signs of a slowdown even before the virus outbreak – gross domestic product grew by 5.02% last year, down from 5.17% in 2018, as investment and exports tapered off.

BI downwardly revised Indonesia’s economic growth projection to between 5% and 5.4% for this year, down from its earlier estimate of between 5.1% and 5.5%.

Warjiyo further warned of the continuing effects of the coronavirus epidemic.

"Uncertainty is high when we measure the impact of [coronavirus], therefore we say that the impact is V-shaped. [GDP growth] will fall, but then there will be [a] recovery," Warjiyo said. “[GDP] will pick up to 5.2% to 5.6% in 2021.”

First-quarter GDP growth, Warijyo said, could drop to about 4.9%, but would likely rebound to above 5% in the second half of the year.

These estimates were partly based on the assumption by Chinese tourism will drop for a period of six months resulting in $1.3 billion loss of earnings derived from tourism.

But some analysts think these forecasts are overly optimistic, given the unknown risks related to the virus.

“I’m therefore keeping my forecast that BI cuts again by another 25 basis points in the second quarter as growth disappoints, and we’re still not seeing clear indications of more fiscal support,” said Euben Paracuelles, an economist at Nomura Holdings in Singapore.

“The [Indonesian] growth outlook is weak. We have a 5.1% figure but we have highlighted the risk of growth testing the 5% level in the first half of the year,” said Mohamed Faiz Nagutha, an economist with Bank of America Securities in Singapore. “We see the policy rate at 4.5% by mid-year.”

Wisnu Wardana, Bank Danamon's economist in Jakarta, said: "we can sense that monetary policymakers are concerned regarding the effects of [coronavirus] to both Indonesian economic growth and external stability."

But Wardana cautioned that further easing might be limited "without a convergence of global easing.”

Capital Economics also thinks the central bank is unlikely to make further interest rate cuts due to the potential impact of the virus on the rupiah currency, which often exhibits high volatility during periods of capital outflows.

Researchers at the University of Indonesia’s Social and Economic Research Institution warned that the virus outbreak will have an indirect impact on Indonesia’s economy.

“We predict the [virus] outbreak to contribute a potential 10 to 30 [basis point] correction to Indonesia’s GDP growth rate in 2020,” they wrote. “The magnitude of the impact will depend on the length of the outbreak and the economic policy responses.”

While Indonesia has not yet confirmed a case of the virus, the debilitating impact of the virus on the Chinese economy has disrupted global supply chains and harmed Asian tourism due to travel restrictions.

“We expect a significant impact on Indonesia’s trade, tourism foreign exchange earnings and GDP growth from the global outbreak of the coronavirus,” said economist Satria Sambijantoro at PT Bahana Sekuritas in Jakarta.

Indonesia has already seen tens of thousands of foreign visitors cancelling visits to the country.

From January to November 2019, some 1.9 million Chinese tourists visited Indonesia, accounting for 13% of all foreign arrivals.