World Bank Warns Forest Fires Will Cut Indonesian GDP By $5.2 Billion

The World Bank has warned that damages incurred from massive forest fires in Indonesia this year will result in economic losses of at least $5.2 billion, or about 0.5% of the country’s gross domestic product.

Fires raged through eight provinces, including Sumatra and Borneo, from June to November, leading to more than 900,000 people reporting respiratory illnesses, 12 national airports halting operations, and the temporary closure of hundreds of schools in Indonesia and neighboring Malaysia and Singapore. The conflagration destroyed more than 2.3 million acres, the largest such wave of fires since 2015 when 6.4 million acres burned.

“The forest and land fires, as well as the resulting haze, led to significant negative economic impacts, estimated at $157 million in direct damage to assets and $5.0 billion in losses from affected economic activities,” the bank wrote in the report.

The Washington-based bank added: "The agriculture and environmental sectors make up over half of the estimated loss, because fires damaged valuable estate crops and released significant greenhouse gas emissions to the atmosphere," .

As a result, the bank projected Indonesia’s GDP will grow by 5% for 2019 and 5.1% for 2020.

Earlier this month, U.S. ratings agency Moody’s said it expected Indonesia’s GDP will advance only by 4.9% this year and then by 4.7% in 2020 -- the slowest such growth since 2016 – due largely to persistently weak commodity prices, particularly for palm oil and coal.

By 2021, Moody’s added, growth will improve to 4.8% in 2021.

“We’ve seen some decline in commodity prices and as a result, slower economic growth,” Moody’s managing director and chief credit officer Michael Taylor said.

But Taylor added Indonesia will not have its credit rating downgraded, despite the weaker growth estimate. In April 2018, Moody’s upgraded Indonesia’s sovereign rating to Baa2 with a stable outlook, one mark above an investment-grade rating.

“If you compare Indonesia to its rated peer group, it still looks pretty well positioned for this rating. We don’t see upward or downward pressure in Indonesia’s credit rating at the moment,” Taylor said.

Moody’s analyst Tengfu Li warned weak commodity prices will also hurt Indonesia’s banks.

“While commodity prices have recovered somewhat, the level of loans at risk is still elevated if you compare it to its peak in 2016,” Li said. “We are sort of watching this space closely because if the commodity cycle turns again, it will have a material impact on the banking sector.”

Nonetheless, the Indonesia government has embarked on an ambitious program of rapid economic growth.

Through an aggressive promotion of exports and investment, Indonesia seeks to reach a gross domestic product figure of $7 trillion by 2045 (up from about $1 trillion currently).

"This is an ambitious target, of course, it must be pursued in various ways," said Rizal Affandi Lukman, deputy for international economic cooperation at the coordinating ministry for economic affairs.

To upgrade exports and investments, Rizal said the Jakarta government has been engaged in trade talks with various countries.

But for now, Indonesia trade balance fell into a deficit of $1.33 billion in November – the largest such deficit since the $2.29 billion recorded in April.

Indonesia posted total exports of $14.01 billion in November, a 5.67% drop year-on-year, while total imports amounted to $15.34 billion, a 9.24% decline over the past year.

“Slowing international trade due to trade tensions [between the U.S. and China] has resulted in lower demand for Indonesia’s products,” said Suhariyanto, chairman of Statistics Indonesia, a government agency.