Indonesian economy 2020: Provisional results

Indonesia has taken an economic hit from COVID-19 with early figures showing a sharp pull back last year.

 

Not surprisingly the sectors hardest hit were transport, and accommodation and restaurants. And interestingly one sector made some slight gains in 2020 as fishery production improved.

The numbers show that efforts to help the people most affected by the pandemic are needed to help move the nation back closer to the 5 – 6% growth of the past two decades.

Our Indonesia Director Kevin Evans believes that economic growth won’t pick up until the second quarter of 2021, and could result in a new electric vehicle industry taking shape. In this piece he takes an in-depth look at the numbers and some of the sectoral and geographical impacts.

The first recession in more than 20 years

Indonesia’s Central Statistics Agency, BPS, has released provisional data regarding growth in 2020. The data showed an economic contraction of 2.1%. This is the first contraction since the Asian financial crisis of 1997-98. Since the turn of this century Indonesia’s economy has produced annual growth rates of 4.9%. Unless indicated otherwise data included in the article is sourced from BPS.

Most notably Indonesia survived the global financial crisis (GFC 2008-09) and also the post resources boom, indeed maintaining quite brisk rates of growth despite many other resource exporting countries suffering significant reversals in growth.

Another feature of growth over the years since its recovery from the Asian financial crisis is that Indonesian growth rates have been very stable within a band between 5% and 6% per year. It is therefore quite clear that the prime cause for this recession is COVID-19 related.

The total value of the Indonesia economy in current prices in 2020 was Rp 15.4 quadrillion; this is equivalent to AUD 1.54 trillion. The per capita income for Indonesians was Rp 56.9 million; this is equivalent to AUD 5,690.

Impact across the regions of Indonesia

The impact of this COVID-19 fueled recession across Indonesia has been varied. While most regions of the country experienced contraction, two regions, namely Sulawesi and the Maluku-Papua regions continued to enjoy modest economic growth.

The above national average rates of growth in Sulawesi continues a trend evident since the start of the century in which several of the fastest growing provinces of Indonesia have been located in Sulawesi, including the largest province, South Sulawesi.

At the same time, as indicated in the column outlining per capita income deviations, despite this faster than average growth Sulawesi remains in “catch up” mode with the national average.

Most concerning of the provisional 2020 results is the region with highest average per capita deviation from the national average, namely in the southeast islands from Bali to West Timor. In this diverse region, where per capita incomes are 47% lower than the national average, this was also the region to suffer the sharpest contraction in economic growth in 2020. As more detailed sub-national data is made available, it may be that the tourist dependent region of Bali, whose people do actually enjoy per capita incomes more than double those of their neighbours in East and West Nusa Tenggara will be seen to have suffered the sharpest decline among these three provinces.

The sectoral impacts

In addition to having a differential impact on growth rates across the archipelago, the recession has also had differential impacts on different sectors of the economy. The two sectors of the economy to have suffered the sharpest contractions during 2020 were the transport sector, which contracted by 15 percent, and the accommodation and restaurant sector which declined by 10 percent. The table below outlines the outcomes for each major sector of the economy in 2020.

At the other end, and of no surprise considering the nature of the epidemic, is that the health and social services sector enjoyed very brisk growth as did the information and communications sector, no doubt supported by many people having to meet virtually and make much more use of the internet and other digital based data sourcing.

Interestingly one sector, which might have been expected to show some growth, was the government services, defence and welfare support sector. This suggests that despite the passage of emergency regulation to boost support for people including some relaxation of tax and other fees, the net impact of this assistance did not create a significant net stimulation for the economy. Given Indonesia’s relatively low levels of indebtedness, it may be that a more ambitious support system that provides economic security to poorest members of society remains viable.

One further sector of the economy, which engages more of the workforce than any other sector of the economy, is the agriculture, forestry and fisheries sector. This sector also managed to produce a modest expansion in 2020. Indeed the result produced in 2020 actually reverses a very long term trend of this sector playing a declining contribution to the national economy.

The graph below demonstrates the steady decline in the contribution of the agriculture, forestry and fisheries sector to the economy. The data from 2001 to 2010 uses the year 2000 as the base year for calculations while the data from 2011 to 2020 uses 2010 as the base year for calculations. The structural adjustments made in updating base years did not hide the fact that the trajectory for the sector has been the same with 2020 the first year to buck that trend.

This sector consists of several sub-sectors. The table to the side indicates the changing contribution of each sub-sector to the national GDP. The major contraction has been from the staple food sub-sector. The forestry and logging sector also showed a decline. Other sub-sectors were relatively stable. The only sub-sector to expand its contribution to the national economy over the past decade was the fisheries sector.

Other sub-sectoral developments

Drilling down a little further to the sub-sectoral levels reveals more starkly the varied developments affecting different sub-sectors of the economy. The table below includes the five sub-sectors of the economy that suffered the sharpest declines and the five sub-sectors that enjoyed the fastest growth.

Air and Rail transportation

2020 was truly an annus horribilis for public transportation, especially for air and rail transport.

The table below indicates the monthly airline passenger movements, domestic and international, over the past 24 months.

The data is sourced from BPS that tracks passenger movements at the five key passenger airports.

The first point to note is that international passenger numbers began to implode about one month faster than domestic passenger departures. Domestic passenger movements have also begun to recover faster than international passenger movements.

The train sub-sector has been severely affected by the coronavirus crisis.

As with the air sub-sector, the collapse in passenger movements commenced well into the first quarter of 2020. Another feature of train passenger movements in Indonesia is that commuter lines serving the wider Jakarta Megapolitan region (approximately 10% of the national population) constitute some 80% of all train passenger movements.

Provision of accommodation

One further sector to suffer a huge contraction is the provision of accommodation sub-sector of the wider tourism and hospitality industry. The arrival of foreign tourists has also collapsed as seen in the side chart.

The most notable exception have been visitors from Timor Leste. While Timor Leste provided some 7.3% of tourists in 2019, in the last eight months of 2020 visitors from Timor Leste provided over 50% of all tourist arrivals! During 2019 Australia supplied 8.6% of foreign tourists to Indonesia. In the post-March 2020 that figure has fallen to 0%.

Closely related to the collapse in tourist arrivals has been a sharp decline in hotel occupancy rates. The chart to the side tracks average hotel occupancy rates over the past two years for Indonesia with the results for the tourist province of Bali included.

We assume the sharp dip in April 2019 may have been connected with the General Elections that took place during that month. The impact of the COVID-19 crisis has clearly devastated the tourist industry in Bali with occupancy rates falling below 10% for several months last year and barely recovering to 20% by the end of the year.

Transport equipment (vehicles)

The results for the transport equipment sub-sector are reflected through data released by Gaikindo (the Association of Indonesian Automotive Industries). Production in 2020 was 578,327 vehicles, some 45% lower than in 2019.

AISI, the Association of Indonesian Motorcycle Industry, reported that motorcycle sales during 2020 reached 3,660,616 motorcycles, some 44% lower than in 2019. Of total sales, exports comprised 700,392 motorcycles, a more modest decline of “only” 14%. It is noteworthy that Indonesia was quite successful in defending its export market despite what must surely have been a very bad year for the industry globally.

In 2019, Indonesian motorcycle exports were valued at USD 1.4 billion, making it the 9th largest exporter supplying 4.9% of the global motorcycle export market. Last year exports comprised 16% of all Indonesian motorcycle sales, the highest level since the middle of the Asian financial crisis in 1998 when domestic sales collapsed by 76% essentially forcing producers to find international markets to maintain survival.

Looking ahead it may well be that it takes some time for the industry to recover to achieve pre-COVID-19 sales.

Indeed it may also be that the new normal for the automotives sector in Indonesia will be a different landscape. Indonesia is now working very hard to attract investment in the electric vehicles (EV) sector. Hyundai is now moving to base its regional EV operations in Indonesia while Tesla is also considering establishing an operation in Indonesia. South Korea’s LG is also investing some USD 10 billion in a major lithium battery factory in Central Java. These developments will also be affected further by the emergence of at least one Indonesian developed and owned electric motorcycle, notably as developed by ITS in Surabaya with its Gesits brand. Indonesia is endowed with plentiful supply of key mineral inputs needed to supply the EV sector such as nickel and copper. Its main import needs will be lithium. To supply the necessary lithium to produce these batteries, Indonesia is fortunate to be located very close to the major global producer of lithium, namely Western Australia.

In terms of the electricity sector needed to fuel EVs, the emerging structural surplus of electricity power generation, especially from the new coal-fired plants on the core Java-Bali grid network, suggests additional demand for electricity from the EV sector would help mitigate the potential damage from stranded power generation assets.

As for an export market for Indonesian produced EVs there is an obvious significant market on the country’s doorstep, namely Australia. The IA-CEPA recognises the potential benefits of the emergence of an Indonesian EV industry. The Australian Government observed on the day the Agreement came into effect that “IA-CEPA also looks to a future where Indonesian electric motor vehicles, a core priority in Indonesia’s industrial development plans, will be available in Australia. Australia has provided the most liberal origin requirements for Indonesian electric motor vehicles of any Australian trade agreement”.

The case of mineral ore mining

The sub-sector with the fastest growth in 2020 was the mineral ore mining sub-sector. In many respects this represented a recovery from the 15% contraction the industry suffered in 2019, meaning that the sub-sector essentially recovered to 2018 levels by the end of 2020.

Recovery – A need to manage expectations

Indonesia’s 2.1% economic contraction in 2020 was its first in a generation. It was also relatively modest by world standards. The IMF estimates the global contraction to have been -3.5%. The five key economies of ASEAN were estimated to have suffered a 3.7% decline, India an 8% decline while developed economies suffered a 4.9% decline. The only significant economy to eek out positive growth was ironically the first nation to suffer the COVID-10 pandemic, namely China, whose economy was estimated to have expanded by 2.3%.

With news that Indonesia suffered this decline in 2020, it may be that people now expect a quick return to growth in 2021. There is every reason to believe that optimism is misplaced.

From all the data presented in this article, it is clear that the Indonesian economy was still humming along at a reasonable rate until well into the first quarter. Looking at issues like vehicle production, passenger movements, it is very clear that levels remain well below those of the first quarter of last year. It is quite likely that the first quarter of 2021 will continue to look a little anemic. There may be an issue of managing expectations by ensuring various economic stakeholders are aware of these dynamics.

It will be the second quarter in which we should expect to see a return to positive growth. As vaccination rates continue to pick up during the second half of 2021, we can all look forward to taking that next trip to Bali for a well earned escape from video meetings and other WFH issues.

Kevin Evans has been a student of Southeast Asia in general and Indonesia in particular for 35 years. During the 25 years he has lived in Indonesia, he has worked variously as a diplomat, stock broker, academic and NGO activist.

Image at top: CNBC Indonesia