Country Focus

An optimistic outlook for 2021 following supportive fiscal stimulus

After an economic contraction of -1.5% in 2020, the country’s first since the Asian Financial Crisis, we are cautiously optimistic for growth of 4.3% in 2021. This recovery will be based on businesses and individuals adapting better to COVID-19, plus expectations of a vaccine next year. Greater mobility also has the potential to boost non-essential consumption, such as restaurant dining, clothing and apparel and entertainment, amid pent-up demand largely supported by Indonesia’s young and increasingly middle-income population.

With continued expansionary fiscal policy in 2021, based on a government target of 5.7% of GDP, the key focus will be towards spending on infrastructure and social safety aid. As of 2019, around 90 out of 245 National Strategic Projects (NSP) had been completed, with the remainder expected in 2021 (Figure R4); after being deferred in 2020 due to COVID-19. The prospect for the pace of economic activity to increase should also lead to higher employment and a general positive outlook for the economy going forward.

Equities

The Jakarta Composite Index is expected to grow by 8.0% to 9.0% in 2021, in line with expectations of a COVID-19 vaccine to restore mobility. We favour Financials, Consumer Goods and Infrastructure in 2021 – the first two being defensive sectors with resilient characteristics, while the latter should prosper from the government refocusing on development after forced delays in 2020.

Fixed Income

The combination of negative global yields and low inflation will likely result in yields on domestic government bonds drifting lower. Bank Indonesia (BI) is also projected to slash the benchmark rate a further 25 basis points in 1Q 2021, bringing the seven-day reverse repo rate down to 3.5% by Q1 2021.

Currency

After remaining subdued, we expect the Indonesian Rupiah (IDR) to weaken to 14,300 against the USD by Q1 2021 and 14,400 by Q3 2021, even as low rates might induce capital inflows in conjunction with economic recovery.