Indonesia boosts financial crisis plans to cope with coronavirus

Indonesia has bolstered its procedures to prevent a financial crisis during the coronavirus outbreak, the finance minister has said, flagging a worst-case scenario of an economic contraction this year and the rupiah currency hitting a record low.

Finance minister Sri Mulyani Indrawati on Wednesday said the protocol to help failing banks has been upgraded to allow for early responses by all financial authorities as part of an emergency regulation that President Joko Widodo announced on Tuesday.
Widodo signed the regulation to give room for more spending and to allow the budget deficit to widen, waiving a cap of a deficit of 3 percent of gross domestic product (GDP) for three years.

He also unveiled plans for 405 trillion rupiah ($24.65bn) of additional spending to cushion the effect of the viral outbreak on Southeast Asia’s biggest economy, which would expand the 2020 fiscal deficit to 5.07 percent of GDP.

The economy is expected to grow by 2.3 percent in 2020, but the government has prepared for a worst-case scenario of a contraction of 0.4 percent, Indrawati told an online news conference. The upper end of the forecast is less than half the government’s earlier projection of 5.3 percent GDP growth this year.

Indrawati’s scenarios also include the rupiah falling further to a range of between 17,500-20,000 to the US dollar, the weakest on record.

Bank Indonesia (BI) Governor Perry Warjiyo later stressed these scenarios were not an outlook and were to be avoided.

He said the current exchange rate level was “adequate”. The rupiah weakened after the announcement to 16,430 at 06:00 GMT, from 16,380 before.

Indrawati described the new procedures as “extraordinary measures” and pledged authorities would adhere to careful governance. Despite, for example, the new protocol giving room for BI to purchase sovereign bonds directly from the government, she said such a move would be a last resort.

Other provisions include allowing the government to lend to the Indonesia Deposit Insurance Corporation – a government agency that insures bank deposits and saves failing banks – easing rules on BI’s short-term liquidity lending and allowing the Financial Services Authority to restructure banks or even merge lenders if needed.

Governor Warjiyo stressed Indonesia would not impose capital controls.

The new plan also includes a cut in the corporate tax rate to 22 percent effective immediately until 2021 and a further trim to 20 percent starting in 2022.

Anushka Shah, sovereign debt analyst at Moody’s Investor Services, said a 5 percent fiscal deficit level would be below the median of countries with a similar investment grade to Indonesia’s.

Indonesia’s known cases of coronavirus have gone from none in early March to 1,528 to date, with 136 deaths as of Tuesday.

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