Impact of the Covid-19 Shock on Banking and Corporate Sector Vulnerabilities in Indonesia

Indonesia’s economic contraction eased and its Covid-19 handling improved in the first quarter of 2021, with at least 13% of the targeted population receiving their first vaccination by the third week of June. The economic improvement was driven by external sectors, but the pace of the recovery differed considerably across sectors. This Survey looks at the balance sheets of corporations and the banking sector in the midst of the pandemic. We find that the worsening of corporate balance sheets may require government intervention to prevent liquidity problems from turning into solvency problems. While the banks’ capital position remains adequate, the deterioration of loan quality, reflecting real sector conditions, is worse than it appears. Recent stress testing of the banking sector confirms the potential vulnerabilities in the sector. We end the article by highlighting policies the government could consider to position Indonesia for a post-pandemic future, particularly over the next two years.