High Hopes for the Omnibus Law
It is no longer a surprise to hear economists and business people say that the global economy is in a sluggish state. That is reality.
Global economic data shows an increasingly weakening trend in the economy due to the pessimism caused by the prolonged US-China trade war. The US economy, which at the start of the trade war in 2018 grew 2.9 percent, is predicted to grow only 2.3 percent this year and is likely to be only 2 percent next year.
The US manufacturing index in November was only at level 48, meaning below level 50 for four consecutive months. Therefore, it turns out that the trade war started by Trump has had a negative impact, not only on the Chinese economy but also on the US economy. There have been predictions that China\'s economic growth will fall next year to only 5.8 percent.
The bond market in the US has reflected an economic slowdown, namely the decline in yields of long-term US Treasury Bonds in the past year from 3.0 percent in October 2018 to 1.7 percent in December. However, the stock market in the US seems to still be "unworried" because the Dow Jones stock index continues to rise. Maybe investors expect a decline in US interest rates will be able to cure the sluggishness of the US economy. What we must consider in the first quarter of 2020 is whether Trump will reduce the tension of the trade war or put more pressure on China, meaning he does not care about the impact on the US economic recession.
Therefore, it turns out that the trade war started by Trump has had a negative impact.
If Trump continues the trade war, the slowdown in the US economy will ultimately cause a decline in the stock market in the US and this will have an even worse impact on stock markets in developing countries. Several international economists predict US economic growth will decline again from 2.9 percent in 2018, to 2.3 percent this year, and to 2.0 percent in 2020.
In Europe the conditions are also not encouraging. Germany, the largest economy in Europe, showed a negative Manufacturing Orders Index of 0.4 percent in October. Economic growth in China, as the second-largest economy in the world, has continued to decline from 6.6 percent in 2018 to 6.2 percent this year, and is expected to further drop to 6.0 percent in 2020, maybe even 5.8 percent. Monetary easing alone will not be enough to stimulate investment. Optimism will only exist if Trump reduces the tension of the trade war in early 2020.
Domestic economy is contracting
Domestic economic conditions are not much different from global conditions. Economic growth in the third quarter of 2019 was only 5.02 percent compared to the same period the previous year (year-on-year/yoy) where the island of Sumatra only grew 4.5 percent. From the expenditure side, the growth of the gross domestic product (GDP) of the household sector is quite weak, only growing 5.01 percent, even though the household sector plays a 55 percent role in the Indonesian economy.
A more pessimistic picture can be seen in the GDP of the investment sector which grew very low at 4.2 percent. Actually the GDP of the investment sector had once increased above 6.5 percent in the third quarter of 2017 until the second quarter of 2018, but since the start of the US-China trade war in the third quarter of 2018 and the deterioration of the export-import balance of Indonesian goods and services (which led to the fact that interest rates must be raised in the period May-August 2018), investment activity is slowing down again.
In terms of sectoral GDP, the growth of two important sectors is very low. The manufacturing sector, which accounts for nearly 20 percent of our economy, grew by only 4.1 percent. The trade, hotel and restaurant sector (which contributes 13 percent to the Indonesian economy) only grew 4.8 percent. This condition is worrying because the household sector will not be able to sustain future economic growth if there is no new investment. Without new investment it means that there is no new employment, resulting in the household sector not receiving additional income. The number of people looking for work continues to increase, but the opening of formal employment is inadequate.
Domestic economic conditions are not much different from global conditions.
Some facts show that the condition of the economic sluggishness is getting deeper. Car sales fell 7 percent in the first 10 months of 2019. The volume of cement sales in Sumatra fell 6 percent in the first nine months of 2019. Komatsu heavy equipment sales in the last 10 months reached only 2,734 units, down 35 percent compared with the same period last year.
The declining economic performance certainly has an impact on the quality of the banking portfolio. The number of non-performing loans, which had improved from 3.2 percent in mid-2015 to 2.4 percent at the end of 2018, increased again to 2.7 percent in September 2019. The slowdown in the global economy reduced the performance of the export sector and pushed the mining commodity sector and plantation commodities deeper, which in turn will lead to the rising non-performing loans in the future. The positive news is that the resilience of Indonesia\'s banking capital is still high because the capital adequacy ratio (CAR) is above 20 percent and the credit reserve ratio is above 100 percent.
Credit growth slows only by 8 percent. What remains strong is only the construction sector credit (growing 26 percent) driven by infrastructure development. Indonesia really needs physical infrastructure. After being built, roads, airports and ports are expected to be filled with various production activities. However, the rapid growth of the infrastructure sector is apparently not accompanied by the growth of production activities, as evidenced by the fact that business loans outside the construction sector grow low. Credit to the trade and manufacturing sectors only grows 4.7 percent and 5.6 percent, even though the two sectors have a share of around 38 percent of total bank credit.
Central Bank (Bank Indonesia) is not silent. With low inflation and falling interest rates in the US and neighboring countries, Indonesia has room for monetary easing. The averaging-primary reserve requirement (GWM) has also declined. However, monetary policy easing must be accompanied by policies in the real sector to open up business opportunities.
Omnibus law plan
The government realizes that this alarming condition must be reversed immediately. The key is to create large numbers of new jobs. Various economic deregulation packages made in the 2015-2019 period were apparently not effective in encouraging business activities. Investment barriers exist in various regulations in various ministries and in local governments. President Jokowi said that our bureaucracy likes to make many rules, and the rules keep changing.
The problem is, since regional autonomy, a lot of the authority to grant investment permits is in the hand of the regions. Governors and regents change every five years, the local government bureaucracy also changes. Not to mention the problem of the high-cost election process. President Jokowi has frequently invited regional leaders to coordinate investment. Finally, the President even gathered the authorities of regional legal institutions (prosecutors, regional police, military district commanders, court) to support investment activities.
Bureaucracy in the central government is also difficult to coordinate. The technical ministers and the director generals have the power to issue regulations, often hampering investment because they are issued without coordination. The President said that permits for export production activities and import substitution must be facilitated. If this country wants to have a stable exchange rate such as Thailand, an export deficit imports of goods and services (current account deficit/CAD deficit) of US$30 billion per year must be reversed to be positive. CAD is the high language used by economists. For ordinary people, CAD means a foreign exchange deficit. If a stable exchange rate is expected, foreign exchange supply must be excessive. That means that the activities of producing export goods and tourism must be seriously encouraged so that foreign exchange supply increases.
To eliminate investment barriers in various ministries and regional governments, the President is determined to issue an omnibus law related to job creation and taxation. There are around 74 laws that inhibit investment that must be harmonized with the omnibus law. It will be a giant work which requires high level agreements with various political parties. Is it possible? The amendment process of the law is indeed a political process in the House of Representatives (DPR). Government and the DPR must agree. It frequently happens that the government wants to change one law but after years no progress is made. On the contrary, if the parties have agreed, the amendment to the law can take place very quickly, even less than a month.
It can be imagined, if what is to be changed is the articles in 74 laws, it means that it involves various commissions in the DPR. A very complicated political work. So, has the government got agreement from all political parties related to the omnibus law on job creation and the omnibus law on taxation? It is here that the cohesiveness of the government and its supporting parties is tested. The economic conditions in 2020 will be severe. Various analyzes of optimism in 2020 depend on whether or not the omnibus law is successful. It was reported that the omnibus law on taxation will be submitted to the DPR in December and the omnibus law on job creation in January 2020. Market participants appear to be only patiently waiting until March 2020 for the finalization of discussions in the DPR and the issuance of the omnibus law. We don\'t have much time.
Mirza Adityaswara, Economist