Indonesian Economy Greets 2020

KOMPAS/ALIF ICHWAN

An aerial view of container loading and unloading activities before the turn of the year at Tanjung Priok Port, North Jakarta, Monday (30/12/2019). The loading and unloading activities will continue ahead of the turn of the year. The government is targeting national economic growth in 2020 at 5.3 percent. This figure is the same as the target of economic growth this year.

All of a sudden, the end of 2019 is here, and the dawn of 2020 will rise on the horizon. It is undeniable that 2019 was a tough year for Indonesia. Three important events took place: the US-China trade war, the 2019 presidential election and the prospect of recession in the US and around the globe.

Macroeconomic data from Statistics Indonesia (BPS) is available only until the third quarter of 2019. Seasonally, the economy was at its lowest point at that time because of both the business and political cycles. As a consequence, looking forward cannot be done by merely looking at the trends, and must also involve a number of leading indicators, such as Bank Indonesia’s consumer confidence index (CCI; IKK in indonesian).

Another indicator is the purchasing managers’ index (PMI), which is useful for detecting the production side through the behavior of goods procurement. Excepting extraordinary events, these indices generally follow a recurring pattern each year, although their maximum and minimum values may differ according to developments in the external environment.

Economic behavior

On the demand side, the two key variables are consumption and investment, which together make up about 85 percent of gross domestic product (GDP). The general pattern since the 1998 monetary crisis has seen growth in investment following prospective growth in public consumption, rather than the other way around. This is in line with the increasing middle-class in medium cities, such as Makassar, Semarang, Yogyakarta and Solo.

KOMPAS/ALIF ICHWAN

Stock trading on the Indonesia Stock Exchange was officially closed by Finance Minister Sri Mulyani Indrawati, accompanied by Trade Minister Agus Suparmanto, at the Indonesia Stock Exchange, Jakarta, Monday (30/12/2019). The year 2019 has been a tough year for the stock market, which has experienced ups and downs due to various factors at home and abroad.

Third-quarter data shows that annual consumption growth has slowed from 5.05 percent to 5.02 percent. The highest contributing component was education and health spending, followed by spending on hotels and restaurants, which grew 6.6 percent and 5.8 percent, respectively.

At the same time, the CCI reached its lowest point of 118.4 in October 2019. This pattern is similar to the durable goods orders (IPBT) indicator, which recorded 108.9, down significantly from 111.7 the previous month.

The turning point was November 2019, when the CCI increased to 124.2 with all components showing improvement. The IPBT also improved across all income groups and age groups.

The IPBT has shown a good pattern at the year-end, which is expected to continue into the first and second quarters of 2020. The Idul Fitri holiday shifting to earlier in the calendar year will also change this behavior slightly.

Positive coverage on trade and the reduced risk of recession in the major mass media and on social media seems to have had an influence on this behavior.

Riding the wave

Just like surfing, the economic outlook for 2020 will depend on how the government uses the first two quarters to maintain the momentum (ride the wave).

The draft omnibus law and its derivative regulations, intended to reduce the barriers to business and investment, is expected to be finished by at least the second quarter of 2020. This is a case of the earlier, the better, in order to utilize the current upwards momentum. Other benefits are an increase in the ease of doing business and investment efficiency, prompted by the decrease in the incremental capital output ratio (ICOR) and improved economic structure.

The government\'s plan to limit the role of the subsidiaries of state-owned companies (BUMN) will increase opportunities for private businesses to prompt a marginal increase in the propensity to invest. A new supply chain will develop.

In order to induce a multiplier effect in the coming years from 2014-2019, the lesson learned is to involve the private sector more to optimizing infrastructure development. The government\'s plan to limit the role of the subsidiaries of state-owned companies (BUMN) will increase opportunities for private businesses to prompt a marginal increase in the propensity to invest. A new supply chain will develop.

These two factors combined will double the purchasing power, so it is not impossible that a growth rate of 5.3 percent – or even more – can be achieved. As stated in this column previously, the highest growth in real investment since 2013 was 7.94 percent, which occurred in the third quarter of 2018. To reach the economic growth target of 5.5 percent per year, investment growth of around 9 percent per year is needed.

The upward growth cycle is expected to begin on the consumption side in health and education spending as well as spending on hotels and restaurants. On the production side, the health and social services sector, as well as transportation and warehousing, will precede recovery.

KOMPAS/HERU SRI KUMORO

Ari Kuncoro

The trade sector will follow, to then be followed by the manufacturing sector in the first quarter of 2020, when durable goods orders are expected to recover. Economic growth may slow in the third quarter after the Idul Fitri holiday, because people will need time to reaccumulate savings to the desired level.

To compensate, the government can resume fiscal stimulus to maintain the momentum until the cycle rises again at the end of the fourth quarter of 2020.

Ari Kuncoro, Rector of the University of Indonesia