Expectations 2020
The year 2019 was not an easy year for the world, including Indonesia. The trade war has become increasingly widespread and uncertain.
A powerful speech, as proven that “Winter is coming” is real before all of us. Winter is increasingly piercing the bone marrow of the economy and the pain has been increasingly felt.
The year 2019 was not an easy year for the world, including Indonesia. The trade war has become increasingly widespread and uncertain. Technological innovations have caused many industries to be in shock and experience disruption. Developing countries are also experiencing huge market pressure. The economic slowdown is happening all over the world and has become a common sight.
Increasing uncertainty
Economic recession has occurred in several countries (Venezuela, Turkey, Argentina) and the shadow of a more severe recession is increasingly haunting the world. The probability of recession in developed countries has risen sharply by around 1.3-2.3 times compared to 2018. The probability of a US recession was 33 percent in November 2019 from 20 percent in 2018. Meanwhile, Germany and Japan were even higher, 40 percent.\
The uncertainty in the world has caused global economic policy responses to become increasingly uncertain.
The uncertainty in the world has caused global economic policy responses to become increasingly uncertain. This is reflected in the value of the global economic policy uncertainty index (IKKE), which continues to increase from year to year. The IKKE trend increased significantly, after the 2008/2009 global economic crisis. Uncertainty was even higher when Trump became the United
States president in 2017. On average, the IKKE in 1997-2007 was recorded at 84, continuing to rise almost 1.6 times, to 132 in 2008-2016. Then continuing again and becoming increasingly uncertain, with an average IKKE of 211 in the 2017-2019 period.
The increasingly difficult condition of the global economy in the past three years has been mainly triggered by the US-China trade war. US trade policy is really very energy consuming and causing the world economy to decline. Discussing the imposition of US and China import tariffs has disrupted world trade and production. Distortion of world trade policy has triggered an increase in uncertainty of trade policy.
This can be seen from the US trade policy uncertainty index (IKKP), which jumped very significantly to 457 (7.5 times) in 2017-2019 from 61 in 1997-2016. Similarly, the Chinese IKKP rose from 63 to 470 (7.4 times) in the same period. No wonder a group of leading economists such as Joseph Stiglitz, Michael Spence and other Nobel economics laureates voiced the same thing. The two-biggest economies in the world, the US and China, must immediately stop their trade war and come up with mutually beneficial solutions. Winners and losers will surely not benefit, will equally suffer and be in vain with the escalation of losses more powerfully and difficult to measure.
The world economy is on a slowing trend. This condition is even more severe because the world is dominated by uncertainty rather than certainty. No wonder the economic prediction method (econometrics) seems to look "old-fashioned" and rather "stupid" because it cannot catch the current world phenomenon. Just look at the predictions of the IMF, which has always revised the predictions of world economic growth lower than previous estimates, accompanied by very significant corrections. In the January 2019 IMF report (World Economy Outlook), world economic growth was predicted to stand at 3.5 percent in 2019. However, three times in a row the world economic growth was revised downward in the April report to 3.3 percent, in July to 3.2 percent, and last October 2019 only grew 3.0 percent. This meant a significant reduction compared to earlier predictions for the year.
Pressure on the increasingly slowing global economy in 2019 was responded to by the decline in benchmark interest rates in various countries. Contrasting conditions compared to 2018, which tended to implement a tight monetary policy, were driven by the US. The US central bank aggressively raised its benchmark interest rate of 1.00 percent from 1.50 percent to 2.50 percent in 2018. Other countries were forced to follow it to compensate for the increase in US interest rates so as to prevent capital outflow from developing countries to developed countries (mainly US). The era of low interest rates in 2019 confirmed that the world economy was indeed in a difficult zone. The world needed back monetary and fiscal stimulus to boost the sluggish economy.
With this 2019 condition, will the global economic slowdown continue to slow down or otherwise improve next year? IMF predictions indicated that the world economy was recovering, growth in 2020 will be better than 2019. Economic growth in 2020 is estimated to be around 3.4 percent from 3.0 percent in 2019, supported by the European Union, ASEAN-5 (Indonesia, Malaysia, the Philippines, Thailand, Vietnam), and India. On the contrary, the US, Japan and China will continue to experience slowdowns and their economy continues to be under pressure.
It seems that the economic predictions for 2020 by the IMF are difficult to achieve because countries that used to become the driving force behind the world economy (China) are sluggish and without energy, including the US. These two countries contributed 40 percent to the world economy in 2018: the US around 24 percent and China 16 percent. If Japan, which contributed 6 percent, was added, then these three countries almost contributed half of the wheels of the world economy. IMF predictions are increasingly irrational because several countries in Europe such as Germany and Italy experienced a significant slowdown and were threatened by recession. Not to mention the Brexit problem that continues to hold up Britain\'s exit from the EU.
Therefore, the probability of world economic growth in 2020 being revised down again will be very large, as is the case in 2019.
Therefore, the probability of world economic growth in 2020 being revised down again will be very large, as is the case in 2019. There are still many global challenges and can hamper the growth rate of the world economy, namely: (1) the prospect of achieving a US-China trade agreement, (2) utilization trade diversion, (3) effectiveness of fiscal and monetary stimulus, (4) economic disruption, (5) uncertain geopolitical conditions.
Looking at this condition, we should be aware that global economic growth will continue to experience a slowdown like 2019. The downward trend in the benchmark interest rate is expected to continue even though its magnitude and speed is lower than 2019. Not only the interest rates that will be lower, central banks in various countries, such as the US , the EU and Japan, also continue to expand their central bank balance sheet assets through a quantitative easing (QE) program to counter the economic slowdown that occurs.
Lower interest rates plus QE means the potential for inflows of foreign capital from developed countries to developing countries (including Indonesia) is increasingly wide open in 2020. Indonesia had felt the positive impact of this in 2019. The entry of foreign capital through bonds and stocks documented the highest record in the history of Indonesia\'s economy, which was recorded at Rp 213 trillion as of 23 Dec. 2019, far exceeding the year 2014 at around Rp 179 trillion. The performance of the rupiah was able to bear fruit at the end of 2019 although uncertainty still haunted the global economy. By the end of 2019, the rupiah could be closed at around Rp 14,000/US dollar, potentially even slightly below Rp 14,000. This means that the rupiah had appreciated compared to December 2018, which was recorded at Rp 14,390/US dollar.
Optimistic
Looking at this, Indonesia\'s economy in 2020 should have additional oxygen in its foreign exchange market. Despite the existence of pressure on the rupiah, it seems relatively limited because the rupiah will still be supported by the inflow of foreign capital through portfolio investments (bonds and stocks). Apparently we need to be more optimistic toward 2020. We will feel a new dimension and hope in the Indonesian economy.
The first and biggest hope are the omnibus laws. The government is aware that investment barriers must be removed immediately in various ministries and local governments. The omnibus law related on job creation and taxation will surely open Pandora\'s box, which has been hampering long-term investment in Indonesia. If this is approved and endorsed by the House of Representatives (DPR) in 2020, the opportunity for foreign direct investment through FDI (foreign direct investment) will increase significantly.
The Indonesian economy can be gradually freed from the traps of portfolio investment, which has usually been the main source of turmoil in Indonesia\'s financial markets when there is negative sentiment in the global economy. With this omnibus law, structural reforms in the Indonesian economy should be truly realized. The problem of the current account deficit (NTB) that has occurred since the fourth quarter of 2011, which left the rupiah vulnerable to turmoil, is to get long-term effective medicines. Not by short-term and brief means through an increase in the BI reference rate (BI7DRR) to press/reduce the NTB deficit.
The second expectation is the continuation of the second phase of infrastructure development that connects the activities of the periphery economy, which previously had a negative impact from the first phase of infrastructure development. At present, infrastructure development is expected to be more effective in connecting centers for raw materials and production, as well as product marketing. The third hope is that the B20 or B30 program is truly effective to be able to reduce the oil deficit which has been a scourge for the current account balance. The acceleration of the use of B30 will have a positive impact on national energy independence and oil palm plantations.
The fourth hope is to encourage export-oriented industrial products that focus on priority industries on the Industry 4.0 road map, namely: (1) food and beverage, (2) textiles and clothing, (3) electronics, (4) automotive, and (5) chemistry. Then other industries are based on natural resources and tourism. Of the four hopes, the main key to the success of Indonesia\'s economy is in the Omnibus Law. If this is successful, it will smooth and complete the second to fourth expectations.
The experience shows that passing a law is always a long political process and consumes a lot of energy. Therefore, we need god-level national awareness and to eliminate each other\'s egos, for the sake of a much better Indonesia in the future. Indonesia\'s economic growth will be accelerated so that it can absorb additional labor every year, inflation will be low and stable, and the rupiah will be stable and strengthen in the future. Indonesian entrepreneurs must also be prepared to welcome this by preparing quality and competitive products, and naturally be independent without having to always be protected by the government.
Anton Hendranata, Economist, Bank Rakyat Indonesia