Strategies to Deal With Commodity ‘Booming’
If the current energy and commodity boom is well navigated and the economy transforms successfully, this could be a legacy the President can be proud of.
Indonesia is benefiting from two things, namely the increase in energy demand and the surge in the supply of US dollars.
First, the increase in energy demand will cause a shift in economic growth, from energy importing countries to energy exporters such as Indonesia.
As the world economy begins to recover from the pandemic, the demand of the world's largest machines for energy is rising. Starting in mid-2021, global energy prices will continue to climb sharply. In the US, the price of gasoline has increased by more than 30 percent compared to 2020. India is also experiencing an energy crisis because its coal supplies are running low. Likewise, another manufacturing giant, China.
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Due to strained relations between countries, last year China stopped buying coal from Australia. Currently, the level of coal inventories of these two major countries is very low, estimated at no more than 50 percent of the usual supply. Likewise, the UK and European Union countries are also facing a spike in fuel prices.
Oil fields and mines, which once reduced operations and cut costs due to declining demand during the pandemic, also need time to return to full capacity operations.
Second, US stock prices at the beginning of the pandemic had fallen, like dominoes. As one of the rescue measures, the US adopted a Quantitative Easing (QE) policy. Starting from the aircraft industry, the US government carried out a rescue policy for Boeing, then continued with the US aviation industry.
The policy of restricting social interaction has also further led to the collapse of related industries, such as hospitality, restaurants, tourist attractions, entertainment and the supporting industries. As a result, currently, the portfolio in the balance sheet of the US central bank continues to grow past 8.6 trillion US dollars.
In 2021, on average, both the price of goods and the hourly wages of workers in the US increased. Most of the valuable goods that countries around the world trade with each other, including gold and oil, are priced in US dollars. So if the US prints dollars, the impact of inflation can spread to all countries.
The massive injection of liquidity by global central banks, especially the Fed, has had an impact on the whole world. Including Indonesia, where foreign exchange reserves are rising. The majority of this liquidity flood is still transacted in the form of securities. There has not been much injection of liquidity invested in the real sector, although recently there have been electric vehicle battery factories.
Five strategies
How can we use these "hot money" opportunities to reform the economy and also mitigate the impact of imported inflation? First, prioritizing the stages of development. Indonesia already has human capital which is getting better and better, but we have limited capital. So, not all sectors can be expanded. The government must dare to give priority to the sectors that will be developed.
Indonesia always has a surplus of manpower, so the focus of development can be on sectors that are able to create the highest formal employment opportunities, and high value-added manufacturing sectors. Before the pandemic, each year there were more than 2 million new workers. During the recovery period, companies will tend to recruit laid-off employees first. So it would be wise if the booming income from rising oil and commodity prices was focused on sectors that were able to absorb the most labor, so that more people would enjoy the recovery and economic growth.
In previous experience, we have also experienced a commodity boom.
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However, there were many critics from the international community who judged that at that time the government was less strategic and nimble to take advantage. Most of the income from the commodity boom that should have been allocated for productive investment was used for subsidies, moreover the subsidies were not well targeted.
Third, the government also needs to be nimble in dealing with imported inflation. During the previous commodity boom, critics argued that the quality of growth was not high. Most of the growth was only nominal, i.e. due to rising prices. This time, the growth must be of higher quality, not only in nominal terms, but also in real terms to increase productivity and production volume. Thus, even though there was a scouring effect of imported inflation, the increase in productivity and production volume can compensate the negative impact.
Fourth, the government needs to take advantage of hot money from this commodity boom strategically so that funds can enter the real sector in accordance with state conditions and needs. For example, productive investment for agricultural modernization that can support national food security, productive investment in building capacity and human resources so that Indonesia will move up in class, participate in activities that have high added value in global supply chains, along with the fourth industrial revolution.
Also trying to pursue new comparative advantages based on science and technology which in the future will be increasingly needed, for example semiconductors, genetic engineering, Internet of Things (IoT), robotics, quantum computing and other things.
Economic transformation
During the previous industrial revolution, many countries managed to rely on their natural resources sector to generate the income needed to transform their economic structure into an economy based on knowledge and technological progress. For example, the US, Australia and Canada are countries that have large natural resources and have successfully utilized revenues from their natural resources sector to reform their real sector economies to be based on technological advances, innovate to build new comparative advantages, strengthen institutions (clear rules of the game and ease of doing business), and grew into a high-income country.
Fifth, in addition to the blessing of rising energy and commodity prices, Indonesia will also host the G20. The administration of President Jokowi has succeeded in increasing the ease of doing business and investment in various aspects. This goodwill and good reputation are intangible assets that must also be optimized in attracting new foreign investors for long-term investment and technology transfer in the midst of booming energy and commodity prices.
Thus, it is hoped that exports from Indonesia to the world will be more diversified and their activities in the global value chain will increase in class, so that economic recovery and growth can be stable and of high quality, and Indonesia can succeed in realizing inclusive economic growth. If the current energy and commodity boom is well navigated and the economy transforms successfully, this could be a legacy the President can be proud of.
Dato Sri Tahir, Founder of Mayapada Group
This article was translated by Kurniawan Siswoko.