Increasing Inflation and Economic Recovery

AFP/WILLIAM WEST

This photo illustration taken in Melbourne on February 25, 2022 shows front pages of newspapers reporting on the Russian invasion of Ukraine.

The world economy is facing a complicated problem. On the one hand, there is hope that the economic recovery will continue as the crisis due to the Covid-19 pandemic has begun to subside. On the other hand, there is a risk from the increasing food and energy prices (inflation) which will, in turn, have a negative impact on poor countries and disadvantaged communities in developing countries.

The Russian-Ukrainian war made the situation even more complex. Russia and Ukraine, both major producers of mining and agricultural commodities, cannot ship their products, which are desperately needed by European countries. As a result, the prices of mining and agricultural commodities continue to increase.

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From January to April, coal prices increased by 99 percent to US$314 per ton, with a peak of $430 per ton in March. In the same period, nickel prices increased 58 percent to $33,144 per ton, while the crude palm oil (CPO) price increased 33 percent to 6,465 ringgits (US$1,519.51) per ton.

Indonesia’s exports also increased thanks to the increase in commodity prices. In 2022, despite the acceleration of imports, it is estimated that Indonesia will book a surplus in foreign trade (goods and services) of about 1 percent of GDP. The surplus will have a positive impact on the stability of the rupiah exchange rate.

Meanwhile, China's economic recovery has been hampered by the zero Covid policy. Several cities in China are still under lockdown. The slowdown in China's economy due to the lockdown has certainly had a significant impact on developing countries' exports to the country.

AFP/RAUL ARBOLEDA

A worker rides a bike as he wears a face mask as a precautionary measure in the face of the global COVID-19 coronavirus pandemic, in Bogota on March 12, 2020. – Colombia declared on March 12, 2020 a “Health Emergency” due to the new coronavirus pandemic, a figure that allows it to take exceptional measures such as prohibiting the disembarkation of cruise ships and the holding of public events with more than 500 attendees.

Due to the lockdown in several cities, China's economic growth is expected to decline from 4.8 percent in the first quarter of 2022 to 3.0 percent in the second quarter. However, in the second half of 2022, the Chinese economic growth is predicted to accelerate again.

Looking for balance

Governments and central banks in a number of countries certainly want their economies to recover quickly. However, the value of money must also be maintained so as not to be eroded by inflation. The effort to find this balance is an art in the monetary management policy.

In order to control inflation and absorb excess liquidity, some of the world's central banks have begun to slowly raise interest rates and increase their primary reserve requirement. Uniquely, China has begun to ease its monetary policy by lowering the minimum reserve requirement because its economy is weakening.

As a result, prices of various technology stocks increased sharply even though the companies have not yet profited.

At a time when the economy was in crisis due to the Covid-19 pandemic, technology stocks (digital economy) skyrocketed because people carried out most of their activities online. The profits of technology companies also increased. Supported by very low interest rates, “speculation” costs become cheaper. As a result, prices of various technology stocks increased sharply even though the companies have not yet profited.

However, with the increase in interest rates in a number of countries, the cost of capital has also increased. Stock investors become more selective. They begin to look at the fundamentals of technology companies, whether they are profitable or not. Therefore, it is now very important for the management of a technology company to provide a roadmap so that investors will know when it will start making a profit.

In the United States, the stock prices of big-earning tech giants, such as Amazon, Microsoft, Apple and Alphabet (Google), have dropped by between 10 and 16 percent since the beginning of the year. Meta (Facebook) shares fell deeper by 38 percent.

BONIFASIUS JOSIE SUSILO HARDIANTO

People wearing protective masks make their way amid the coronavirus disease (COVID-19) pandemic at a business district in Tokyo, Japan August 4, 2020.

Even the shares of the film company Netflix fell 43 percent. The same thing occurred in Asia. In the January-April period, shares of two Chinese technology giants, Alibaba and Tencent, fell 17 percent. In fact, the shares of Shopee’s parent company (SEA Ltd) fell 52 percent. Indonesian companies that have already traded their shares on the stock market or those which plan to go public should pay attention to the factors that affect the current volatility of financial markets, namely the risk from the increase in the US Federal Reserve’s (the Fed) interest rate, and risk of rising inflation due to commodity prices.

The easing of the Covid-19 crisis has led to a global economic recovery. With the economic recovery, banks are expected to increase their loans. In Indonesia, the lending growth is estimated to reach 7-9 percent this year.

Inflation in the US has already increased to 8 percent, whereas normally, US inflation remains below 2 percent.

However, because inflation in the US has increased significantly, it is feared that the increase in the Fed’s interest rates will also increase. Inflation in the US has already increased to 8 percent, whereas normally, US inflation remains below 2 percent.

Concerns about inflation were reflected in the yield of US government bonds (10-year tenor) which increased very sharply from 1.62 to 2.82 percent during the January-April period. Even though the Fed's short-term interest rates only increased by 0.25 percent in March, long-term interest rates have jumped by as high as 1.2 percent (or 120 basis points).

The yield of Indonesian government securities (tenor of 10 years) had also increased by 0.6 percent from 6.3 to 6.9 percent in the January-April period. Indonesia's inflation is still low; this shows an upward trend.

Monthly inflation in March was 0.66 percent, higher than 0.08 percent in March 2021. On an annual basis, inflation in March was 2.64 percent, compared to 1.37 percent in March 2021. In addition, it is necessary to monitor wholesale price index because it is usually higher than consumer price index.

KOMPAS/PRAYOGI DWI SULISTYO

Finance Minister Sri Mulyani .

The major wholesale price index in March 2022 was recorded at 3.54 percent, due to mining goods’ inflation of 7.71 percent and industrial goods’ inflation of 4.33 percent. An increase in the price of wholesale goods will usually be passed on to the selling price of the product to consumers. It is very important to provide sufficient stock of basic commodities.

In contrast to the US and many other countries where inflation has already skyrocked due to the increase in energy and food prices, in Indonesia, inflation is still relatively under control because prices of fuel and electricity have not increased, thanks to government subsidies. However, the burden of state budget will be higher due to the rising subsidies.

Therefore, to control the state budget deficit, which must fall below 3 percent of GDP next year, non-priority spending must be reduced. Finance Minister Sri Mulyani Indrawati said last week the government projected the budget deficit in 2023 in the range of 2.81-2.95 percent of GDP. The state budget deficit increased significantly in 2020-2021 as the government spent more money to help the community and small businesses during the crisis due to the pandemic through the national economic recovery program.

In line with the end of the Covid-19 crisis, the government is expected to be able to reduce the state budget deficit from 6.1 percent of GDP in 2020 to below 3.0 percent in 2023. It means that additional debt will also decrease.

NUR HIDAYATI

Mirza Adityaswara

MIRZA ADITYASWARA, the president director of the Indonesian Banking Development Institute (LPPI)

(This article was translated by Hendarsyah Tarmizi).