Indonesia Can Survive Recession While Economic Growth Slows

Although Indonesia is expected to be able to survive the imminent global recession, its economic growth will continue to slow next year. Joko “Jokowi” Widodo has reminded his ministers to be careful in determining polici

KOMPAS/RADITYA HELABUMI

Visitors see food products produced by MSME entrepreneurs in the series of Indonesia Sharia Economic Festival (ISEF) at the Jakarta Convention Center, Jakarta, Wednesday (5/10/2022). The slowing of the world economy, including China as one of Indonesia's main trading partners, will disrupt export performances and slow down economic growth in 2023.

JAKARTA, KOMPAS - Although it is estimated that Indonesia will not fall into recession in 2023, the decline in economic growth will be inevitable. The reduced state revenues and state expenditures being limited in order to maintain the state budget deficit below 3 percent will narrow the fiscal space. State spending must, therefore, be prioritized to protect the vulnerable populations.

Indonesia is considered a little more fortunate than other countries in the region, such as Singapore and Malaysia, because the economy is not too dependent on exports that are expected to decline due the slowdown in the global economy next year.

Senior economist Muhamad Chatib Basri said in Jakarta on Tuesday (11/10/2022) that the export contribution to the domestic economy would not be too significant but it would be able to reduce the impact of the global recession which is expected to occur in 2023.

No doubt, the slowing of the world economy, including China as one of Indonesia's main trading partners, will disrupt export performances and slow down economic growth. However, Indonesia is expected to be able to escape the global recession threats.

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The contribution of the country’s exports to the Gross Domestic Product (GDP), which is around 25 percent, is lower than those in other countries in the region, such as Singapore in which its exports accounted for more than 200 percent of its GDP.

On the other hand, energy demand from European countries is also expected to be even greater due to gas supply disruption caused by the Russian-Ukraine War. Therefore, the price of coal is expected to remain stable even though there is a decline in crude oil prices.

We previously grew at 5.2 percent, but next year, the growth will be a little below 5 percent.

"The situation will be more challenging but it does not mean we will experience negative economic growth. We previously grew at 5.2 percent, but next year, the growth will be a little below 5 percent," Chatib said on the sidelines of the 2022 Investor Daily Summit at the Jakarta Convention Center (JCC), Senayan, Jakarta.

Indonesia's economic fundamentals, which are relatively stronger because they are supported by the domestic economy rather than foreign trade, have also received the attention of international institutions. In the latest report released at the end of August, the World Bank maintained its economic growth forecast for Indonesia at 5.1 percent in 2022 and 2023, when the economic growth estimates in other countries are lower. This projection is the same as previous estimates in April and June 2022.

Impact

Indonesia will not be entirely free from the global recession risks. Although the sluggish exports will not bring a serious impact, the Indonesian economy will be affected by the global tightening monetary and fiscal policy.

Chatib said the tightening of monetary policy carried out by the central bank in a number of developed countries would further push up the domestic interest rates and weaken the rupiah exchange rate against the United States dollar.

During 2022, the benchmark interest rate at the British central bank has increased 200 basis points. Similarly, The Federal Reserve, the central bank of the US, has raised the benchmark interest rate by 300 basis points. As a consequence, Bank Indonesia (BI) has also raised its benchmark interest rate by 50 basis points to 4.25 percent.

KOMPAS/PRIYOMBODO

Officers count the United States (US) dollars exchanged at the PT Valuta Inti Prima foreign exchange exchange in Jakarta, Monday (3/10/2022). The rupiah at Bank Indonesia's Jakarta Interbank Spot Dollar Rate (Jisdor) on Monday (3/10/2022) was at Rp 15,293 per US dollar or 0.40 percent weaker from last weekend's Rp 15,232 per US dollar.

The higher interest rate has a negative impact on the business climate and hampers economic growth. As a result, inflation at the producer level or the Producer Price Index (PPI) rose to 11 percent in the second quarter. This figure exceeds inflation at the consumer level or the consumer price index (CPI) of 5.95 percent in September 2022.

"Producers have begun to pass an increase in production costs to consumers. BI will further tighten its monetary policy [to control inflation] and that will hit our economy," said Chatib.

During the crisis, the state budget should become a shock absorber. However, it is difficult to expand the expenditures because there is a need to reduce the state budget deficit below 3 percent next year. On the other hand, state revenues have the potential to fall due to the decline in commodity prices. This will limit fiscal maneuvers.

Producers have begun to pass an increase in production costs to consumers.

"If asked whether there will be a recession, the answer is no. However, our economy will continue to slow down and we must be on guard so that we will be able to anticipate it," said Chatib.

One of the ways to cope with the recession threat is to improve the quality of state spending. The state budget spending should be prioritized to protect the most vulnerable community groups from an economic shock." This is why social protection should become the most important priority of the government," he said.

Carefulness

In the plenary cabinet meeting at the State Palace, President Jokowi reminded his ministers to be careful in making policies amid worsening global conditions. While 28 countries have queued for assistance from the International Monetary Funds (IMF), the current Indonesian economy is considered safe.

Coordinating Economic Minister Airlangga Hartarto said at a press briefing in the President's office that the Indonesian economy was relatively strong internally. "We have a [big] domestic market and [high household] consumer spending that contribute to economic growth," he said.

Speaking at a similar event at JCC, Airlangga said, the level of Indonesian resilience is still high amid the crisis. For three consecutive quarters, Indonesia's economy continues to grow in the range of 5 percent. He said he was optimistic that economic growth in 2022 will reach the target of 5.2 percent and 5.3 percent in 2023.

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Some of the highlighted indicators are the performance of the real sector and the trade balance that is still growing positively, the consumer confidence index that is at the optimistic level (above 100) and the fall of the rupiah against the US dollar is not as low as other countries.

"This must be maintained and the government must continue to carry out various policies, from the easing of community activities [post pandemic] and fiscal policies as a shock absorber to the stabilization of administered prices [goods and services regulated by the government]," Airlangga said.

This article was translated by Hendarsyah Tarmizi.