Indonesia to Prevent Impact of Global Economic Slowdown
Rapid monetary tightening in developed countries to curb inflation will result in the flight of foreign funds from the domestic market and push up domestic borrowing costs.
The global economic slowdown and the threat of recession in a number of countries will have an impact on Indonesia. The government has prepared a number of strategies to fortify the national economy.
WASHINGTON DC, KOMPAS — More than a third of the global economy is expected to experience negative growth and a recession this year and next year. The impact will also hit Indonesia through various channels even though Indonesia's economic growth in 2022 and 2023 is expected to continue to grow at least at 5 percent. A number of steps have been prepared by the government to block the impact of the global economic downturn on the national economy.
In the October 2022 edition of the World Economic Outlook report released at the 2022 International Monetary Fund (IMF)/World Bank Group Annual Meeting in Washington DC, the United States, on Tuesday (11/10/2022), the IMF predicted the global economy will continue to get worse, at least until 2023.
> Global Situation Affects National Economy
There are three main contributing factors, namely the Russian-Ukrainian war that has disrupted global supply chains, triggering a food and energy crisis, the increase in the global cost of living due to persistent and widespread inflationary pressures and the economic slowdown in China.
The growth projection for July 2022 had been cut by 0.7 percentage points from 3.6 percent in April 2022. Thus, global economic growth will continue to slow from 6 percent in 2021, 3.2 percent in 2022 and 2.7 percent in 2023.
Amid the rising threats, the IMF again revised its projection for global economic growth in 2023. The IMF projects global economic growth in 2023 at 2.7 percent, 0.2 percentage points lower than the agency’s growth estimate of 2.9 percent in July 2022. The growth projection for July 2022 had been cut by 0.7 percentage points from 3.6 percent in April 2022. Thus, global economic growth will continue to slow from 6 percent in 2021, 3.2 percent in 2022 and 2.7 percent in 2023.
“More than a third of the global economy is headed for contraction this year or next year, while the three largest economies, namely the United States, the European Union and China, will continue to stall. In short, the worst is yet to come and for many people 2023 will feel like a recession," said Pierre-Olivier Gourinchas, IMF Research Department chief economist, when presenting the October 2022 edition of the World Economic Outlook.
Rapid monetary tightening in developed countries to curb inflation will result in the flight of foreign funds from the domestic market and push up domestic borrowing costs. This will certainly reduce business expansion which will, in turn, slow the pace of the national economic growth.
For these reasons, the IMF also revised its projection for Indonesia's economic growth in 2023 down to 5 percent. The figure fell by 0.2 percentage point compared to the projection issued in July 2023 which was at 5.2 percent. In the 2023 state budget, Indonesia's economic growth is targeted at 5.3 percent. As for 2022, Indonesia's economic growth is also estimated to reach 5.3 percent.
To prevent global economic risks from having a major impact on the national economy, Finance Minister Sri Mulyani Indrawati, who attended the IMF Annual Meeting in Washington DC, said the government had and would prepare a number of steps.
According to Sri Mulyani, one of the steps taken is that the government will seek to reduce risk exposure coming from global financial markets in the form of high debt yields due to rapid interest rate hikes by central banks in developed countries.
“According to the agreement with the House of Representatives (DPR), next year, the state budget deficit will be reduced back to a maximum of 3 percent. This is, of course, in line with the market situation, which will indeed be very tight and very expensive. So the cut in the deficit is needed to reduce the risks that come from the market," said Sri Mulyani.
With the reduction in the budget deficit, the number of debt securities to be issued by the government in 2023 will be significantly reduced compared to the 2020-2022 period. In this way, the government will not be too burdened by expensive returns on world financial markets.
The next risk mitigation measure, said Sri Mulyani, is to ensure that the national economic recovery can be maintained. Until now, household spending is one of main drivers of economic growth, which is still relatively strong as domestic inflation remains under control. Although the inflation rate is rising, it is still below those in other countries. "Nevertheless, we must remain vigilant because global inflationary pressures are very high and will not fall quickly," said Sri.
To maintain the momentum of economic recovery, the government will use state budget and non-state budget instruments. "Learning from the COVID-19 pandemic, the government and the House of Representatives agreed to make the state budget (APBN) flexible and responsive so that we can cope with the huge global economic uncertainties and risks," Sri said.
With the support of subsidies originating from the state budget, the people’s purchasing power will be maintained amidst rising inflation.
With its flexibility, the state budget will be optimally used in reducing shocks (shock absorbers) originating from the global economy. With the support of subsidies originating from the state budget, the people’s purchasing power will be maintained amidst rising inflation.
The non-state budget instruments that will be carried out by the government, among others, are to continue to encourage downstream industries and improve the investment climate so that more foreign direct investment will flow into Indonesia.
“Downstream industries will make us more resilient in terms of the balance of payments. Meanwhile, the flows of foreign investment thanks to the ease of doing business can offset the capital outflows due to rising interest rates in developed countries," said Sri Mulyani.
Meanwhile, the governor of the National Resilience Institute's (Lemhannas), Andi Widjajanto, said in Jakarta on Wednesday that President Joko “Jokowi” Widodo had asked the Lemhannas to make a quick study to anticipate and mitigate the food, energy and financial crisis. “The study must be carried out comprehensively and in a detailed manner,” Andi said. (INA/CAS)
(This article was translated by Hendarsyah Tarmizi).