Global inflationary pressures are still high. Central banks raised interest rates again. There may be a global recession and Indonesia must adapt.
By
UMAR JUORO
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Indonesia’s economy itself is currently still growing quite well, supported by high consumption and commodity prices. With inflation still high, at 8.3 percent in the United States, 9.1 percent in Europe and very high in some developing countries such as Turkey and Argentina -- mainly due to high energy and food prices, plus the ongoing Russia-Ukraine war -- the central bank still has to keep raising interest rates.
The US central bank (The Fed) again significantly raised interest rates by 0.75 basis points (bps) to a range of 3-3.25 percent. Because inflation is still high, it is estimated that the Fed will raise interest rates again several times to around 4 percent by the end of 2022 and 4.6 percent in 2023 in order to control inflation in the range of 2 percent.
BI may still have to raise interest rates again to control inflation and rupiah stability.
Other central banks followed suit by raising interest rates as they also faced high inflation and adjusted the Fed's steps to cope with capital outflows and a weakening currency exchange rate. Bank Indonesia (BI) also raised the policy interest rate even higher by 0.50 percent to 4.75 percent.
With inflation of 4.69 percent and inflation estimated at around 7 percent in 2022, and the value of the rupiah weakening to more than Rp 15,000 per US dollar, BI may still have to raise interest rates again to control inflation and rupiah stability.
Inflation and monetary policy
High inflation is actually not only related to high food and energy prices, but also related to monetary policy with low interest rates to stimulate the economy, which lasted for quite a long time after the 2009 global financial crisis.
An increase in inflation should be anticipated as a consequence of low interest rates, but the central bank generally underestimates this, so it is surprised and late in anticipating an increase in inflation.
With inflation forecasts still high, while there is little that can be done to increase energy and food supplies, and the difficulty of stopping the Russia-Ukraine war, the mainstay of practical policy instruments has become entirely dependent on rising interest rates, even if it means facing the risk of recession, or negative growth, as a consequence.
This policy has been implemented by most of the central banks, except for Japan’s. Thus, we are entering a period of high inflation and interest rates in the next few years.
Indonesia's economy continues to grow
Despite the possibility of a recession in developed economies and weakening economic growth in China, Indonesia's economy can still grow quite well, slightly above 5 percent in 2022 and 2023. High commodity prices, especially coal and CPO, coupled with a strong recovery in public consumption, enable continued economic growth in the midst of a weakening world economy.
Bank credit, which is strongly correlated with economic growth, also grew at around 10.7 percent, occurring in all credit categories. Third party funds are also still growing quite high, around 9 percent, which indicates the availability of individual and corporate liquidity. Of course, the increase in policy interest rates, which will be followed by loan interest, corrects credit growth, but with credit demand still high, credit growth is still quite high in line with economic growth.
This situation reminds us of the 2010-2014 period after the global financial crisis when Indonesia's economic growth was quite high, 5-6 percent, along with high credit growth and high commodity prices. When commodity prices declined, credit and economic growth slowed down. At that time, the largest manufacturing sector, which should have continued its growth, actually experienced a slowdown due to protective policies that hindered investment.
Now manufacturing growth is still around 4 percent, lower than economic growth. With the disruption of global supply chains controlled by China -- due to the Covid-19 lockdown and China-US tensions – then, like Vietnam, Indonesia can participate more in the transfer and the transformation of the world's supply chains shifting away from dependence on China.
The mandatory domestic mineral processing certainly encourages manufacturing development. However, it should be selective, because not all mineral processing can develop competitively; moreover, management of mineral price volatility is also difficult. In addition, the challenges from importers are also very big, such as the case of the ban on nickel exports by the European Union, which hampers trade. Selectivity must be done to optimize the calculation of the cost benefits of mineral processing in the country.
Energy and food
Indonesia, as the largest coal producer, has benefited greatly, with the price increase amounting to around US$440 per tonne. Power plants are also still dominated by coal, whose domestic prices are still controlled by the government.
China and India still make significant use of coal from Indonesia. European countries that are experiencing an energy crisis due to the cessation of gas imports from Russia have returned to using coal, even though this is contrary to the achievement of the zero-carbon emission program.
With the pressure due to the energy transition on no longer using coal, banks are also increasingly abandoning financing for coal. Unfortunately, the implementation of the energy transition program has been hampered because state-owned electricity company PLN, with its coal-fuelled power plants, has an excess supply of electricity, so that it does not support the energy transition to new and renewable energy sources (EBT).
Meanwhile, oil prices will also remain high due to high demand and insufficient supply. Unfortunately, Indonesia's oil and gas production tends to decline with the lack of investment in exploration for new oil and gas fields.
Improving the investment environment, especially for gas, will increase gas production; moreover gas is still categorized as an environmentally friendly energy source compared to coal and oil. A realization of Masela gas development can be a trigger for increased gas investment.
The development of new and renewable energy (NRE), especially solar power, is still far from expectations. In fact, Indonesia's potential is very large, especially solar energy, and the export market is also large. The development of solar energy for export should be better facilitated to encourage the development of renewable energy, instead of banning the export of solar energy. Of course, domestic obligations and green certification must give credit to the national interest.
We will still face the problem of high inflation. Monetary policy to maintain economic stability must continue to be adjusted.
Food production, especially rice, is good enough, so there is no need to import. The price of cooking oil, which has high volatility, has also been controlled, which was helped by a correction in the price of CPO, with CPO as one of the main export products. Its production and price can still increase, of course with the consideration of higher environmental sustainability.
A valuable lesson, both for developed and developing countries, is that the supply of energy and food is very important for economic stability and development, and of course for the welfare of the people. Indonesia is blessed with abundant energy and food potential. Of course, how to manage and use it economically will determine the realization of this blessing.
We will still face the problem of high inflation. Monetary policy to maintain economic stability must continue to be adjusted. However, economic growth can continue, not dependent on high commodity prices, by increasing the development of the manufacturing industry, taking advantage of global supply chain relocation opportunities. Energy production, both conventional, especially gas, and NRE, can be increased by facilitating investment for exploration.
