Indonesian Economy Shines in the Dark
We must not let our guard down or feel complacent. The government, together with the monetary authorities, need to prepare a contingency plan if the threat of global uncertainty hits Indonesia.
The ghost of a recession, which has been talked a lot about by many economists, is actually moving further away from Indonesia.
The encouraging sign can be seen from the latest data on economic growth which has continued to improve over the past year. Statistics Indonesia (BPS) recently reported a gross domestic product (GDP) growth rate of 5.7 percent year-on-year (yoy) in the third quarter of 2022, so for three consecutive quarters the economy continued to grow. The numbers also showed an upward trend: 5.01 percent in the first quarter, 5.44 percent in the second quarter and 6.72 percent in the third quarter.
This consistent economic performance is a dream for all countries amidst the threat of uncertainty and fears of stagflation. This makes Indonesia a shining light in the midst of global economic darkness.
Indonesia was able to recover quickly from the downturn caused by the COVID-19 pandemic. Not only that, the World Economic Outlook published by the International Monetary Fund (IMF) in October 2022 reveals that Indonesia's GDP has reached US$4.02 trillion (Rp 66 trillion at the exchange rate of Rp 15,500/US dollar). This achievement also places Indonesia in the seventh position of the world's largest economy.
The ghost of a recession, which has been talked a lot about by many economists, is actually moving further away from Indonesia.
With this achievement, the IMF is optimistic about Indonesia's economic prospects. Indonesia's condition is in contrast to the 31 other countries which, according to IMF estimates, will experience successive economic contractions.
A positive economic growth is also enjoyed by other ASEAN countries. Singapore grew 4.4 percent in the third quarter of 2022, while Vietnam shot up to 13.67 percent. In contrast, the economic performance of several developed countries shows relatively high uncertainty. Germany continues to grow, but only at 1.1 percent, with the United Kingdom at 0.8 percent and Italy at 0.2 percent.
The United States economy expanded by 2.6 percent in quarter III-2022, compared to quarter II-2022 which contracted by 0.6 percent. China also grew positively by 3.9 percent, better than in the second quarter of 2022 which was only 0.4 percent. South Korea grew 3.1 percent. Japan's economic growth data for the third quarter of 2022 has not yet been released, but it is predicted that the figure is minimal.
Performance indicators
From the data, we can conclude that the global economic situation is not doing well. Inflation, which rises everywhere, accompanied by the threat of stagflation, was the main contributing factor. It is different from the situation in 2021, where almost all countries enjoyed economic expansion. However, this fast growth momentum could no longer be maintained in 2022. There are still many other countries that struggle hard to be able to get out of the threat of stagflation.
The success of the national economic performance in maintaining the positive growth momentum is inseparable from several influencing factors.
First, various macroeconomic and fiscal policies issued by the government that are counter cyclical in nature have been able to maintain consistency in economic growth since the pandemic until now. Likewise with the accommodative monetary policy implemented by Bank Indonesia (BI), which was able to maintain the stability of the rupiah exchange rate and to control the inflation rate, and to maintain the need for liquidity flows in the market.
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Other government policies that are sectoral or micro-based have also driven growth of sectors that have been affected by the pandemic so far. With these various policy mixes, Indonesia was able to overcome these tough challenges toward economic recovery.
Second, the Consumer Confidence Index (IKK) for the third quarter of 2022 remained high. The public still has a strong level of confidence regarding the prospects and future of the Indonesian economy. The KPI is one of the main indicators that measure economic performance. Indonesian people do not seem to care too much about the uncertainties that occur in the global economy.
The last IKK figure in September was at 117.2, slightly lower than 123.2 in July. However, this decline did not have a significant effect considering that the figure is still above 100, still in the optimistic zone. It means that consumers are still optimistic about the national economic conditions going forward.
Third, the performance of the processing and manufacturing industries continues to improve. This is reflected in the Prompt Manufacturing Index (PMI) data released by BI, which increased from 53.61 percent in quarter II-2022 to 53.71 percent in quarter III-2022.
The PMI indicator is very important considering that the processing and manufacturing industry has been one of the main contributors to national economic growth. Meanwhile, the Purchasing Managers Index for September 2022 also rose to 53.7 from 50.2 in June. These two indicators are consistent with the expansion of the national processing industry so as to encourage the economy to continue to grow positively.
Fourth, Indonesia's export performance, which declined by 8.1 percent during 2020, has shown improvement in subsequent years. Indonesia's exports grew by 24 percent in 2021 as a result of rising global consumption and investment.
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During the first three quarters of 2022, Indonesia's export value reached $219.35 billion, up 33.5 percent compared to the same period last year. A strong export performance has contributed to the opening of new jobs and the increase in the government's tax revenues and what is equally important is the rise in national foreign exchange reserves.
Fifth, the results of the BI Retail Sales Survey show the Real Sales Index (IPR) of 200 for September 2022, 5.5 percent higher than the same period in 2021. This increase in retail sales was supported by sales of food, beverages, tobacco and household, communication and information equipment.
Retail sales of spare parts, accessories, clothing and recreation also remained strong. The increase in the IPR reflects the movement of the real sector due to consumption demand which tends to continue to increase post-pandemic.
Sixth, the Composite Stock Price Index (JCI) of the Indonesian Stock Exchange (IDX), which was recorded at 6,949.11 at the end of June 2022, further rose to 7,040.8 at the end of September, or an increase of around 1.3 percent. Meanwhile, the market capitalization as of the end of September 2022, reached Rp 9,268 trillion, an increase from Rp 9,046 trillion in June 2022.
This condition illustrates that investors in the capital market still have a high level of confidence in the national economy and the government's ability to maintain a sustainable growth momentum. The JCI continued to strengthen and at the end of October 2022 had touched 7,098.89. Observers estimate that by the end of 2022 the JCI will be able to reach a new record in the range of 7,400.
Threat of uncertainty
Indonesia can be proud of itself amidst the threat of recession and global uncertainty because it has been able to maintain economic growth in the first nine months of 2022. The economy is expected to continue to grow in the fourth quarter. How about 2023?
Optimism for expansive economic growth is expected to remain intact in 2023. The question is, will the growth rate in 2023 be as strong as in 2022 or lower? Economists are generally divided.
Even so, we still need to observe several fundamental factors that can have a direct or indirect impact on future economic growth.
First, the ghost of inflation, which is feared to reduce growth, is still not seen to have a significant effect on economic growth at this time. The year-to-date inflation rate continued to increase during the January-October 2022 period. It rose to 4.73 percent in October 2022. Meanwhile, the 2021 inflation rate was only 1.87 percent (yoy).
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The increase in the inflation rate, which is persistent and tends to rise until the end of 2022, needs to be watched out for, not to let it further increase and get out of control.
Second, the threat of monetary policy contraction is getting stronger so it will reduce the flow of liquidity in the market. A tight monetary policy is really needed when the inflation rate starts to accelerate. Pressing the brake pedal is needed to control the inflation rate so that it is not too high.
If the brake pedal is pressed too strongly through the increase in the benchmark interest rate, it will result in a decline in economic growth. For example, the United States central bank, The Federal Reserve, had to raise interest rates several times in a short period of time in order to reduce inflation. It reduced the economic growth and even caused negative growth in the second quarter of 2022.
Prepare an umbrella before it rains
The success of Indonesia's economic growth during the first nine months of 2022 has proven that the Indonesian economy is still strong and resilient in facing the threat of global stagflation.
However, we must not let our guard down or feel complacent. The government, together with the monetary authorities, need to prepare a contingency plan if the threat of global uncertainty hits Indonesia.
We managed to get through such a heavy disturbance when the COVID-19 pandemic emerged and were able to return economic conditions to the situation before the pandemic occurred. Commitment and experience from all levels of government in formulating a mix of macro and microeconomic policies that were countercyclical in 2020-2021 can actually bring back the economy to a position of expansion again.
Let's support the government and its staff to be able to deal with the potential threat of uncertainty in the form of a perfect storm that may occur in 2023.
Agus Sugiarto
Agus Sugiarto, head of the OJK Institute
This article was translated by Hendarsyah Tarmizi.
