Economy Facing Turbulence

Entering 2023, the Indonesian economy is still facing world economic turbulence. Inflation remains high, with high interest rates to keep it down.

Many countries are predicted to experience a recession. There is a hope that inflation has reached its peak, so the central bank will no longer need to raise its interest rate. Facing this, Indonesia's economy can still grow adequately.

The modern economy is like a wide-body jet airplane with stronger and lighter fuselage materials. It requires an upward force (lift) to take off, in the form of production and consumption, and to overcome the gravity that pulls down in the form of costs.

To overcome the resistance from the front (drag), and to increase the speed, it takes a strong thrust such as investment and efficiency. At a certain altitude, with a stable speed, the ”economic airplane” can cruise and reaches its destination safely.

During the pandemic, the plane practically did not fly (grounded), like the economy, which stagnated or even experienced a negative growth or recession.

Also read:

> Indonesia's Economy in 2022 and Prospects for 2023

> 2023 State Budget as Economic Stimulus

Post-pandemic, the economy has grown quite well again, like an airplane traveling safely to its destination. But soon the weather deteriorates with air turbulence. In the political economy, it comes in the form of the Russia-Ukraine war, as well as China-US geopolitical tensions over the status of Taiwan.

This situation is exacerbated by rising prices (inflation), like an airplane suffering excessive fuel or a fuel leak that causes it to malfunction. In the economy, its manifestations are the rise in food and energy prices, as well as fluctuations in financial markets.

High inflation is curbed by raising interest rates to maintain stability such as lowering aircraft speeds to a safe altitude. It is possible that many large-bodied aircraft will have to be grounded again, like the United States, the European Union and the United Kingdom, whose economies are likely to experience another recession.

Pilots’ decision

The role of the pilot determines the flight path and altitude of the aircraft, especially in bad weather and air turbulence.

A pilot is like the president of a country with the copilot being the finance minister and the governor of the central bank as the navigator. The vice president of the country is like a backup pilot who does not fly it. In practice, it is the copilot who flies the plane with the support of the navigator.

During the post-world financial crisis, interest rates are set very low, making them vulnerable to speculation and fluctuations, even suffering excess liquidity, like an airplane suffering excess fuel or fuel leaks.

Curbing the high inflation by raising the rates is like an action to turn off one of the aircraft's engines, which results in the drastic decline in its speed and altitude.

It could occur because the automation and software to manage fuel distribution are not functioning properly, causing the aircraft to malfunction.

In this situation, the pilot usually slows down the speed, and if done improperly, it amplifies the turbulence. In addition, a mistake in forecasting economic development and inability to curb the high inflation is like an aircraft instrument that provides incorrect indicators of weather, altitude and speed.

Curbing the high inflation by raising the rates is like an action to turn off one of the aircraft's engines, which results in the drastic decline in its speed and altitude.

“Economic planes” are still flying

Facing quite strong turbulence, the Indonesian ”economic aircraft” are still flying at a commensurate speed and altitude. Consumption on the expenditure side and high commodity prices on the production side are still the backbone of the economy.

In 2023, economic growth can still be around 5 percent. But the high inflation, rising interest rates and the economic recession in many countries have a negative effect on the production sector, especially industry.

Passengers of the “economic aircraft” are businesspeople and consumers with high-value goods and services, who depend on the reliability of pilots in flying “economic aircraft”, especially in the face of turbulence and uncomfortable weather.

First and business-class passengers are usually dominated by bankers, big businessmen and wealthy families. They may continue to invest and spend to sustain growth.

Also read:

> Inflation and High Interest Rates

> Global Recession and Policy Choices

In general, in 2023, banks, in their business plans, are still targeting growth of more than 10 percent, and this is commensurate with economic growth of around 5 percent.

Passengers on large airplanes are also affected by inflation. They are closely interrelated with one another (entanglement) as creditors and debtors, producers, consumers and distribution chain such as suppliers and producers. Their linkages even reach passengers on other planes.

With the advancement in information technology, all of this is possible. They are generally also prone to panic because they are worried about turbulence caused by bad weather or possible accidents.

When they have to be evacuated due to aircraft malfunctions, they would face a problem, even if they get the priority lane, especially when the plane crashes. It is just like an economic and financial crisis. They will ask for bailouts in unimaginable amounts.

It is up to the skill of the pilot and navigator to balance several key factors.

Banking liquidity is still adequate, even though the navigator Bank Indonesia (BI) is likely to raise the policy interest rate again. The other problem, in addition to the inflation, is the impact of the decline in the supply of US dollars due to capital outflows.

The difference between the BI policy rate and the US central bank’s interest rate remaining at only 0.75 percent – it should be around 2 percent -- will further pressure the rupiah.

It is up to the skill of the pilot and navigator to balance several key factors, such as high interest rates, inflation and the value of the rupiah to obtain growth (speed) in conditions amid bad weather and turbulence.

Low-cost economy aircraft

Not all passengers can afford to pay and be accommodated in large-bodied aircraft. Many passengers use small-bodied low-cost aircraft with short and measured distances.

Its speed is commensurate with large-bodied aircraft with the same cruising altitude, but with a shorter cruising range.

Rising food and energy prices are also having a serious impact on low-cost aircraft. The passengers are small and medium business actors as well as middle- and low-income customers. They are very focused on low cost.

There is no business class. The passengers are usually less disciplined, especially if there is no seat number. Indonesia's low-cost “economic planes” still fly at speed and are commensurate with their altitude.

Also read:

> Impact of the Global Economic Recession

They also act as feeders for other large aircraft. What is of concern, of course, is the feasibility of the aircraft and the pilot related to the level of safety.

In addition, there are also commuter planes with propeller engines with fewer passengers and shorter travel distances. Cruising speed and altitude are also lower than that of jet aircraft. Its role can also be as a feeder for jet aircraft.

“Economic planes” are even integrated with economic activities, both on land and at sea. Linkage occurs through the network transportation, communication and of course with the passengers. Large airplane passengers play a big role in activating the network.

Of course, many residents cannot afford to be airplane passengers. They have low incomes and do not have steady jobs. Even so, they are also affected by inflation, even more severely. For them, social programs are the right move.

Preparing for a change of pilots

Twenty-23 is also the year of preparation for the replacement of pilots, whose election will be held in early 2024. Some of the aircraft's senior crew even participated in the selection of the pilot. Of course, this affects the effectiveness of their own works. A new pilot may be chosen to control the aircraft and change direction.

The pilot, with the new copilot, navigator and flight crew, is of course expected to be able to control the plane well, even though the weather may still be bad, with turbulence, to reach their destination safely. Meanwhile, the “economic aircraft” itself does not only need maintenance, but also modifications and automation to make it more efficient and environmentally friendly.

Passengers should also be involved in improvements in functions and services. That way, the economic growth can be quite high and sustainable.

ARSIP THE HABIBIE CENTER

Umar Juoro

Umar Juoro, senior fellow of the Habibie Center

This article was translated by Hendarsyah Tarmizi.