The World Bank’s report, “Global Economic Prospects” January 2023, warns of the increasingly real risk of a global economic recession this year (Kompas, 12/1/2023).
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While Indonesia’s economy is still projected to grow by 4.8 percent, it does not mean the country will be protected from the effects of a global recession or economic slowdown. The global economy is projected to only grow 1.7 percent, down from the initial prediction of 3 percent.
Developed countries are projected to only grow 0.5 percent, with the United States and the European Union projected to grow 0.5 percent and 0 percent respectively. China is projected to grow 4.3 percent. Developing countries are expected to grow as well, but are also facing a long period of slowdown due to weakening debt and investment burdens.
The International Monetary Fund also sees Indonesia as a beacon of light in the darkness of the global economy in 2023. According to the World Bank, Indonesia’s economic resilience is supported by sound macroeconomic fundamentals, structural reforms in administration and taxation, as well as having a pace of household consumption and overall business optimism that remain on guard.
Among the factors mentioned, there still needs to be vigilance over the impact of monetary tightening in developed countries, which can raise inflation and put pressure on Indonesia’s domestic economy. China’s economic slowdown must also be anticipated as China is Indonesia’s main trading partner. Exports that once hit a record high with a trade balance surplus for 32 consecutive months, could be affected by the global slowdown.
Pressure on exports and the risk of capital flight due to high interest rates in developed countries make it important to maintain the investment climate and household consumption.
Fiscal stimulus to maintain the people’s purchasing power may still be needed. The World Bank, IMF and observers agree on the importance of fiscal flexibility in absorbing shocks during a crisis. This includes the possibility of widening the fiscal space by increasing the state budget deficit, as long as the figure is still below 3 percent of the gross domestic product (GDP).
Improved or stable debt ratings, which are determined by various rating agencies, also serve as a separate capital for Indonesia in accessing international funding and facing global uncertainty. However, caution must be exercised considering that global interest rates are still high. Prudent and cautious fiscal management must not slack.
The World Bank warned of the increasing debt risks of all developing countries. Over the last decade, debt has more than doubled to US$9 trillion by the end of 2021. Around 60 percent of the poorest countries have defaulted on debt payments or are threatened by debt default. Indonesia itself ranked 34th out of 50 developing countries in terms of debt vulnerability, according to Bloomberg, CMA and the IMF.
Indonesia’s foreign debt figures and the ratio of Indonesia’s debt to GDP have continued to improve since March 2022. The debt structure is also healthy, with 87.1 percent in the form of long-term debt.
This is not the first time that Indonesia has faced the threat of a global crisis. In addition to a solid macroeconomic foundation; solidity, coordination and a credible policy mix; the support of all elements of the nation is also needed to bring this country through difficult times and grow stronger, healthier and more sustainable.