Facing Economic Uncertainty

When the world economy faces uncertainty, domestic consumption is the mainstay. The Indonesian economy can still be exploring at a speed of about 5 percent in facing this uncertainty.

Banking problems in the United States (regional bank) and Switzerland (Credit Suisse), with their influences on many countries, have been solved.

Inflation has slowed down, so the central bank is expected to pause from raising interest rates. Similarly, with Indonesia’s strong banking conditions, inflation has slowed to below 5 percent, the rupiah is appreciated, and Bank Indonesia (BI) not only holds back policy interest rates, but also sees the possibility of lowering them.

Even so, the US and the European economy is not free from the possibility of negative growth or a recession. The rapid and high increase in interest rates suppress economic activities.

Many fund owners choose to be safe by moving from small and medium banks to large banks and bonds. The possibility of a credit tightening occurs. The flow of funds to the digital economy and financial technology also decreases. Many companies lay off workers again.

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OPEC+ helps reduce production to prevent a decrease in oil prices. As a result, oil prices rise. This situation makes it difficult for the central bank in controlling inflation and avoiding a hard landing or recession. Therefore, the increase in interest rates by the Federal Reserve is still possible before the pause resumes.

The economic prospects in Asia have improved with the opening of China, with a positive influence at the regional level. China's economic growth is estimated at 5.5 percent and the Indonesian economy at 5 percent. However, multilateral institutions, such as the International Monetary Fund, the World Bank, and DB, reduce projections to 4.8-4.9 percent.

Finance is the most decisive

In modern economics, finance is the most decisive in economic development and its fall. Banking, capital markets and bonds, as well as other financial markets, facilitate financial flow. Cross-border financial transactions are around one and a half of the world's gross domestic product (GDP). Therefore, financial problems are transmitted quickly throughout the world like electromagnetic waves, spreading fast everywhere.

Banking loans in developed countries and certain developing countries, such as China, are about one and a half to two times GDP. Capital market capitalization exceeds its GDP. Meanwhile in Indonesia, the ratio for credit is still around 40 percent and the capital market capitalization is around 50 percent of GDP. Therefore, the effect of monetary policy on the financial sector and the real sector in Indonesia is relatively low in transmission.

In anticipating the possibility that there is still a banking problem, stronger risk management is needed. Even though capital adequacy and liquidity are in good condition, the level of risk tends to increase. In addition, the weakening of economic activities in the US and Europe decreases exports, especially those related to manufacturing products.

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The normalization of commodity prices, especially coal and crude palm oil (CPO) as main export products, affects the export and credit quality. The capital market is depressed by the fact that there are still fears of banking problems in the US and in Europe. Adjustment steps in risk appetite and reduced risk (derisking) must be done even if this corrects credit growth.

Credit growth in Indonesia can still be expected to be around 10 percent. With consumption loans and capital still being quite high, investment loans with the normalization of commodity prices are likely to experience a slowdown. A gradual increase occurs for interests of deposits and loans that can still be adjusted.

Adjustment steps in risk appetite and reduced risk (derisking) must be done even if this corrects credit growth.

The restructuring of credits left by the pandemic remains at around Rp 427 trillion. Credit restructuring facilities from the Financial Services Authority (OJK) ends in March, with certain sectors getting an extension. For this reason, banks that utilize restructuring facilities still have to adjust the allocated provisions.

The condition of companies' financial balances in general is quite encouraging. There is no gap (mismatch) between assets and liabilities significantly even though previously the companies were in losses in the bond ownership which had fallen. However, losses were resolved with increases of operational revenues.

Supply chain problems

The prohibition of high-tech exports, especially chips from the US, Europe and Japan to China, disrupts the global supply chain that has not yet recovered from the pandemic. This situation provides benefits to India and Vietnam, which fill the gap in the chip supply chain. Meanwhile the continued Russian-Ukrainian war creates high geopolitical tensions, which significantly disrupt the development of the global supply chain, especially foodstuffs.

Indonesia wants to play a bigger role in the global supply chain, especially for batteries and electric vehicles (EVs). Various efforts to attract investment are carried out by providing various attractive incentives. Nickel export prohibitions are carried out, which will be followed by the export ban of other raw materials.

The continued Russian-Ukrainian war creates high geopolitical tensions, which significantly disrupt the development of the global supply chain, especially foodstuffs.

However, the export prohibition does not guarantee the development of the downstream industry due to a tight competition. In addition, this step brought trade disputes with the related importing countries.

More realistic policies, such as domestic supply obligations, are more in line with the calculation of cost and benefits. Thus, the possibility of success in increasing the role of the global supply chain becomes stronger.

Consumption is the mainstay

When the world economy faces uncertainty, domestic consumption is the mainstay. Consumption grows quite well in the range of 5 percent. Growth in consumption as an economic driving force is still reliable. With controlled inflation, consumer confidence is maintained.

Of course investment is also important as the economic driving force. Improvement of the investment environment with the enactment of the Job Creation Law and focus on developing the global supply chain can be expected to increase investments.

Exports as an addition to the driving force are in the possibility of weakening due to the quite high uncertainty in the global economy. Even so, the Indonesian economy can still be exploring (cruising) at a speed of about 5 percent in facing this uncertainty.

KOMPAS/PRAYOGI DWI SULISTYO

Umar Juoro

Umar Juoro, Senior Fellow at the Habibie Center

This article was translated by Hyginus Hardoyo.