Projected 2019 Indonesian economic growth

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DR. Fuad Bawazier, MA
Economist and Former Finance Minister in Cabinet Development VII

IO – During his campaign, Jokowi promised 7% economic growth. However, within 4 years of his rule, our economic growth remains in the 5% range. The President has taken many steps to stimulate economic growth, such as:

  1. Expanding national debt;
  2. Granting Tax Amnesty;
  3. Massively constructing infrastructure; and
  4. Issuing 16 Economic Policy Packages.

Unfortunately, none of these steps were designed properly. Other than being controversial, these steps have received a lot of sharp criticism, as they are costly and fail to increase economic growth, according to target.

  • A drastic increase of national debt with the biggest yield in the Asia-Pacific region is now a cause for concern. Does the State Budget have a long-term ability to pay down the principal and interest on these debts? The usage of debt money is not on target, because not everything is used for capital expenditures.
  • Tax amnesty only generated Rp 143 trillion or 14% of the targeted fund repatriation from abroad. Furthermore, due to its sloppy design, fiscal authorities feel that the tax amnesty was actually a legal instrument that allowed tax payers to hide from their tax obligation.
  • Jokowi’s 16 Economic Policy Packages are helpless in their effort to leverage investments. In fact, the latest package, which was only issued on 16 November 2018, was revoked after bitter opposition from both Jokowi’s opposition and supporters.
  • Many among us question the viability of the costs and benefits of the Government’s imprudent construction of infrastructure. While initially, President Jokowi planned to sell the completed projects, in order to get funding to construct new infrastructure (which would theoretically stimulate economic growth) his regime found that projects once completed cannot be sold, except at a severe loss.

It is stated that infrastructure during Jokowi’s era has been too costly and of low quality, pointing to steep maintenance costs later on. This is why they have been unsaleable. Meanwhile, the number of infrastructure users is generally below target, dismaying investors even further.

Nearing the 2019 political year, Bank Indonesia, Statistics Indonesia (Badan Pusat Statistik – BPS), the World Bank, and domestic and foreign economic experts all forecast Indonesia’s economic growth will remain at around 5.0%-5.3%, and that even this will be accompanied by various negative aspects and sentiments that tend to impede the rate of growth. Goldman Sachs is the only one to predict that Indonesia’s economic growth in 2019 would get to 5.7%, as predicted in Economics Research for September 2018. The State Budget’s official target is 5.3%.

What is there of note which we need to be concerned about in relation to the prediction of economic growth in 2019?

I. FINANCIAL SECTOR

  1. Foreign reserves have sunk USD 15.35 billion within 9 months in 2018, to USD 114.8 billion.
  2. Current Account Deficit (CAD) reached USD 22.6 billion within 9 months in 2018, or 2.86% of GDP. However, CAD during Q3-2018 reached USD 8.8 billion or 3.37% of GDP. It is obvious that all of the Government’s policies expended toward augmenting exports, investments, economic growth and dollar inflow to Indonesia, as well as efforts to reduce imports, particularly petroleum fuel imports through the B20 program, have been proven ineffective.

On the other hand, capital transaction and financial surplus in January-September 2018 was only USD 10.64 billion. This is much lower than the figures for the previous 2 years (2016 and 2017) at USD 29.35 billion and USD 29.23 billion, respectively. Therefore, Balance of Payments has been in a constant deficit from the start of 2018 to the end of Q3-2018. In Q3-2018 alone, the deficit in our Balance of Payments is USD 4.4 billion.

  1. Trade Balance is USD 3.34 billion in a deficit within the first 9 months of 2018, since Indonesia’s commodity-based exports are suffering from depressed global prices. However, in October 2018 the Trade Balance deficit is down to USD 1.82 billion, including petroleum fuel deficits at USD 1.4 billion. Therefore, the Trade Balance deficit for the first 10 months of 2018 is USD 5.164 billion.
  2. Meanwhile, portfolio investments (part of financial transactions) “hot money” that Indonesia has been enjoying, turned cold, to a negative USD 1.2 billion within 9 months in 2018. This is much lower than the figures for the previous 2 years (2016 and 2017), which had positive (inflow) rates of USD 19 billion and USD 20.65 billion, respectively.

In conclusion, there is no internal indication of anything that would tend to strengthen the Rupiah exchange rate – other than currency swaps done with trade partners.

II. REAL SECTOR

  1. Production GDP growth during 9 months of 2018 is as follows: Q1 = 5.06; Q2 = 5.27, and Q3 = 5.17. Consumption growth over the same period: Q1 = 4.38; Q2 = 3.90, and Q3 = 4.41. The difference between production and consumption is called “inventory change”, which for Q3-2018 sits at 0.76. From these figures, we see that production growth is bigger than consumption growth. In other words, some production is not absorbed by the market because supply exceeds demand.
  2. The above figures tie in with the “open secret” that Indonesia’s economy is not only over-capacity, but also over-production. Therefore, it is only natural that the investment yield in Q3-2018 at Rp 173.8 trillion is 1.3% smaller than that of Q3-2017, at Rp 176.6 trillion. This is because in the short term what we need is consumption growth or an increase in domestic buying power, not new investments other than for exports – or at least as an import substitution strategy to cut the Current Account deficit.

The Government must be able to increase demand for both domestic and export consumption, instead of uselessly increasing supply that the market cannot absorb, let alone seeking new investment in sectors already over capacity. Most importantly, there must be an opportunity for domestic production to be absorbed by Government and State-owned enterprise projects, particularly infrastructure projects.

  1. With the recent and continuing strengthening of the Rupiah exchange rate, which has been effected in order to maintain its exchange rate with the dollar, it is not impossible that producers will increase their efficiency by cutting production in 2019 in order to be able to sell off unsold inventory. In this case, ceteris paribus, economic growth in 2019 is predicted to be only 4.5%.