THE WAR IN UKRAINE What impact does it have on the Indonesian economy ?

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THE WAR IN UKRAINE
Illustration: LEONARDO A. PUTONG

Jakarta, IO – The war in Ukraine has been going on for 3 weeks, and has already exerted a huge impact on the Global economy. The European Union has called Russia’s invasion of Ukraine the biggest threat since World War II. There has never been a direct invasion of a state at the gates of the European Union and NATO member countries. World economic projections from various international institutions predict slow global growth until at least 2023. The Ukraine war is a “hot spot” that can shakes many fundamental institutions and customs. 

Russia’s contribution to the economy is actually minimal, at only 1.7% of total global output. That nation does have the power to level a shock to the world economy, especially to oil and gas prices. Russia is a source of oil gas station with reserves no less important than those of OPEC countries. When the largest oil producers feel the impact of supply chain disruptions, panic shoots crude oil prices up to US$120 per barrel, in just two weeks. 

Rising prices of crude oil and natural gas trigger double inflation. The US recorded the highest inflation of 7.9%, a figure not seen in the last decade. Consumers will have to bear the higher cost of fuel. The purchasing power of Europeans and Americans fell sharply. The highest recorded increase in the US cost-of-living linked to fuel was the price of second-hand cars, electronic products and food & beverages. 

Emerging countries face a different impact. A commodity bonanza windfall may help the state budget. However, the cost of shipping goods from Russia to all countries, including Indonesia, has almost doubled. The risk due to war also caused logistics ships to seek out alternative, safer routes. Not a few insurers withdrew from guaranteeing logistics shipments across the Black Sea, due to fears of entering a combat zone. (FIGURE-1) 

FIGURE-1

Wild crude oil prices are triggering big questions about the stability of energy prices in the country. BPS data revealed that the total volume of oil imports nationally increased 14.07 percent to 42.13 million tons in 2021. Meanwhile, the value jumped 79.07% to US$25.53 billion. Rising oil prices trigger a significant increase in fuel subsidy costs. Realization of subsidies for fuel and 3 kg LPG gas has been increased up to IDR 1 0 . 2 trillion in January 2022, just before the war. This figure is an increase of around 347.2 percent from the realization of energy subsidies in January last year, of IDR 2.3 trillion. 

Our projection suggests that from initial IDR134 T budget of energy subsidy, it estimates government will need another IDR180- 200 T to hold energy prices stable until year-end. Does the government have enough funds? With a projected average crude oil price of 86 USD per barrel until the end of 2022, state revenue is estimated to gain IDR69 trillion. This figure is obtained from a sensitivity of IDR 3 trillion per US$1 per barrel increase in crude oil prices compared to the ICP assumption in the 2022 State Budget. Specifically, the projected increase in tax revenue is IDR 18.4 trillion and PNBP of IDR 50.6 trillion. 

Holding the energy subsidy is also challenging because government expenditures piled up as oil prices increased. In terms of state spending, it is projected that there will be an increase in the aggregate expenditure burden of IDR 59.8 trillion. Central government expenditures increased by IDR 43.7 trillion and regional budget transfers by IDR 18.4 trillion. 

However, government should take pre-emptive moves to stabilize our domestic fuel price. The government should continue to hold the price of Pertalite (non-subsidized fuel). Pertalite consumption reaches 50% of total national fuel consumption. The government can add compensation funds to Pertamina. For non-subsidized fuel such as Pertalite, it is only necessary to allocate compensation funds through the APBN scheme. 

Compensation funds are obtained from a windfall or profits resulting from a boom in comm o d i t y prices. Income will increase immediately, so the state budget has room to withstand the increase in the price of Pertalite. The estimated economic price of Pertalite is above Rp. 11,500 per liter. So, if it is sold for Rp. 7,650 per liter, Pertamina must bear the difference of Rp. 3,850 per liter. The difference should ideally be closed using the windfall of state revenues from coal and palm oil export tax revenue. 

FIGURE-2

Apart from oil problems, wheat became the most sought-after commodity, when news came of Ukraine being attacked. Russian tanks passing through the main grain fields in Ukraine, the largest wheat producer in the world, created chaos in the grain trade. Indonesia should be worried and must take various measures. Per year, Indonesia imports US$700 million of wheat from Ukraine.

Meanwhile, finding alternative sources will take time, because the global price benchmark for wheat is also rising rapidly. Searching for wheat from Australia or China is not that easy. Everybody is hunting for cheaper and reliable raw materials. 

Russia also well known as a fertilizer producer. Of course, the shortage of ammonia, which is the raw material for fertilizers, is a serious threat. Referring from Trade-map data, fertilizer imports from Russia to Indonesia were recorded at US$210 million in 2020, occupying the second highest position after imports of steel. For the agricultural sector, which has faced the challenge of rising distribution costs since mid-2021, the reduced supply of raw materials for fertilizers will add to the burden of production costs. This is a situation that is quite risky for food price stability throughout 2022. The government is advised to immediately increase the allocation of fertilizer subsidies because buying non-subsidized fertilizers, especially imported ones, is certainly not affordable for farmers. 

On the other hand, there is an opportunity to encourage domestic ammonia production. Several business actors, especially SOE fertilizer companies – i.e. Pupuk Indonesia, should take advantage of this momentum in the loss of supply from Russia to increase their ammonia and fertilizer production targets. (FIGURE-2)