WARDING OFF A GLOBAL RECESSION Is Indonesia’s economy at risk?

29
globe
LEONARDO A. PUTONG

Jakarta, IO – The telltale signs that global economy is slowing down was when the International Monetary Fund (IMF) said that it planned to revise the 2022 global economic outlook on July 26. It is worth noting that the IMF has done this twice so far this year. In January, global economic growth was estimated to be around 4.4 percent, down from October 2021 projection of 4.9 percent. Then, in April the IMF again slashed its forecast to 3.6 percent after Russia attacked Ukraine, thrusting the global economy further into uncertainty. Many countries are now staring at sharp economic downturn, and even the risk of recession is rising by the day. 

The Russia-Ukraine war came on the heels of the Covid-19 pandemic when the world has yet to fully recover. As the conflict becomes protracted, it has sparked a global food and energy crisis as prices of essential commodities sky – rocketed. The pandemic and the war have caused unprecedented global supply chain disruptions. The warnings that the world is likely to enter recession has caused jitters across both advanced and developing economies. 

Another factor that further weighs on the global economy and may precipitate the recession is the rise in global inflation, especially in advanced economies. This has resulted in the aggressiveness of the Federal Reserve (the US central bank) to hike its benchmark interest rates, twice so far. In early 2022, it approved a 0.25 percentage point rate hike, the first increase since December 2018. And on June 15, it raised it further by 75 basis points, the largest increase since 1994. This defied analysts’ early projection that the Fed would be moderate and measurable in hiking its interest rate to minimize its impact on the still fragile global economy. As we all know, the US is already facing a record high inflation and it kept rising very quickly, from 7.5 percent yoy in January to 9.1 percent by end of June, its highest in 41 years. The rising inflation trend in the United States has left the Fed with very little wiggle room, forcing it to hike the benchmark interest rate even more aggressively to curb runaway inflation. As a result, the financial sector was shaken as the US dollar strengthened sharply following the tight monetary policy by the US central bank. For developing countries, the situation is even more complicated. After previously lagging behind in the pandemic recovery, they now face the volatility of currency exchange rates. This exacerbates the sluggish economy, heightening risk of a recession. (FIGURE-1) 

Indonesia exposed to global recession? 

In the case of Indonesia, which has a relatively small volume of international trade (export-import) ratio of 40 percent of GDP, the impact of the global recession from the trade track can be said to be relatively limited. This is of course on condition that the global recession is not too deep and prolonged. However, the global recession risk this time around is slightly different when compared to the global recession at the peak of the pandemic in 2020. At that time, all countries including Indonesia restricted movement which resulted in economic contraction while this time the recession is triggered by a surge in commodity prices, which adversely impacted import-reliant countries while benefiting commodity-exporting countries. As Indonesia is one of the major exporters of commodities, even though the increase in commodity prices has an impact on purchasing power at a macro level, it also enjoys windfall from higher prices of commodities, especially palm oil. This is why external economic pressure can still be relatively cushioned by the performance of the domestic economy. 

Not surprisingly, recently Bloomberg noted that the probability of recession for Indonesia is only at 3 percent, lower than Thailand’s 10 percent and Malaysia’s 13 percent. However, of course, this is not something to celebrate, let alone make Indonesia complacent about the immunity of its economy against the effects of the global recession. Indeed, Indonesia must remain vigilant. The reason being, if most countries in the world experience a recession, the demand for goods and services from Indonesia can also plunge because the purchasing power of importing countries is weakened. As a result, Indonesia’s exports will decline and this can erode the country’s foreign exchange reserves and its ability to defend the Rupiah exchange rate, which is already under pressure. When the Rupiah weakens, it can trigger the risk of recession from the financial track. This is in line with Indonesia’s high demand for imports, be they for raw materials, industrial auxiliary materials as well as food items the country doesn’t produce. Therefore, it is highly important that Indonesia is able to mitigate the global recession risk. Preventive measures need to be taken so that the economy can continue its recovery amid the risk of a global recession.