Realistic assumption of Indonesia's economy
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Bisnis Indonesia - Asumsi realistis ekonomi RI
9 June 2023
By: Tegar Arief
The national economic growth next year is designed to be more rational by considering the global uncertainty and its impact on consumption and investment, which are two of the main stimuli for the gross domestic product (GDP).
Yesterday, on Thursday (8/6), the government and House of Representatives (DPR) Commission XI held a discussion on the basic assumptions of macroeconomic on the 2024 state budget draft (RAPBN) to cut the lower limit of the economic growth target from 5.3% to 5.1%. Moreover, the upper limit remains unchanged at 5.7%.
Finance Minister Sri Mulyani Indrawati said that the lower limit of the economic growth target was cut due to the high increase in risks in 2024.
It is in line with the forecast of several international institutions that predict the global economy and the domestic economy to weaken in the second half of this year, which will continue to next year.
“It is better to cut the lower end from 5.3% to 5.1%,” he said at the work meeting with DPR Commission XI on Thursday (8/6).
The Finance Ministry has mapped out the economic dynamics next year. Domestically, several of Indonesia’s economic indicators are giving expansive signals, including consumption that continues to strengthen.
However, impacts from the global dynamics on the state need to be observed, especially regarding the reduced export trend. Investment performance also has the potential to be restrained, which is in line with the wait and see behaviour of business players following the strong global economic dynamics and the 2024 elections.
Sri Mulyani added that the government also studied the latest economic developments to improve the accuracy of the various basic assumptions that will be used to calculate the 2024 RAPBN.
One of the government’s observation focuses is to lower the upper limit of the economic growth target next year. “We will see the consistency [of the economic growth],” she said.
Bank Indonesia (BI) Governor Perry Warjiyo, during the occasion, said that the upper limit of the economic growth in 2024 was at 5.7%, which is still too high.
In line with the lower limit that will be cut from 5.3% to 5.1%, Perry proposed that the upper limit of the economic growth target needed to also be cut to 5.6%. This suggestion is in line with BI’s economic growth forecast that estimates the growth to reach around 4.7%-5.5% in 2024. “Because [the upper limit of the target] will be too high if only the lower limit is cut,” Perry said.
DPR Commission XI Chairperson Kahar Muzakir said that geopolitical tensions increased global uncertainties and fragmentations. They also affect the growth of the economy in many countries, including in Indonesia.
He added that global economic dynamics and risks as well as their impacts on Indonesia were some of the factors that must be considered in determining the economic growth assumption.
The lower limit that has been agreed upon is in line with the forecast of several international institutions.
For example, Issue 1 of Economic Outlook Volume 2023 of Organisation for Economic Cooperation and Development (OECD) predicts that Indonesia’s economy will grow 5.1% in 2024.
The World Bank in Global Economic Prospects June 2023 forecasts that the national economy will grow 4.9%, which is more realistic.
The international institution sees that economic growth next year will be limited as the main sectors that are the stimuli for the GDP, namely household consumption, investment, and exports, are receding.
Consumption will still face challenges from inflation that has the potential to reduce the purchasing power. Meanwhile, the fiscal space will be tighter compared to the period between 2020-2022.
Moreover, investment is predicted to slow down as business players tend to wait and see for the new government. Meanwhile, the export performance will be under pressure from the normalisation of commodity prices.
This concern is also felt by the government as pressures are coming from the Russia-Ukraine war, the increase in inflation, and the high interest rate trend.
Limited expansion
Responding to the rational assumption for the economy next year, businesses in Indonesia sees that the decision of the government and DPR is appropriate. Historically, the economy has always slowed down every time there is a change in leadership.
Coordinating Vice Chairperson of Maritime Affairs, Investment, and Foreign Affairs of Indonesia Chamber of Commerce and Industry (Kadin) Shinta W. Kamdani said that economic performance in a political year could not be expansive, especially when the global economic prospect is quite challenging.
“The economy will grow significantly when the new government has settled with their cabinet and when they have executed a work programme,” he said Bisnis.
The pessimism of business players is not unreasonable. BI’s data shows that the business world’s expansion this year is still quite limited.
For example, non-construction investment in the first quarter of 2023 only increased by 7.93% from 8.63% in the fourth quarter of 2022. The same goes for construction investment that decreased from 2.58% to 0.08% in the same period.
Exports decreased from 14.22% in the first quarter of 2022 to 11.68% in the first quarter of 2023. Meanwhile, imports plummeted from 16.04% in the first quarter of 2023 to 2.77% in the first quarter of 2023.
The data shows that businesses, especially the processing industry or the manufacturing industry, are still struggling to contribute to the economy.
Segara Institute Executive Director Piter Abdullah Redjalam suggested the government to loosen the fiscal space so that social aid expenditure could be maintained in 2024. That step will strengthen the purchasing power to stabilise consumption. “The government can widen the APBN’s deficit even though it must remain under 3% of the GDP,” he stated.
