Crucial quarter for Indonesia's economy
This article has been translated by PwC Indonesia as part of our Indonesia Infrastructure News Service. PwC Indonesia has not checked the accuracy of, and accepts no responsibility for the content.
Bisnis Indonesia - Kuartal krusial ekonomi RI
1 November 2022
By: Maria Elena, Ni Luh Anggela, and Wibi Pangestu Pratama
Extra efforts will be required to boost national economic growth in the final quarter of this year. The reason, in addition to uncertain direction of the global economy, is because domestic inflation is also predicted to see another increase.
The consensus of Bloomberg economists that Bisnis gathered on Monday (31/10) even estimates that inflation in Indonesia in October 2022 will surpass 6% year-on-year (YoY). Last time, the Statistics Indonesia (BPS) reported September inflation at 5.95% (YoY), higher than that of August at 4.69% (YoY). BPS is releasing October 2022 inflation data today, Tuesday (1/11).
The risk of inflation increase is closely related to the fuel price hike on 3 September. Some predict that inflation is very likely to go up again in the fourth quarter of 2022.
The forecast is perhaps not wrong. Historically, BPS records that the impact of fuel price hike on inflation normally occurs in the second month from when the unpopular policy is implemented.
Moreover, the economic growth for the past three months this year has faced a series of dynamics, from benchmark interest rate hike, weakened purchasing power due to fuel price hike, to the Russian-Ukrainian geopolitical tension that has heated again and triggered food crisis.
Most recently, Russia manoeuvred by stopping grain export including wheat, worsening the risk of food inflation for the rest of this year.
Bank Indonesia (BI) as the authority tasked with inflation control also fully understands the gravity of economic risk brought about by the various dynamics. Russia’s unilateral move is worried to trigger an increase in CPIs across countries, including Indonesia.
If that scenario comes to pass, central banks in various countries are predicted to respond quickly by increasing their benchmark rates. BI has also indicated that it plans to implement another raise in its reference rate to rein in inflation.
BI Deputy Governor, Dody Budi Waluyo, said that the use of monetary instruments will continue to be boosted despite at the expense of economic growth rate this year.
In his opinion, given the inflation emergency, the risk of the economy being eroded this year is not top priority at the moment, as the economy will become unsound if the inflation rate far outpaces that of the economic growth.
“The slowing growth is second priority, as there is no bargaining on the issue of stability. There is no such thing as high [economic] growth if it is followed by high [inflation] prices,” he said, Monday (31/10).
Dody added that the domestic inflation risk is very high following the relaxation of people’s mobility restriction policy, which drives an increase in demand.
In his opinion, reflecting on the heavy pressure faced from both external and domestic factors, the risk of missing this year’s economic growth target is relatively high because of the impact of benchmark rate increase.
He said that BI will be prudent in deciding on the benchmark rate policy by paying attention to goods that contribute the most to inflation.
“Perhaps our economic growth is not as high as estimated but BI will not raise the reference rate unless absolutely necessary.”
ECONOMIC PROSPECT
Referring to the survey by BI, the inflation level in October 2022 reached 5.8% (YoY), while the Bloomberg economists consensus was at 6.04% (YoY). In September 2022, inflation stood at 5.95% (YoY).
Meanwhile, the economic growth target set by the government this year is 5.2%, and BI’s estimate is within the range of 4.5%-5.3%.
With regard to economic prospect, Fiscal Policy Agency (BKF) of the Finance Ministry estimates that growth in Q3/2022 would reach 5.7%, higher compared to that of Q2/2022 at 5.4%.
However, the fiscal authority is wary of economic growth slowdown in the final quarter this year, which could affect the economy’s movement throughout 2022.
In order to secure the economy, the government will maximise spending of both the State Revenue and Expenditure Budget (State Budget) and the Regional Revenue and Expenditure Budget (Regional Budget).
Finance Minister Sri Mulyani Indrawati remarked that although Indonesia was able to overcome the Covid-19 pandemic, the government remains prepared to tackle new challenges, among which are geopolitical tension and global crisis threat.
According to Sri Mulyani, the State Budget will remain the instrument relied on to provide protection to the national economy, both in terms of consumption and production.
Economists view that the impact of fuel price hike will continue on for a while, even up to the first half of next year. The same is true for its impact on the economic growth rate.
Bank Mandiri’s economist Faisal Rachman said that the fuel price hike not only has a first round effect on fuel prices and transportation service prices but also a second round effect, namely on other goods and services.
“This means that the main and core inflation could heat up significantly. We predict the inflation rate will hit 6.27% by the end of 2022,” he said.
Executive Director at the Centre of Reform on Economics (Core) Indonesia Mohammad Faisal explained that the fuel price hike has a trickle down effect on inflation.
The policy raises the inflation component of administered prices and trickles down to the inflation component of volatile foods. By the end of this year, Faisal believes inflation potentially reaches above 6% (yoy).
In his opinion, inflation becomes one of the aspects that can affect economic growth, impact loan demand, and even investment. Faisal has even calculated that this year’s economy could grow only 4.5%.
He added, domestic consumption becomes the main support for economic growth. As long as inflation does not erode public consumption, economic growth still stands a chance to record positive performance.
“Private consumption is driven mainly by the middle-upper class that is not so affected by inflation,” Faisal concluded.
