Indonesia Growth Analysis.docx
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Indonesia Growth Analysis We all know that we were having a rough economy volatility over the course of 2018, this was in line with the rising political tensions, the so famous trade war between Tiongkok and the US, and lastly the prolonged depreciation of rupiah. In order to overcome the declining of Rupiah exchange rate the Indonesian government needs to find the right solution to clearly address the external and internal issues which were involved since the 1998 financial crisis. On the other hand the government is still optimistic that Indonesia’s economy will still grow slightly by 5.1% to 5.5% in 2019 (BI Forecast).
Gross Domestic Product The country is expected to experience a deficit of 1.84% against its gross domestic product (GDP) in 2019 with estimated revenues of 2.142 trillion IDR and expenditure of 2.439 trillion IDR, up from 2.204 trillion IDR in 2018. Tax revenue is expected to reach 1.781 trillion IDR compared to 1.609 trillion IDR in the previous year. Energy As for nergy sector, the energy subsidies and consumptions are predicted to give a lot more pressure to the state budget. This prediction is based on the energy consumption rate and prices as well as the government’s decision not to change the pricing policy knowing that Indonesia is having an increase in the people’s purchasing power and the government’s popularity ahead of the elections. The Indonesian government allocated an energy subsidy of 157.79 trillion IDR in the 2019 state budget or up 65% from 94.6 trillion IDR in the 2018 state budget. The subsidy consists of 100.69 trillion IDR for fuel subsidies and 57.10 trillion IDR for electricity subsidies. Banking In the banking sector, the increase in Bank Indonesia’s 7 days reserve repo rate (BI7DRR) will lead to an increase in the bank lending rate in 2019. Until the third quarter of 2018, Bank Indonesia (BI) has increased its reference rate by 125 bps to 5.5%. As a result, banks are expected to increase their lending rate by 25 - 50 bps. If BI further increases its rate to 5.75% in the last quarter of 2018, the lending rate will go up by 30 bps - 60 bps. The increase in the overall lending rate will discourage potential lenders while at the same time increase the risk of non-performing loans. Consumer loans, in particular, are at risk given their significant role in Indonesia’s banking sector as well as consumerism patterns.
US VS Tiongkok Trade War
Soaring Imports
Upcoming Political Turbulence
Indonesia's Economic Growth in 2019
Rupiah Depreciation
US vs Tiongkok Trade War In July 2018, US and Tiongkok has been increasing import duty on goods worth $16 billion and $34 billion USD respectively. In September 2018, Trump added another 10% increase in import duties on Chinese products worth $200 billion USD and that was only the starting because Trump planned to increase it by 25% in January 2019. Tiongkok knew what was going on and they chose to retaliate Trump’s action by increasing Tiongkok’s import duty on US products worth $60 billion USD. As the worst happened, similar steps were also taken by the US administration against its other major trading partners, including Indonesia, with the ultimate goal to curb its growing trade deficit. The US administration took a number of steps to tackle this issue including reviewing the eligibility of 124 Indonesian products included in the generalized system of preference (GSP) as well as asking World Trade Organization (WTO) to impose a fine of $350 million USD as part of an import restriction policy against its products. Some analysts predict that Indonesia's export revenue may decline up to $11 billion due to this ongoing trade war. Bank Indonesia (BI) somehow managed to stem this risk in order to prevent the further Rupiah depreciation and capital outflows. As an increase in the Fed’s funding rate will cause capital outflows from the country, this move will cause bank interest
rates to rise which could inhibit loan growth and lead to a spike in non-performing loans that will eventually hamper economic growth.
Soaring Imports Recently in 2018, the Indonesian government created an income tax regulation (Finance Minister Regulation No. 110/2018) which make an increase in income tax of up to 10% on 1,147 imported consumer goods, including cosmetics, furniture, clothing, electronics, automotive and food products. This regulation was made because of Indonesia’s growing deficit due to the country’s mounting import levels over the last decade. In 2018 during January to August the import grew 24.52% to $124.18 billion USD from $99.73 billion USD in the previous year. Oil and gas account for the majority of Indonesia’s import with other significant imports being machinery and mechanical planes, automotive, organic chemical material, iron, steel and plastic. There are other measures from the Indonesian government like implementing mandatory B20 requirements to reduce oil imports and requiring the industry to increase local content usage. The goal of this measure is to improve the country’s trade balance which will later lead to a lower and weaker demand of US dollar and a stronger Rupiah. However this measure have a drawback like at the end of the day they will serve the consumer level with higher prices and it will slow down the economy as a whole. There was a report from analysts that the real culprit behind the mount in imports is the Trade Ministry’s policy that support and recommend the import action for food commodities such as rice, raw sugar and salt. In addition, the Indonesian government has also halted a number of infrastructure projects, including those deemed of national strategic importance, such as 35 GW power projects, which relied heavily on imported machinery.
Rupiah Depreciation Regarding the rupiah depreciation issue, many reports believe that the currency in 2019 will remain volatile and under pressure in the short-term because of monetary tightening in the USA vs Tiongkok trade war and rising crude oil prices that put more pressure on Indonesia's current account deficit. At least this condition will stand true until the next elections. From January until September 2018, the Indonesian currency
has declined by more than 10% from 13,345 IDR to nearly 15,000 IDR to the US dollar; the lowest level since the 1998 financial crisis.
Bank Indonesia (BI) has been actively in trying their best to prevent further depreciation of the Rupiah through actively intervening in the market as much as possible. As a result, Indonesia’s forex reserves plunged from $131.98 billion USD in January 2018 to $117.8 billion USD in September 2018.
Upcoming Political Turbulence Indonesia embrace democracy as its government system which focused on “from people, for people and to people”. Democracy means that every Indonesian has the right in every decision making which can change their life and this has no exception in voting for the next president. Soon the people of Indonesia will have to vote in a president election for 2019-2022 period. In the heat of president election, the moment will surely affect certain sectors in a country, one of it is economics. In short term, the effect that will be felt easily is the increasing expenditure done by the success team for every presidential candidate. In long term, it will be related a lot with the vision and mission of the president, whether it will be done perfectly or wrongly. There were a lot of real-life cases for this, for example, Venezuela which had a dire crisis recently. But still there are a couple of countries that can still maintain the stability of their economics even though they had a political turbulence. For example, Japan, Korea, Taiwan.
All that things said, the reality is that a lot of economics expert stated that the upcoming presidential election in 2019 will only have a little impact towards the Indonesian economics other than new regulations. As we quoted the governor of Bank Indonesia (BI) Perry Warjiyo who said “The source of uncertainty of Indonesian economics will come mostly from the growth of the global economics which related to the upcoming presidential election” The same statement was also stated by Institute for Development of Economics and Finance (indef) which stated “The effect would be relatively small, its around 0.1-0.2% towards the Indonesian economics”. Lastly, we quoted Tony Prasetantono from University of Gajah Mada (UGM) that agrees with the statements we presented above. According to him the performance of economics, let alone investment, has no relation at all with politics. In 2009 presidential election, It was true that the economics growth of Indonesia was having a disruption. But it was never because presidential election, it was because the global financial crisis that hit the world. Even in 2014, the pressure of economics were caused by the impact of global factor like the soaring price of oil. At that time the oil price hit $100USD/Barrel which give pressure on the state budget.
Conclusion According to the analysis that we presented above, we believe that Indonesia’s economic prospects in 2019 are rather in a mixed bag. If we are speaking in the short term idea, the economic growth is expected to be in modest level given the Rupiah depreciation, capital outflows, the widening of the trade and considering the impact of the upcoming presidential election. Usually investors will hold themselves a bit after the presidential election, the main reason is because the whole situation might turn upside-down when there is a new president coming up with their new regulations regarding doing business in the said country. However, for a long-term investment, it might be the right time for the investors to invest in the country, especially in its financial instruments. It’s because the Indonesian stocks and securities are highly undervalued at the moment because of
the Rupiah depreciation and thus present a very interesting opportunity for investment. And as for the upcoming presidential election issue, we think that it won’t cause any long-term instability in the Indonesia’s economics as long as there is no new twisted regulations which can turn things upside-down.
REFFERENCES https://www.bps.go.id/pressrelease/2019/02/06/1619/ekonomi-indonesia-2018-tumbuh-5-17persen.html https://www.tempo.co/abc/3113/pemilu-2019-dinilai-kurang-pengaruhi-perekonomian-indonesia https://www.kompasiana.com/afridamusaidila/5c2783bdbde57508f877b6f6/dampak-pemiluterhadap-perekonomian-indonesia https://www.indonesia-investments.com/news/todays-headlines/indonesian-rupiah-approachingidr-14-000-per-us-dollar-level-why/item8752? http://www.gbgindonesia.com/en/main/why_indonesia/2018/indonesia_s_2019_economic_outloo k_challenging_times_amid_political_turbulence_11877.php https://www.indonesia-investments.com/news/todays-headlines/what-about-indonesia-s-gdpgrowth-in-2019-and-beyond/item8977? http://www.gbgindonesia.com/en/main/why_indonesia/2018/indonesia_s_economic_outlook_in_2 018_modest_optimism_challenges_remain_11830.php
Gross Domestic Product The country is expected to experience a deficit of 1.84% against its gross domestic product (GDP) in 2019 with estimated revenues of 2.142 trillion IDR and expenditure of 2.439 trillion IDR, up from 2.204 trillion IDR in 2018. Tax revenue is expected to reach 1.781 trillion IDR compared to 1.609 trillion IDR in the previous year. Energy As for nergy sector, the energy subsidies and consumptions are predicted to give a lot more pressure to the state budget. This prediction is based on the energy consumption rate and prices as well as the government’s decision not to change the pricing policy knowing that Indonesia is having an increase in the people’s purchasing power and the government’s popularity ahead of the elections. The Indonesian government allocated an energy subsidy of 157.79 trillion IDR in the 2019 state budget or up 65% from 94.6 trillion IDR in the 2018 state budget. The subsidy consists of 100.69 trillion IDR for fuel subsidies and 57.10 trillion IDR for electricity subsidies. Banking In the banking sector, the increase in Bank Indonesia’s 7 days reserve repo rate (BI7DRR) will lead to an increase in the bank lending rate in 2019. Until the third quarter of 2018, Bank Indonesia (BI) has increased its reference rate by 125 bps to 5.5%. As a result, banks are expected to increase their lending rate by 25 - 50 bps. If BI further increases its rate to 5.75% in the last quarter of 2018, the lending rate will go up by 30 bps - 60 bps. The increase in the overall lending rate will discourage potential lenders while at the same time increase the risk of non-performing loans. Consumer loans, in particular, are at risk given their significant role in Indonesia’s banking sector as well as consumerism patterns.
US VS Tiongkok Trade War
Soaring Imports
Upcoming Political Turbulence
Indonesia's Economic Growth in 2019
Rupiah Depreciation
US vs Tiongkok Trade War In July 2018, US and Tiongkok has been increasing import duty on goods worth $16 billion and $34 billion USD respectively. In September 2018, Trump added another 10% increase in import duties on Chinese products worth $200 billion USD and that was only the starting because Trump planned to increase it by 25% in January 2019. Tiongkok knew what was going on and they chose to retaliate Trump’s action by increasing Tiongkok’s import duty on US products worth $60 billion USD. As the worst happened, similar steps were also taken by the US administration against its other major trading partners, including Indonesia, with the ultimate goal to curb its growing trade deficit. The US administration took a number of steps to tackle this issue including reviewing the eligibility of 124 Indonesian products included in the generalized system of preference (GSP) as well as asking World Trade Organization (WTO) to impose a fine of $350 million USD as part of an import restriction policy against its products. Some analysts predict that Indonesia's export revenue may decline up to $11 billion due to this ongoing trade war. Bank Indonesia (BI) somehow managed to stem this risk in order to prevent the further Rupiah depreciation and capital outflows. As an increase in the Fed’s funding rate will cause capital outflows from the country, this move will cause bank interest
rates to rise which could inhibit loan growth and lead to a spike in non-performing loans that will eventually hamper economic growth.
Soaring Imports Recently in 2018, the Indonesian government created an income tax regulation (Finance Minister Regulation No. 110/2018) which make an increase in income tax of up to 10% on 1,147 imported consumer goods, including cosmetics, furniture, clothing, electronics, automotive and food products. This regulation was made because of Indonesia’s growing deficit due to the country’s mounting import levels over the last decade. In 2018 during January to August the import grew 24.52% to $124.18 billion USD from $99.73 billion USD in the previous year. Oil and gas account for the majority of Indonesia’s import with other significant imports being machinery and mechanical planes, automotive, organic chemical material, iron, steel and plastic. There are other measures from the Indonesian government like implementing mandatory B20 requirements to reduce oil imports and requiring the industry to increase local content usage. The goal of this measure is to improve the country’s trade balance which will later lead to a lower and weaker demand of US dollar and a stronger Rupiah. However this measure have a drawback like at the end of the day they will serve the consumer level with higher prices and it will slow down the economy as a whole. There was a report from analysts that the real culprit behind the mount in imports is the Trade Ministry’s policy that support and recommend the import action for food commodities such as rice, raw sugar and salt. In addition, the Indonesian government has also halted a number of infrastructure projects, including those deemed of national strategic importance, such as 35 GW power projects, which relied heavily on imported machinery.
Rupiah Depreciation Regarding the rupiah depreciation issue, many reports believe that the currency in 2019 will remain volatile and under pressure in the short-term because of monetary tightening in the USA vs Tiongkok trade war and rising crude oil prices that put more pressure on Indonesia's current account deficit. At least this condition will stand true until the next elections. From January until September 2018, the Indonesian currency
has declined by more than 10% from 13,345 IDR to nearly 15,000 IDR to the US dollar; the lowest level since the 1998 financial crisis.
Bank Indonesia (BI) has been actively in trying their best to prevent further depreciation of the Rupiah through actively intervening in the market as much as possible. As a result, Indonesia’s forex reserves plunged from $131.98 billion USD in January 2018 to $117.8 billion USD in September 2018.
Upcoming Political Turbulence Indonesia embrace democracy as its government system which focused on “from people, for people and to people”. Democracy means that every Indonesian has the right in every decision making which can change their life and this has no exception in voting for the next president. Soon the people of Indonesia will have to vote in a president election for 2019-2022 period. In the heat of president election, the moment will surely affect certain sectors in a country, one of it is economics. In short term, the effect that will be felt easily is the increasing expenditure done by the success team for every presidential candidate. In long term, it will be related a lot with the vision and mission of the president, whether it will be done perfectly or wrongly. There were a lot of real-life cases for this, for example, Venezuela which had a dire crisis recently. But still there are a couple of countries that can still maintain the stability of their economics even though they had a political turbulence. For example, Japan, Korea, Taiwan.
All that things said, the reality is that a lot of economics expert stated that the upcoming presidential election in 2019 will only have a little impact towards the Indonesian economics other than new regulations. As we quoted the governor of Bank Indonesia (BI) Perry Warjiyo who said “The source of uncertainty of Indonesian economics will come mostly from the growth of the global economics which related to the upcoming presidential election” The same statement was also stated by Institute for Development of Economics and Finance (indef) which stated “The effect would be relatively small, its around 0.1-0.2% towards the Indonesian economics”. Lastly, we quoted Tony Prasetantono from University of Gajah Mada (UGM) that agrees with the statements we presented above. According to him the performance of economics, let alone investment, has no relation at all with politics. In 2009 presidential election, It was true that the economics growth of Indonesia was having a disruption. But it was never because presidential election, it was because the global financial crisis that hit the world. Even in 2014, the pressure of economics were caused by the impact of global factor like the soaring price of oil. At that time the oil price hit $100USD/Barrel which give pressure on the state budget.
Conclusion According to the analysis that we presented above, we believe that Indonesia’s economic prospects in 2019 are rather in a mixed bag. If we are speaking in the short term idea, the economic growth is expected to be in modest level given the Rupiah depreciation, capital outflows, the widening of the trade and considering the impact of the upcoming presidential election. Usually investors will hold themselves a bit after the presidential election, the main reason is because the whole situation might turn upside-down when there is a new president coming up with their new regulations regarding doing business in the said country. However, for a long-term investment, it might be the right time for the investors to invest in the country, especially in its financial instruments. It’s because the Indonesian stocks and securities are highly undervalued at the moment because of
the Rupiah depreciation and thus present a very interesting opportunity for investment. And as for the upcoming presidential election issue, we think that it won’t cause any long-term instability in the Indonesia’s economics as long as there is no new twisted regulations which can turn things upside-down.
REFFERENCES https://www.bps.go.id/pressrelease/2019/02/06/1619/ekonomi-indonesia-2018-tumbuh-5-17persen.html https://www.tempo.co/abc/3113/pemilu-2019-dinilai-kurang-pengaruhi-perekonomian-indonesia https://www.kompasiana.com/afridamusaidila/5c2783bdbde57508f877b6f6/dampak-pemiluterhadap-perekonomian-indonesia https://www.indonesia-investments.com/news/todays-headlines/indonesian-rupiah-approachingidr-14-000-per-us-dollar-level-why/item8752? http://www.gbgindonesia.com/en/main/why_indonesia/2018/indonesia_s_2019_economic_outloo k_challenging_times_amid_political_turbulence_11877.php https://www.indonesia-investments.com/news/todays-headlines/what-about-indonesia-s-gdpgrowth-in-2019-and-beyond/item8977? http://www.gbgindonesia.com/en/main/why_indonesia/2018/indonesia_s_economic_outlook_in_2 018_modest_optimism_challenges_remain_11830.php
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