Maintaining Economic Growth

ANTARA FOTO/Puspa Perwitasari

A man walks by the Indonesian Stock Exchange monitor as 2018 trading opens on Jan. 2 in Jakarta. The Vice President hopes that the Indonesian stock market will have a greater multiplier effect on the national economy to maintain its momentum for growth this year.

It is almost certain that Indonesia\'s economic growth in 2017 will not reach 5.1 percent. However, on the other hand, the Composite Stock Price Index (CPI) continued to set a new record, touching 6,353 at the end of the year. Why was the stock market performance not reflected in the economic growth data?

President Joko “Jokowi” Widodo also wondered why improvements in the various economic indicators did not lead to high economic growth. It is as though economic growth is "trapped" at the 5 percent level. Why can it not be higher?

The CPI could skyrocket due to the performance of several factors. First, the performance of listed companies\' earnings in Q3 2017, which grew 19.48 percent compared to a year earlier, pushed the index up by 20 percent through 2017. It indicated a parallel increase between the listed companies’ growth in profits and the 20 percent rise in the stock price index.

Secondly, the decrease in Bank Indonesia\'s benchmark interest rate to 4.25 percent led to a significant drop in deposit rates. Decreasing interest rates was in keeping with the low inflation of 3.61 percent. However, it was not followed by decreased lending rates. As a result, the increase in bank credits was low at only 8 percent, far below the 12 percent target. In fact, credit expansion is an important engine for driving economic growth.

In principle, the relationship between the banking sector and the capital market is like a blood vessel.

Meanwhile, the low bank interest rate can actually lead to a shift in funds from banks to the capital market. This happened in the United States in the 1990s. The success of the US central bank’s chairman, Alan Greenspan, in lowering the interest rate to 2 percent led to funds shifting from banks to the New York Stock Exchange.  The investors were so enthusiastic that they even bought low credit quality securities. This is the origin of the phenomenon of junk bonds.

In principle, the relationship between the banking sector and the capital market is like a blood vessel. When banks’ interest rates rise, fund owners will be happy to place their money in banks. Conversely, when banks’ interest rates fall, funds will flow from the banks to capital markets, which promise higher returns.

Third, it is possible that the Indonesian stock market was affected by the performance of the NYSE. In the first year of Donald Trump’s term as the US President, the Wall Street stock price index broke records 90 times (!) to 25,295.

The strengthening of the US stock index was triggered primarily by the policy to cut the tax rate, which was expected to provide a large stimulus to the US economy.

Investment growth will result in increased purchasing power at a later stage.

So, the current phenomenon is that the economy is stimulated more by the capital market than the real sector. Capital market funds will later flow into the real sector, which will lead to an increase in production capacity and job opportunities, but this will not occur instantly and will take time. Unfortunately, stock prices could be corrected before the funds are truly flowing effectively into the real sector.

Capital

Entering 2018, we have some encouraging indicators that support economic growth. First is the stability of the rupiah, supported by the strengthening of foreign exchange reserves, which now exceeds US$130 billion. This is a significant achievement. While most countries are experiencing a decline in foreign exchange reserves (mainly due to funds flowing to the US), Indonesia’s foreign exchange reserve hit its highest mark. Our lowest foreign exchange reserve in the last five years was $93 billion (July 2013).

Second, Q3 investments in 2017 grew 13.7 percent compared to the same period the year before. The increase is expected to compensate for consumper spending, which grew only 4.93 percent.

However, the growth in investment will not immediately lead to growth in consumption. Investment growth will result in increased purchasing power at a later stage. The 2017 investment target of Rp 679 trillion was possible to be achieved. The increase is expected to drive consumption growth to over 5 percent in 2018.

Kompas/Heru Sri Kumoro

Tony Prasetiantono

Third, the government remains focused on infrastructure development with Rp 2.20 quadrillion in private funds and Rp 409 trillion from the 2018 State Budget. This amount is significant, and should be able to promote economic growth. Indeed, there is criticism that the state budget is already burdened by debt. However, so far, the two main debt criteria have not been violated. Government debt to gross domestic product (GDP) remains 28 percent, while the deficit has been maintained under 3 percent of GDP. However, we must remain vigilant.

Fourth, the government’s Rp 129 trillion (including village funds of Rp 60 trillion) budget allocation for social security programs and a better health system, which totals Rp 110 trillion, can help stimulate economic growth. From this amount alone is a fiscal stimulus of Rp 239 trillion.

However, it should be rechecked to see if the budget allocation can be disbursed easily toward economic growt , or if its implementation faces bureaucratic obstacles, including at the village level.

The implementation of the 16 economic policy packages should also be rechecked to see that they are in line with expectations. Meanwhile, oil prices have begun to increase and is now $67 dollars per barrel. This could lead to new uncertainties about the future of the economy. The impact on the Indonesian economy could be positive and negative at the same time. It will be positive if this pushes up the prices of other commoditities (coal and palm oil).

However, it will be negative if the government is forced to provide larger energy subsidies. However, I view the rise in oil prices as temporary, because supply still exceeds demand.

With these interconnected factors, we are optimistic that economic growth this year will reach at least 5.3 percent. With the global situation still uncertain and vulnerable, it is important that we maintain the positive trend and momentum of the economy until it can grow over 6 percent, in accordance with expectations.