Stagnant Growth

The Central Statistics Agency announced that Indonesia\'s economic growth reached 5.07 percent in 2017, a slight increase from 5.03 percent.

Kompas/Priyombodo

Cars ready for export are seen on Monday (5/2) at the Indonesia Kendaraan Terminal in Tanjung Priok, North Jakarta. State-owned port operator PT Pelabuhan Indonesia II (IPC) plans to list its subsidiary PT Indonesia Kendaraan Terminal on the Indonesia Stock Exchange (IDX) in the first half of 2018.

The Central Statistics Agency (BPS) announced that Indonesia\'s economic growth reached 5.07 percent in 2017, a slight increase from 5.03 percent. On the one hand, the 2017 growth figure is disappointing, because there is no significant increase. Growth in consumer spending is trapped at below 5 percent.

In general, macroeconomic indicators are quite encouraging. That is why President Joko “Jokowi” Widodo complained that the positive macroeconomic indicators (low inflation, increase in foreign exchange reserves and low interest rates) did not lead to economic growth above 5 percent.

Inflation was relatively low at 3.61 percent. For Indonesia, a rate below 5 percent, let alone below 4 percent, is very good. It is not easy to control inflation in a country as big as Indonesia.

However, sometimes we forget that low inflation also indicates a decline in consumer spending. The low inflation rate correlates with the decline in sales of consumer goods. Logically, low inflation should encourage consumers to buy more. In fact, car sales in 2017 totaled only 1.1 million units, lower than the potential 1.2 million units, a figure achieved three years ago.

The same goes for motorcycle sales, which totaled only 6 million a year. In the past, during a commodity boom (high palm oil and coal prices), motorcycle sales reached 8 million units a year.

The automotive sector and the property sector are key indicators of consumer spending in the country. When car and property sales are high, economic growth usually increases. I tend to attribute low inflation to the success of Bank Indonesia (as the monetary authority) and regional inflation control teams or TPID (for the real sector) and to the decline in consumer spending. If consumer spending declines, there are no grounds for manufacturers to raise prices.

Consumer spending is lethargic as the people feel uncertain about the economic prospects. This is a "derivation" of the turbulent global economic conditions, which are difficult to predict. Weak car and motorcycle sales may be the result of a shift in consumption patterns toward the business segment associated with leisure, recreation, entertainment and tourism.

At present, people prefer to spend on smart devices for entertainment and on sightseeing, rather than buying new cars and motorcycles. However, as a driving force the contribution of the automotive industry to economic growth is greater than that of smart devices and tourism.

As for foreign exchange reserves, although fluctuating (sometimes declining by US$2 billion a month), the trend is one of continued strengthening, with a recent increase to $130 billion. Stronger foreign exchange reserves contribute to rupiah stability.

Beyond these three macro indicators, another important indicator is bank credit, which grew only 8 percent in 2017. Is it possible to further increase bank lending?

The increase in world oil prices, which usually drags commodity prices to some extent, will benefit Indonesia, but if oil prices rise too much, say above $70 per barrel, the state budget will be in danger due to an increase in fuel subsidies. However, the rise in US oil inventories and production in certain oil producers should mitigate a further price increase.

While we hope for global economic stability, bank credit growth of 12-14 percent is a must in 2018. Investment growth that began in 2017 should lead to growth in bank lending and an increase in people’s purchasing power, which in turn could boost consumer spending.

A TONY PRASETIANTONO

Head of the Center of Economics and Public Policy Studies of Gadjah Mada University