Building Collective Strength

Name: Building Collective Strength
Uploaded: 2019-10-08T05:02:44Z
Duration: 20 min 32 s
Description: The escalation of the trade war between the United States and China has led to a decline in world trade. As a result, the economic growth of almost all countries has contracted

The escalation of the trade war between the United States and China has led to a decline in world trade. As a result, the economic growth of almost all countries has contracted

Enny Sri Hartati

· 4 minutes read

The escalation of the trade war between the United States and China has led to a decline in world trade. As a result, the economic growth of almost all countries has contracted. Turkey has suffered negative growth and is on the brink of a recession, the impacts of which are feared to spread to many other countries.

A recession could also take place in the US and could lead to a global recession. In addition, tension between Iran, the US and Saudi Arabia could trigger a geopolitical crisis in the Middle East. If that happens, a sharp increase in global oil prices would be inevitable.

Such a concern was revealed by international credit rating agency Moody\'s, which said there was increased risk of default on corporate debt in 13 countries in the Asia-Pacific region. India and Indonesia are the most prone to a deterioration in corporate debt repayment capacity. Indonesia has the highest risk because about 53 percent of corporate debt in the country has a debt-to-income ratio of above 4. This means the ratio of revenue against interest expenses (interest coverage ratio/ICR) is very small. As a result, income will fall sharply while interest expenses will increase.

The increased risk of default cannot be separated from the decline in people\'s purchasing power. Most companies rely on the domestic market. Low household spending means in a decline in sales.

Corporate resilience and competitiveness are becoming increasingly fragile because they have to face two kinds of pressures at once, namely a high-cost economy and an influx in imported products. Exports, which are still dominated by commodities, face weak demand and low prices. As a result, corporate bonds will only cover maturing debt financing.

The increasing debt risk also has the potential to reduce corporate credit ratings and investment grade ratings in Indonesia. Indonesia will face difficulty in convincing investors to invest in the real sector. Capital outflows also have the potential to occur. This will further widen the deficit in the balance of payments and trigger exchange rate volatility.

Other risks can also affect the fiscal sector. State-owned enterprises (BUMN) may also face a higher risk of debt default as a consequence of the acceleration in infrastructure development. The rate on return on investment in infrastructure development is quite low due to the economic slowdown.

The tasks of President Joko “Jokowi” Widodo in his second term will be quite challenging, not only because of the mounting work that needs to be done, but also because of increasing global pressure. It is urgent to open up the market and consolidate domestic strength, such as by convincing investors to invest in the country, especially after the political reconciliation and the success of Jokowi in gaining political support.

The government should be increasingly open to all aspirations, input, and criticisms from the wider community so that it can produce the right policies and enjoy the support of all stakeholders.

Moreover, the potential and sources of domestic economic growth are still vast. On a net basis, the integration and dependence of Indonesia\'s economy on the external factors is relatively small, less than 20 percent.

This means that a way out and mitigating the increasing risk of default on corporate debt is still wide open. If in the near future Indonesia still has difficulty in convincing large investors, the investment potential of micro, small and medium enterprises (MSMEs) would still remain very promising. The key is to establish an integrated policy that can be fully implemented.

One thing that has vast potential is the optimizing of the village fund, which is expected to reach Rp 72 trillion next year. That amount is more than enough to drive the economy of all villages. The key is to use the village fund to increase the capacity, productivity and added value of the rural economy, such as to facilitate post-harvest processing, produce village products of good quality, or develop tourism. As a result, income, purchasing power, and spending of rural communities would improve.

Finally, many investors are waiting to see the composition of the upcoming Cabinet. Therefore, the government should use this opportunity to gain the confidence of foreign investors. If Cabinet posts are filled with professional people with strong competency, credibility and integrity, surely investors will invest in the country.

The plan to "upgrade" the status of the Investment Coordinating Board (BKPM) to the Investment Ministry and to separate the Taxation Directorate General from the Finance Ministry and turn it into an autonomous institution, should be mainly intended to remove investment obstacles.

The formation of new institutions should not be just for the distribution of power. Given the complex and severe challenges ahead, the opportunity should not be wasted.

Enny Sri Hartati, Senior Researcher, Institute for Development of Economics and Finance (Indef)

Editor:

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