Politics and Potential Recession

KOMPAS/PRIYOMBODO

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"A recession is coming" is the message of the survey by Swiss investment bank UBS and Campden Wealth, which provides investment advice for the super-rich, that involved 360 family-owned businesses with assets averaging US$1.2 billion per family.

The survey shows that 55 percent of its respondents a recession will occur in 2020. Of these, 40 percent are anticipating the coming recession by shifting their investment portfolios to safer instruments, such as securities, private equity, hedge funds and property (The Financial Times, 24/9/2019), with many withdrawing their investments to deposit as cash.

The behavior of these investors are aimed to avoid the risk of general changes amidst the emergence of an inverted yield curve, when interest rates on short-term bonds surpass interest rates on long-term bonds.

The yield of US government bonds issued in 2014, which mature in less than a year, is nearing 0 percent, while the yield of 20-year bonds are around 2.5 percent; bonds issued in 2019 with tenors less than one year have an above-2 percent yield and 20-year bonds have a yield of only 1.5 percent. So far, the inverted yield curve is being seen as a sign of pending economic recession.

If a recession occurs in 2020, it would be different from the 2008 crisis, when severe economic contraction hit demand, marked by a decline in purchasing power.

The annual UNCTAD Trade and Development Report, published on 25 Sept. 2019, also emphasized a potential recession in 2020. The UN trade body’s report said the global slowdown would continue, due to the protracted trade war and declining investment.

The report projected 2.3 percent global growth in 2019, a decline from 3 percent last year. This year\'s growth will be the lowest growth since 2009, when it was 1.7 percent.

A recession is defined as two or more consecutive quarters of negative economic growth.

The global economic contraction has been marked by political dynamics like the failure to secure a Brexit deal, the alleged attempt to overthrow the US government, as well as the trade and currency wars, not to mention the oil crisis prompted by the alleged Iranian drone attack on the Aramco refinery in Saudi Arabia. A recession could occur in 2020 if the political constellation remains unchanged.

Nouriel Roubini’s “The Anatomy of the Coming Recession”, an analysis published on the Project Syndicate website (22/8/2019), points to three possible causes of a recession in 2020: One, the prolonged US-China trade war; two, the two superpowers’ struggle for technological dominance; three, the potential for soaring oil prices due to the political crisis in the Middle East.

AFP/FAYEZ NURELDINE

Employes of Aramco oil company stand near a heavily damaged installation in Saudi Arabia\'s Khurais oil processing plant on September 20, 2019. Saudi Arabia said on September 17 its oil output will return to normal by the end of September, seeking to soothe rattled energy markets after attacks on two instillations that slashed its production by half. The strikes on Abqaiq –- the world\'s largest oil processing facility –- and the Khurais oil field in eastern Saudi Arabia roiled energy markets and revived fears of a conflict in the tinderbox Gulf region.

If a recession occurs in 2020, it would be different from the 2008 crisis, when severe economic contraction hit demand, marked by a decline in purchasing power. This time around, recession will weaken supply (production), so that the impacts will be prolonged.

In 2008, the government still had a large capacity for stimulating the economy, while it has very limited capacity to do so this time around. Interest rates are very low, while the debt burden is very high. Policy choices are limited and can no longer rely on fiscal instruments. Long-term structural transformation is needed.

The problem is, the political orientation in many countries is populist and depends on monetary-fiscal policy while ignoring structural transformation.

If we look closely, economic problems stem from political problems. Political decisions can change due to frustrations with the economy’s future. This situation raises two technical implications for the short term. First, policy coordination is very difficult. Multilateral institutions like the World Trade Organization (WTO) are no longer relevant. Second, the independence of central banks has eroded in many countries, because they must solve economic problems as a result of political pressures.

KOMPAS/PRIYOMBODO

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Impact mitigation

If a recession occurs in 2020, how will it impact our economy? There are three main pathways for transmitting external shock to the domestic economy. First, through the financial market, which is often characterized by capital outflow accompanied by weakening exchange rates. Mitigation efforts should be made by raising interest rates through monetary policy instruments.

Second is the trade cycle, which could be affected by a decline in exports that will pressure the trade balance. These effects can be mitigated through fiscal policy, by raising duties on imported goods and encouraging exports through a variety of tax and tariff incentives.

Third are structural effects that impact the ability to maximize potential economic growth. One way to boost growth to prevent falling below 5 percent in 2020 is to increase investment, especially foreign direct investment (FDI). This is necessary because consumption and government spending will stagnate, while exports could fall.

A variety of concrete policies need to be readied that focus on maintaining investment as a buffer of growth. The World Bank warns that Indonesia\'s growth is at risk of falling to 4.6 percent if maximum efforts are not made to increase investment.

KOMPAS/HERU SRI KUMORO

A. Prasetyantoko

Unfortunately, like global dynamics, the domestic economy is also beset with the cloud of political complications. Technocratic efforts cannot be maximized if political stability cannot be maintained. Investors are still waiting for political stability before realizing their investments in Indonesia. It is time to seek political consensus to solve the country’s various issues regarding the approval of controversial draft bills, including the Corruption Eradication Commission (KPK) Bill, the Criminal Code Bill and the Land Bill.

Without political consensus, the global recession could potentially drag down the country’s economy. In fact, the economy should grow at a higher rate by taking advantage of the changes to the global supply chain due to the trade war. Vietnam has many advantages – one of these is political stability, which ensures that policies can be implemented more effectively.

A. Prasetyantoko, Lecturer at Atma Jaya Catholic University Jakarta