Still Room for Growth

KOMPAS/ELSA EMIRIA LEBA

Tony Prasetiantono

We are all aware that economic difficulties will continue in 2019. The road ahead remains long and bumpy. Like a tunnel, what is on the other end is still in the dark. The global economy is still gripped by uncertainties.

The US-China trade war has not ended. The US still could raise its interest rates. World oil prices have not stabilized. However, will all this lead to pessimism for the Indonesian economy? I do not think so.

There is still room for us to act. From the global side, the most essential factor is the beginning of the end of US economic growth. When the US economy strengthened, other countries suffered.

They suffered from capital outflows to the US, which caused other countries to experience: (1) liquidity drought, (2) high interest rates, and (3) most world currencies weakened against the US dollar. The rupiah experienced all three problems throughout 2018. The entire world was practically sacrificed for the US economy to improve. This is unfair.

The US created jobs on the back of high capital inflows, which in turn led to a fall in unemployment to 3.7 percent, the economy grew 2.9 percent (even 4.2 percent in one quarter), and the stock index rose to a record high of 26,743 (9/21/2018).

The US has two weaknesses: (1) high inflation that once reached 2.9 percent and (2) a widening trade deficit, which was due in part to the strengthening of the US dollar.

If the global economy was hit by a "tsunami" in 2018, the large wave of seawater will actually begin to recede in 2019. The capital inflow to New York has diminished considerably, and has even begun to reverse. During Christmas 2018, the Dow Jones fell to 21,712, or a decline of 5,000 points (18 percent) from its record high. This can be interpreted to mean that the US financial bubble has begun to burst. However, on the other hand, the rate of US labor absorption, which weakened to 176,000 people in November, rose again in December to 312,000 people. This could encourage the US Federal Reserve (the Fed) to again increase interest rates in 2019.

However, the rate hike is unlikely to be as aggressive as before. As inflation has subsided to 2.5 percent, the benchmark interest rate should be limited to a 2.75 percent hike. Since the interest rate is already at 2.5 percent, I expect the Fed to raise it only once more in 2019.

Confidence

So what has been the response of Bank Indonesia (BI)? At the end of 2018, BI was confident to maintain the benchmark interest rate at 6 percent. This has turned out to be the correct policy. Even though the Fed raised its interest and BI did not, the rupiah did not weaken and instead strengthened to Rp 14,032 per US dollar (1/7/2019). Why? Because the US appeal is reaching its saturation point. The New York stock market’s capacity for absorbing global funds has a limit. When the limit is reached, global capital will flow back to emerging markets, including Indonesia.

In 2018, the rupiah depreciated 9 percent in the first nine months and appreciated 4 percent in the remaining three months of the year. In 2019, I expect the rupiah has a chance to again appreciate towards equilibrium (not undervalued). Therefore, the central bank does not necessarily need to raise its benchmark interest rate from the current 6 percent. There are other factors outside of interest rates that have more impact on strengthening the rupiah.

Meanwhile, world crude prices are becoming more "friendly". As oil producers have been too aggressive in increasing production to take advantage of rising oil prices ($84 per barrel previously), and combined with weakening demand from a sluggish economy, crude prices have fallen to a mere $57 per barrel (Brent) and $48 per barrel (WTI). This relatively low price trend will continue throughout 2019. Oil producers are still finding it difficult to agree to cutting production, especially the US.

Indonesia\'s other strength in 2019 is its fiscal condition. Sri Mulyani Indrawati was just ranked the world\'s Best Minister of Finance 2018 by The Banker magazine. This is no accident. In the midst of the high wave of uncertainties, she was highly successful in maintaining fiscal credibility. The most impressive thing is that state revenues reached 102.5 percent against state expenditures of 99.2 percent.

The budget deficit was reduced from Rp 325 trillion to Rp 259 trillion. The primary balance (state revenues minus spending, excluding debt interest payments) is nearly zero, or precisely a deficit of only Rp 1.8 trillion. In contrast, the previous year saw a deficit of Rp 87 trillion. These are all new records for the state budget.

Based on a number of factors, such as (1) the US economy is beginning to correct, (2) the rupiah will strengthen, (3) BI does not need to raise its interest rates, (4) world crude prices are more stable, and (5) the fiscal condition is credible, there is still room for the Indonesian economy to grow more in 2019, for example to 5.3 percent. This is no utopia. (A. TONY PRASETIANTONO, Head of the Center for Economics and Public Policy Studies, Gadjah Mada University)