Maintaining Purchasing Power

Kompas/Priyombodo

A retail supermarket in South Jakarta, Saturday (9/11/2019). The Indonesian economy in the third quarter of 2019 grew 5.02 percent. Household spending, which grew 5.01 percent, contributed greatly with a portion of 56.52 percent.

With the Indonesian Onward Cabinet now formed, it is to be expected that there will be pros and cons regarding its composition.

I don\'t think there is time to debate that. Many things are more crucial and important to think about, execute and mitigate to reach a more advanced and dignified Indonesia. Indonesia must be creative in facing a world economy that is not friendly, difficult to anticipate and difficult to predict.

In business cycle theory, the global economy is now in a phase of slowing growth. The world is faced with increasing uncertainty. The economic slowdown is spreading everywhere. Even, since 2018, a number of countries have fallen and become trapped in recessions such as Venezuela, Turkey, Argentina and Italy. Now we wait for the time that other countries will follow and fall into the same abyss, namely the economic recession.

The negative impact of the trade war between the United States and China is increasingly apparent. It is not only being felt by the two fighting countries, but has expanded to many countries in the world. Global trade activities have dropped significantly, meaning world commodity prices have also plummeted. If this trade war does not end immediately, it seems we can only dream that the world economy will improve and be able to escape from economic recession.

The loose monetary policy (lower interest rates) and expansive fiscal measures taken by many countries to counter the cyclical economic slowdown will prove pointless and ineffective, at least for most. This policy will be redundant, like sowing salt in the sea.

Indonesia itself has felt the negative impact of the weak world economy ("Antibodies of the Global Recession", Kompas, 15/10/2019). National economic activities are increasingly felt to be slow, as reflected in slowing growth in state income until Aug. 31. Based on data from the Finance Ministry, tax revenue only grew 1.4 percent, a significant decline compared to 2018’s growth of 16.5 percent. Likewise, non-tax state revenue (PNBP) only grew 11.6 percent from 24.3 percent last year.

Increasingly under pressure

We must be vigilant and cautious, there are indications that people\'s purchasing power is under pressure, which has the potential to weaken domestic demand that will then disrupt growth in household spending. Disposable income growth has slowed since the end of the 2011 primary commodity bonanza era.

Disposable income growth was around 15.1 percent in 2011, but this growth was then eroded by almost half to 8.4 percent in 2018. It seems the decline in incomes from primary commodity exports cannot be replaced by other sectors, and the negative impact has been felt in Sumatra, Kalimantan and Papua, which rely heavily on primary commodities.

However, we cannot ignore indications of weak domestic demand due to poor public income.

The role of household spending in the Indonesian economy is vital, contributing around 55 percent to gross domestic product (GDP). So when household spending growth slows, it is almost certain the economy as a whole will be severely disrupted. It must be recognized that the government has managed to maintain monthly inflation in the range of 2.5 to 4.4 percent in the last four years since 2016, so that people\'s purchasing power has been maintained and remained stable. However, we cannot ignore indications of weak domestic demand due to poor public income.

Second, the growth of the consumer confidence index has increasingly declined since the beginning of 2019. During the January-September 2019 period, the average growth in the consumer confidence index was only 1.2 percent, down significantly compared to 2018, which was around 10.9 percent. Third, growth in imports of consumer goods dropped dramatically to around 10.5 percent on average in the January-August period, far below the 27.3 percent recorded in 2018.

In the last five years, when disposable income growth has been eroded, Indonesia has been lucky and has survived with growth of slightly over 5 percent (except for 4.88 percent in 2015). This is because household spending grew in the range of 4.9 to 5.1 percent. The question is, how long can we maintain household spending growth at that level, when community incomes are being eroded and people’s ability to save is also increasingly limited?

If this cannot be overcome immediately and the structural transformation of the economy does not proceed effectively and quickly, it is not impossible that Indonesia\'s economic growth in the future will be below 5 percent. This will certainly not be enough to absorb new entrants to the workforce each year.

KOMPAS/ALIF ICHWAN

Visitors have a look at shoes on display at one of the booths in the 2019 Urban Sneaker Society area in District 8 of SCBD building in Jakarta, Sunday (10/11/2019).

Mitigation efforts

Bank Indonesia’s (BI) policy of easing interest rates and macroprudential relaxation could prove ineffective if the main problem is people\'s purchasing power. The business world will expand if demand for goods and services increases. If domestic demand is weak, employers will be defensive and simply try to survive. Banks will also act similarly in channeling their credit, they will be very selective to avoid soaring bad loans.

The reference interest rate has dropped and economic liquidity has been relaxed by BI, but that does not guarantee credit growth will accelerate. Therefore, in the short term, we should focus on mitigation efforts to enable people\'s purchasing power to be maintained and for domestic demand to remain vibrant.

The challenge is how the Indonesian manufacturing industry can become its own host when the penetration of imported Chinese goods is increasingly massive because of the US-China trade war.

Absorption of locally made products in the domestic market will automatically move the wheels of the domestic manufacturing industry, which in turn can absorb labor and increase people\'s incomes. The challenge is how the Indonesian manufacturing industry can become its own host when the penetration of imported Chinese goods is increasingly massive because of the US-China trade war.

At a time when the domestic manufacturing industry is still rearranging, the government still has fiscal space to maintain people\'s incomes and purchasing power, especially for lower-income people. In the state budget, the government\'s commitment to low-income, poor and very poor people is clear. There are food assistance cards, the family hope program, access to capital for micro, small and medium enterprises through subsidized credit interest and other initiatives. This idea is very good, as with effective execution and distribution, it will be a powerful cushion for sustaining the purchasing power of the lower levels of society.

Anton Hendranata, Lecturer at the School of Economics and Business, University of Indonesia