2020 Economic Prospects: Expectations under the Threat of Recession
With the end of 2019 approaching, economists and financial agencies are increasingly eager to provide projections of what is going to occur in 2020. At first glance, there is a sign of hope that the economy next year will improve, or at least remain the same as this year. However, any expectation of extraordinary growth must be ruled out, considering the lack of potential commodity booming such as the one that took place a few years back.
Throughout 2019, nearly all economic players, the general public included, showed restraint, opting to wait for the conclusion of the country’s political situation while the presidential election took place. As a sizeable and largely heterogeneous nation, any political occurrence such as an election tends to result in uncertainty and concerns among economic and business players, especially large corporations.
Nevertheless, until the third quarter of 2019, the Indonesian economy reached 5.02% growth. Although the final figures will only be released in February next year, they are expected to remain within the same range. However, in 2020, the nation’s focus, as led by the Joko Widodo-Ma’ruf Amin government, will be fixated on development. Bank Indonesia (BI) in particular has displayed a strong sense of optimism, having projected the country’s economic growth in the year to reach the range of 5.1%-5.5% with an exact point at 5.3% as contained in the 2020 State Budget.
The central bank (BI), said Governor Perry Warjiyo, is confident that Indonesia’s economic prospects in 2020 will remain adequate and are likely to improve due to well-maintained national economic stability and the continuation of economic growth momentum.
The confidence is based on domestic demand, consumption, and investment in several regions supported by other driving factors of economic growth, such as inflation, predicted at 3.1% in 2019. BI has even gone as far as predicting that in 2020 inflation will be in the range of 3% +1%.
In addition, the rupiah exchange rate is predicted to remain stable in 2020 due to the trade balance, which recorded a slight surplus in October 2020, and the availability of agricultural foreign exchange reserves to resolve the country’s current account deficit (CAD).
Furthermore, the stability of the financial system is likely to be relatively well-maintained. Despite the limited growth of bank loans in 2019, BI believes that the growth will increase in 2020 as the central bank continues to cut rates with improving economic prospects.
Understandably, not all economists and financial agencies are quite as hopeful. The World Bank, for example, has projected that Indonesia’s economic growth will be within the range of 5%-5.1% in 2020, lower than the June 2019 projection. In addition, the World Bank also estimated that Indonesia’s economy will grow by 5.1% in 2019 and 5.2% in 2020.
Similarly, the Organisation for Economic Cooperation and Development (OECD) has projected that Indonesia’s economic growth in 2020 will not surpass 5%, as written in the OECD’s Economic Outlook in November 2019. More notably, JP Morgan has projected that Indonesia’s economic growth in 2020 and 2021 will only reach 4.9%, while the Center of Reform on Economics (CORE) has projected a growth range of 4.9%-5.1%.
Putting Hopes in the Omnibus Law
The aforementioned projected figures and assumptions are minimum expectations. Thus, the figures can still be higher with more room for expectations. It might be a stretch to expect surpassing the growth that occurred during the commodity boom, but it is fairly reasonable to aim to surpass the psychological level of 5%.
There are several requirements to reach that level. Quoting Asian Development Bank economist Priasto Aji, at least three conditions must be met: First, consistency in infrastructure development. It is no secret that infrastructure availability is essential for growth and connectivity. Only with adequate infrastructure can goods and service distribution be accessible for affordable prices. In particular, embracing foreign investors in infrastructure development is pivotal.
Second, human resource development with a focus on skills, which can support the micro, small, and medium enterprise (MSME) sector, including through the use of digital technology to optimise business performance, access funding sources, and as marketplaces.
Third, in order to increase growth economic reforms must be kept in place through more investment and facilitating the establishment of startup companies. Among the initiatives the government can take is providing financial access for prospective entrepreneurs.
In the context of the 2020 economy, the government is required to meet the aforementioned conditions through comprehensive regulations contained in the Omnibus Law. With the end of the year approaching, the Omnibus Bill has been proposed to the House of Representatives to be discussed, and it is expected that it will be made into law by no later than April 2020.
There are three pressing issues targeted by the government in the Omnibus Law: the tax law, job creation, and MSME empowerment. It is expected that the law will encourage the acceleration of Indonesia’s economic growth, including through investment and MSME development. Through the Omnibus Law, the government hopes to improve dozens of overlapping regulations which serve as obstacles to business in the country. Thus, the Law has relevance in supporting economic growth by assisting the government in meeting the aforementioned three conditions.
A number of economists are convinced that the Omnibus Law will contribute 1% to economic growth, implying that Indonesia’s economic growth next year could reach 6%. Nevertheless, the government must also focus on one important
issue: household consumption, which is predicted to be slightly corrected in 2020. On one hand, the public’s revenue is expected to increase with the possibility of higher CPO prices, increasing government assistance and minimum wages, upcoming regional elections in nine provinces and 261 cities/regencies, and monetary relaxation which will positively impact on the real sector.
However, there are several government policies which negatively affect purchasing power, such as eliminating 900 VA electricity subsidies, slashing solar subsidies from Rp 2,000 to Rp 1,000 per litre, lowering 3-kg LPG subsidies, raising the Social Security Administration Agency (BPJS Kesehatan) tariffs, and increasing cigarette excises. Such matters should not be dealt with lightly, as household consumption is one of the dominant factors that drive growth. From
Indonesia’s current Gross Domestic Product (GDP) structure, the contribution of household consumption is recorded at 65.82%.
The Threat of Global Recession
Aside from the aforementioned internal factors, external and global factors should also not be ignored, with the most easily calculated being the US-China trade war. Still, we should also meticulously calculate the continuous impact of the battle between the two economic giants, which could result in a global recession.
We cannot be sure whether a recession would occur, as not all economists are in mutual agreement over the issue. However, I would like to quote Noriel Roubini, who in 2006 stood before IMF economists and declared that the US would soon face a property loan crisis. While many doubted him at that time, his prediction materialised only a couple of years later, and everyone paid expensive attention when he made a second speech in 2008.
On 2020, Roubini and Brunello Rosa have written a prediction entitled The Making of a 2020 Recession and Financial Crisis, which highlights a number of key issues. There are many factors that can cause a recession, but Roubini and Rosa underline three in particular: First, the US-China trade war, the trade dispute between the US and Europe and other Northern American countries, and the US-Iran conflict.
Second, the bubbling up of assets such as share values and loans, including the concerns surrounding cryptocurrency. “Crypto is the mother or father of all scams and bubbles,” Roubini said. At the same time, US President Donald Trump’s relationship with the US Federal Reserve continues to deteriorate. Similarly, IMF Managing Director Kristina Georgieva also expressed her concern regarding the US-China trade war. Cumulatively, the trade war could lower global GDP outlook by US$700 billion or 0.8% of the 2008 GDP.
Obviously no one can be sure whether a recession would occur or not, but any concern of one serves as an early warning for the Indonesian government that all projections, based on hopes of economic growth, could turn into shambles in the case of a global recession. (ARM/MS)