Sailing Through The Uncertainties

Global economic uncertainty continues. The trade war between the United States and China is not over and the world economy is slowing. Credit growth in Indonesia will still be limited until 2020. Businesses people must tighten their belts and bankers must be careful to offer loans, maintain the quality of their assets, and strengthen the capital. (Karnoto Mohamad)

The world will enter the year of 2020 which is difficult and uncertain. Anxiety on recession is still lingering. The world’s super-rich people also believe that the recession will come. According to Global Family Office Report 2019 conducted by UBS and Campden Research, out of 360 global family-owned companies with an average wealth of US$1,2 billion (Rp16,9 trillion), 55% of them believe that there will be a recession in 2020. They claim they must rearrange their portfolio by transferring to safer assets and strengthening their cash reserves.

In the early September, a number of leading economists predicted a recession would occur in 2020. Nobel laureate Robert Shiller said that the chance of a 2020 recession was 50%. The same thing was said by Larry Summers, a professor from Harvard University and a former Finance minister of the United States (US). He said a recession of nearly 50% will occur before 2021. In 2018, US economist Nourel Roubini predicted a financial crisis would occur in 2020.

These days, many countries in the world have been worried. The US economy, which grew by 2,9% in 2018, is predicted by the International Monetary Fund (IMF) to be slowed to 2,3% this year. The US economy is becoming more volatile with predictions for growth in 2020 to 1,9%. If the tension of the trade war with China continues, the finance growth in the US can only be 2.2% this year; and, next year, it can be 1,8%. The fading of the US economy, which accounts for a quarter of the world’s gross domestic product (DPB), affects the world economy. Turkey, which has been hit by a crisis since 2018, is in danger and Venezuela is on the verge of collapse.

Red signal lights up from Europe. According to Macroeconomic Policy Institute, Germany as the largest economy in Europe has an increased risk of falling into recession from 43% in August to 60% as of last September. The purchasing managers index (PMI) which is an indicator of manufacturing activity slipped to around 43.6 in August. The export-dependent German economy was hit hard by the trade war. The German economy this year grows only 0,4%, lower than the previous projection of 0,6%.

Britain’s condition is similar. It’s economy is threatened. If Britain leaves EU membership without agreement, the economy will be cut to 1,9% this year and minus 1,5% next year. The slowdown of China’s economic growth continues to be 6,2% in 2019 and 6,1% in 2020. While Japan is increasingly difficult to get out of the slow lane with the economic growth is predicted of only 0,6% this year and next year.

The trade war between the US and China results in the slowing down of economic growth in the countries of the world. The condition has been occurring since the end of 2018. There are not any signs of ending. Unfortunately, other countries seem to do trade wars, too. After the US stopped a trade deal worth US$5,7 billion as of early June, India responded by charging a tariff for 29 US products. Besides threatening to increase import tariffs on a number of products from the European Union, the US has also raised the import tax on iron from Vietnam to 400%. Meanwhile, Japan has removed South Korea from the list of trading partner and restricted exports of raw material from the country.

The winds of crisis have crept into Indonesia through trade transmission. Indonesia has failed to take advantage of the US and China trade war and the trade balance has been negative since 2018. The pressure on Indonesia’s export performance will continue. Five countries that have been absorbing half of Indonesia’s non-oil and gas exports have experienced slowing down in economic growth this year. The five countries are China, the US, Japan, India and Singapore.

President Joko Widodo (Jokowi) admits those signs of crisis. “Numbers have shown that the global economic growth has slowed down and the possibility of a recession will be even greater,” he said in a meeting discussing the world economy at the president’s office in early September.

Professor of Economics of University of Indonesia (UI), Ari Kuncoro, said that the crisis could have happened in 2018. However, US President Donald Trump tried to postpone the recession by implementing a policy of cutting income tax by 10% to raise economic growth. “Because there is 2020 presidential election, the chance of the recession is shifted to 2021. However, because of the chaos of the trade war between the US and China, the possibility of the crisis may occur in 2020,” he said during a discussion with Infobank last month.

Sri Adiningsih, a professor of Economics of Gajah Mada University (UGM) who is also served as the Chair of the Presidential Advisory Council (Wantimpres), acknowledges that the country is on a graph of slowing economic growth. “I see a decline in economic growth but not too big; therefore, in my opinion, this will not result in a major recession,” he told Infobank last month.

The Governor of Bank Indonesia (BI), Perry Warjiyo, believes that the global economic growth is still positive. “Some countries experience negative growth in two quarters in a row and it can be called a recession. However, globally, including in Indonesia, we expect growth this year to be below 5,2% or still 5,1%. Next year, it will be 5,3%. It’s not a recession, “he told Dicky F. Maulana to Infobank in a press conference in Bank Indonesia Board of Governors’ meeting last month.

INDONESIA TO BOOST CONSUMPTION AND STATE SPENDING

In a study entitled Infobank Outlook 2020, Infobank Research Bureau states that Indonesia’s economic growth is predicted in 2019 to be around 5,10% and, in 2020, in the range of 4,9% to 5,1%. Global condition in 2020 is difficult to predict with the obvious slowdown in growth. It is also difficult for the Government to declare high export growth next year for three reasons. One, the drop in commodity prices. Two, Indonesian manufacturing products are allegedly less competitive in the export market. Three, Economic slowdown occurs in the countries that become Indonesia’s export markets. The decline in exports that occurred in 2018 and continues so that the trade balance becomes a deficit. During the eight months of 2019, Indonesia’s exports have decreased 8,28% to US$110,07 billion year on year compared to the same period in 2018. The deficit in the trade balance is getting thinner due to a greater decline in imports at 9,89%.

In term of direct investment, Indonesia is less attractive than its neighboring countries such as Vietnam and Thailand. The relocation of 33 companies from China to those countries; and, none of them moves to Indonesia. That situation is like a slapping to the Government of Indonesia, which is proud of the investment it has achieved. The Government tries to fix the situation by being pessimistic about exports performance, so it improves the investment climate through a number of draft laws such as employment and land, the Government is also trying to boost growth through two other pillars, namely government spending and boosting public consumption.

Over the past five years, the contribution of public consumption to gross domestic product (GDP) has been in the range of 56% – 57%. Meanwhile, the contribution of government spending is in the range of 12% – 13% of GDP. The potential slowdown in private consumption growth is already apparent. In fact, the government spending at the beginning of the year until the third quarter is always low so that its contribution to GDP is only around 8%.

To maintain the growth of public consumption, the Government has made various strategies, ranging from maintaining food stability to increasing social assistance. Bank Indonesia has also done relaxation to encourage banks to give loans and stimulate consumer demand. In response to interest rate cuts by central banks in the world, BI has lowered its benchmark interest rate by 25 basis points three times to 5,25% over the past three months until September. In addition, BI is relaxing the rules related to Macroprudential Intermediation Ratio (RIM) and loan to value (LTV), which will be effective on 2 December 2019.

To maximize the absorption of state spending, the government seems to want to resolve various obstacles. The problem is, bureaucracies tend to be lazy and want to spend on goods and capital if there is a commission obtained. The obstacle itself lies on the part of government officials themselves who are full of fear of procuring goods and services because the Corruption Eradication Commission (KPK) has handled many cases of budget mafia both through arrest operations (OTT) and investigations.

Corruption in the State Budget (APBN) often involves big names, from ministers, legislators, regional heads, to directors of state-owned enterprises (SOEs). A concrete example, the e-KTP project valued at Rp5,9 trillion, which occurred during the 2010 and 2011 state budget, was almost half corrupted, namely Rp2,3 trillion. Chairman of the House of Representatives (DPR) Setyo Novanto was convicted in the case. The latest case, the KPK named Minister of Youth and Sports Imam Nahrawi as a suspect in the alleged KONI bribery case related to the 2018 budget year grants.

Indeed the government feels disturbed by the low uptake of the Government spending in addition to a number of ministers who tripped over corruption cases. The Government seems to prioritize the realization of absorption of APBN funds to boost the economy, rather than looking for ways for the Government budget to be spent effectively, efficiently and credibly. Likewise, the legislature has the same interests because many members of the DPR are entangled in corruption of the State Budget funds. Quickly and quietly, the government and the Parliament succeeded in passing the revised KPK law last September. And, despite receiving strong opposition from some of the public and a wave of student demonstrations, President Jokowi was determined not to issue Government Regulations in lieu of the KPK Law.

It could be that there was a barter between the Government and political parties through the revision of the KPK Law and the Criminal Code. Political party elites felt insecure because many of their cadres were affected by arrest operations. Political parties have an interest in protecting their cadres so that the actions of the KPK must be muted through the revision of the KPK Law. Through the revision of the Criminal Code, the government wants to maintain its authority so that its work programs can run effectively without interruption. Moreover, the actions of the KPK were enough to disturb the government when a number of its ministers were named suspects by the KPK.

By reducing the KPK’s spur, the government can encourage maximum government spending uptake without fear of corruption. Moreover, Jokowi has ambitions to continue to build infrastructure and establish a new capital city in East Kalimantan that needs funds of up to Rp446 trillion, of which 19.20% is funded by the state budget. Do not forget, the leakage of the state budget in Indonesia reached 25%, as was often thrown at the debates of the presidential candidates by candidates to criticize the previous government. Regardless of the portion of the leak, the state budget which in 2020 is budgeted Rp2,540.40 trillion will increase the money in circulation and have an impact to encourage public consumption which is an important engine of economic growth when exports cannot be expected.

So, will the growth of public consumption be able to compensate for the decline in export performance so that the target of economic growth that the government wants to achieve by 5,20% in 2019 and 5,30% in 2020 can be achieved?

According to Infobank Research Bureau study, efforts to spur growth in public consumption are still hindered by weak public purchasing power. One indicator can be seen from the increasing ratio of household debt which reached 17% of GDP by the end of 2018. In fact, public consumption has tended to slow down if the debt to GDP ratio reaches 12%. According to data from the Central Statistics Agency (BPS), total monthly household expenditure for world rent reaches 40% of the average per capita expenditure of Rp1,237,198. The ratio is above the normal 30% limit. The reason, the increase in people’s income is lower than the increase in house prices from year to year. A very limited consumption capacity is experienced by 42% of formal workers whose income is below the provincial minimum wage (UMP) and 74 million informal workers.

Bank Indonesia policy relaxation that will reduce the down payment for mortgages (KPR) to only 10% – 15% to stimulate demand for consumer credit is expected to divert public spending to mortgage instalments and reduce consumption of other products. This is because economic growth in the range of 5,0%, such as the average of the last five years, does not significantly increase public income while property prices rise higher. Let alone aside funds to save, the budget for consumption is reduced.

On the other hand, third-party funds (TPF) in banks grew slower than credit growth. Because liquidity is quite tight, banks find it difficult to reduce lending rates even though BI has lowered its benchmark interest rate three times in the last three months. In the midst of tight liquidity, the government has instead become a competitor to the banking industry in collecting public funds through state securities (SBN) to finance fiscal deficits. In 2020, the government has budgeted Rp351,9 trillion in debt financing and issued state securities of up to Rp389,3 trillion.

Due to limited liquidity and high credit risk due to the economic slowdown, the banking industry will not be too busy to expand credit. Infobank Research Bureau predicts the realization of bank credit growth until the end of 2019 is estimated to be around 8% – 10%, while DPK grows in the range of 7% – 9%. Whereas in 2020 bank loans are projected to grow in the range of 7% – 9%, and DPK will increase in the range of 6% – 8%. Banks will also focus on monitoring the development of credit quality. Although by industry in June 2019 NPLs of commercial banks decreased to 2,50% and with credit at risk 11,11%, many banks had low quality productive assets. There are 21 banks that recorded credit at risk above 20% so they have to work hard to improve their credit quality.

Uncertainty when the end of the trade war that slows economic growth is a test of bankers and business people. Bankers and business people must be more careful in maintaining liquidity and asset quality and increasing efficiency. The high rate of poverty and inequality as well as the current account deficit also became a big job in the economic field for the Jokowi government in the second period. To solve various economic problems, President Jokowi must not be too confident. Because, Jokowi’s victory in the 2019 presidential election was not an absolute victory because it only won 55%, most of whom were not fanatical voters. Not to mention there are 45% of owners who don’t trust Jokowi. To solve various problems, the Government must be able to trust all parties, not just embrace political parties. No democratic government has succeeded in resolving various crises without the trust of all elements of the nation. (*)