A Look at Indonesia’s Resilience in 2023

A recent article published by Antara News, suggests that the end of 2022 was beset with pessimism. Global recession was on the horizon and was complicated further by the Russia-Ukraine war and the Fed’s interest rate hike, which made economists project a slowdown, including in Indonesia.

The conflict between Russia and Ukraine has had an impact on global food and energy instability and countries worldwide are expected to continue to prioritize domestic supplies, while monetary tightening in the United States threatens global inflation and exchange rates, including the depressed rupiah.

Policymakers were urged to prepare regulations that protect national economies, and people were urged to anticipate the economic condition to survive a recession.

Antara News argues that global pressure can be seen in soaring inflation. At the end of 2022, inflation was recorded at 5.51-percent year-on-year (yoy), exceeding Bank Indonesia’s (BI’s) target of 2-4-percent yoy.

To control inflation, BI took persistent steps on the 7-Day Reverse Repo Rate (BI7DRR), also known as the BI-Rate. The interest rate was recorded at 3.5-percent in July 2022 and in order to maintain inflation within the range of three percent, give or take one percent, in 2023, BI raised the interest rate to 5.50-percent in January 2023.

Similar to BI, the Finance Ministry also targeted inflation to be around 3.6-percent in the 2023 State Budget (APBN).

Efforts to control inflation were made to maintain people’s purchasing power; the main source of Indonesia’s economic growth.

The government also targeted economic growth to reach 5.3-percent this year by preparing various fiscal instruments to withstand the economic turmoil and maintain recovery momentum.

State revenue was targeted at IDR 2,463-trillion and state spending at IDR 3,061.2-trillion, so that the state budget deficit could be pegged at 2.84-percent. The monetary-fiscal preventive efforts resulted in declining inflation and that in turn, strengthened public consumption performance and contributed to economic growth achievements, say Antara News.

In Q2/ 2023, the economy was recorded to grow by 5.17-percent yoy, maintaining the national growth trend above five percent for seven consecutive quarters.

The manufacturing industry also expanded, and Indonesia’s manufacturing Purchasing Managers’ Index (PMI) in that period was recorded at the level of 53.3, say Antara News.

This achievement resulted in Indonesia being listed in the 18.2-percent of countries that recorded expansive and strengthening manufacturing amid global economic contraction.

These positive performances proved recession projections wrong, however, the diminishing threat of recession did not make the Indonesian economy completely free from economic turmoil.

The El Nino phenomenon threatened the food sector and was one of the factors in 2023’s economic turmoil. This was also followed by the Hamas-Israel conflict, which potentially increased global oil and food prices.

These conditions were expected to keep global inflation at a high level, which forced interest rates in advanced economies, including the Federal Funds Rate (FFR), to stay higher for longer. And in turn, this leads to the reversal of capital flows from developing countries to developed countries.

In addition, the strength of the US dollar put pressure on various world currencies, including the rupiah. In response, BI raised its benchmark interest rate by 25 bps in October 2023 after maintaining it for eight consecutive months, say Antara News.

BI’s six percent interest rate is expected to maintain the stability of the rupiah exchange rate and inflation within the target range, thereby mitigating the feared negative impacts on domestic economic resilience.

What to Expect in 2024

Antara News suggests that economic uncertainty is expected to continue in 2024, as geopolitical tensions are difficult to predict, the economies of several countries are projected to remain weak, and the El Nino phenomenon may continue next year.

In terms of financial markets, experts projected the Fed to reduce its interest rate in the second half of 2024, which Indonesian Finance Minister Sri Mulyani Indrawati said is a signal that the interest rate shock will have passed.

Even so, BI still prepared its monetary policy by maintaining interest rates at the level of six percent. It is expected that inflation in 2024 can be controlled within the range of 2.5-percent, give or take one percent, say Antara News.

Indonesia also needs to pay attention to economic performance during the upcoming 2024 election, which is said to put the national economy in a potentially vulnerable situation.

Although campaign activities can push up public consumption, political uncertainty makes investors adopt the wait-and-watch approach that will impact market stability.

Policymakers need to continue monetary-fiscal manoeuvres to safeguard the economy in 2024, say Antara News, adding that BI’s commitment to focus on pro-stability monetary policy and the Finance Ministry utilizing the 2024 State Budget as a shock absorber are expected to protect the national economy next year, as both have reduced the threat of recession so far in 2023.


Source: Antara News

Stock image by Tom Fisk on Pexels

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