Indonesia Growth Analysis

We all know that we were having a rough economy volatility over the course of 2018,
this was in line with the rising political tensions, the so famous trade war between
Tiongkok and the US, and lastly the prolonged depreciation of rupiah. In order to
overcome the declining of Rupiah exchange rate the Indonesian government needs to
find the right solution to clearly address the external and internal issues which were
involved since the 1998 financial crisis. On the other hand the government is still
optimistic that Indonesia’s economy will still grow slightly by 5.1% to 5.5% in 2019
(BI Forecast).
  Gross Domestic Product
The country is expected to experience a deficit of 1.84% against its gross domestic
product (GDP) in 2019 with estimated revenues of 2.142 trillion IDR and expenditure
of 2.439 trillion IDR, up from 2.204 trillion IDR in 2018. Tax revenue is expected to
reach 1.781 trillion IDR compared to 1.609 trillion IDR in the previous year.
 Energy
As for nergy sector, the energy subsidies and consumptions are predicted to give a lot
more pressure to the state budget. This prediction is based on the energy consumption
rate and prices as well as the government’s decision not to change the pricing policy
knowing that Indonesia is having an increase in the people’s purchasing power and
the government’s popularity ahead of the elections. The Indonesian government
allocated an energy subsidy of 157.79 trillion IDR in the 2019 state budget or up 65%
from 94.6 trillion IDR in the 2018 state budget. The subsidy consists of 100.69 trillion
IDR for fuel subsidies and 57.10 trillion IDR for electricity subsidies.
 Banking
In the banking sector, the increase in Bank Indonesia’s 7 days reserve repo rate (BI-
7DRR) will lead to an increase in the bank lending rate in 2019. Until the third quarter
of 2018, Bank Indonesia (BI) has increased its reference rate by 125 bps to 5.5%. As
a result, banks are expected to increase their lending rate by 25 - 50 bps. If BI further
increases its rate to 5.75% in the last quarter of 2018, the lending rate will go up by
30 bps - 60 bps. The increase in the overall lending rate will discourage potential
lenders while at the same time increase the risk of non-performing loans. Consumer
loans, in particular, are at risk given their significant role in Indonesia’s banking sector
as well as consumerism patterns.
 US VS Upcoming
Tiongkok Political
Trade War Turbulence

Soaring Rupiah
Imports Indonesia's Depreciation
Economic
Growth in
2019

US vs Tiongkok Trade War

In July 2018, US and Tiongkok has been increasing import duty on goods worth $16
billion and $34 billion USD respectively. In September 2018, Trump added another
10% increase in import duties on Chinese products worth $200 billion USD and that
was only the starting because Trump planned to increase it by 25% in January 2019.
Tiongkok knew what was going on and they chose to retaliate Trump’s action by
increasing Tiongkok’s import duty on US products worth $60 billion USD.

As the worst happened, similar steps were also taken by the US administration against
its other major trading partners, including Indonesia, with the ultimate goal to curb
its growing trade deficit. The US administration took a number of steps to tackle this
issue including reviewing the eligibility of 124 Indonesian products included in the
generalized system of preference (GSP) as well as asking World Trade Organization
(WTO) to impose a fine of $350 million USD as part of an import restriction policy
against its products. Some analysts predict that Indonesia's export revenue may
decline up to $11 billion due to this ongoing trade war.

Bank Indonesia (BI) somehow managed to stem this risk in order to prevent the
further Rupiah depreciation and capital outflows. As an increase in the Fed’s funding
rate will cause capital outflows from the country, this move will cause bank interest
rates to rise which could inhibit loan growth and lead to a spike in non-performing
loans that will eventually hamper economic growth.

Soaring Imports
Recently in 2018, the Indonesian government created an income tax regulation
(Finance Minister Regulation No. 110/2018) which make an increase in income tax of
up to 10% on 1,147 imported consumer goods, including cosmetics, furniture,
clothing, electronics, automotive and food products. This regulation was made
because of Indonesia’s growing deficit due to the country’s mounting import levels
over the last decade. In 2018 during January to August the import grew 24.52% to
$124.18 billion USD from $99.73 billion USD in the previous year. Oil and gas account
for the majority of Indonesia’s import with other significant imports being machinery
and mechanical planes, automotive, organic chemical material, iron, steel and plastic.

There are other measures from the Indonesian government like implementing
mandatory B20 requirements to reduce oil imports and requiring the industry to
increase local content usage. The goal of this measure is to improve the country’s
trade balance which will later lead to a lower and weaker demand of US dollar and a
stronger Rupiah. However this measure have a drawback like at the end of the day
they will serve the consumer level with higher prices and it will slow down the economy
as a whole. There was a report from analysts that the real culprit behind the mount
in imports is the Trade Ministry’s policy that support and recommend the import action
for food commodities such as rice, raw sugar and salt. In addition, the Indonesian
government has also halted a number of infrastructure projects, including those
deemed of national strategic importance, such as 35 GW power projects, which relied
heavily on imported machinery.

Rupiah Depreciation
Regarding the rupiah depreciation issue, many reports believe that the currency in
2019 will remain volatile and under pressure in the short-term because of monetary
tightening in the USA vs Tiongkok trade war and rising crude oil prices that put more
pressure on Indonesia's current account deficit. At least this condition will stand true
until the next elections. From January until September 2018, the Indonesian currency
has declined by more than 10% from 13,345 IDR to nearly 15,000 IDR to the US
dollar; the lowest level since the 1998 financial crisis.

Bank Indonesia (BI) has been actively in trying their best to prevent further
depreciation of the Rupiah through actively intervening in the market as much as
possible. As a result, Indonesia’s forex reserves plunged from $131.98 billion USD in
January 2018 to $117.8 billion USD in September 2018.

Upcoming Political Turbulence

Indonesia embrace democracy as its government system which focused on “from
people, for people and to people”. Democracy means that every Indonesian has the
right in every decision making which can change their life and this has no exception
in voting for the next president. Soon the people of Indonesia will have to vote in a
president election for 2019-2022 period. In the heat of president election, the moment
will surely affect certain sectors in a country, one of it is economics. In short term, the
effect that will be felt easily is the increasing expenditure done by the success team
for every presidential candidate. In long term, it will be related a lot with the vision
and mission of the president, whether it will be done perfectly or wrongly.

There were a lot of real-life cases for this, for example, Venezuela which had a dire
crisis recently. But still there are a couple of countries that can still maintain the
stability of their economics even though they had a political turbulence. For example,
Japan, Korea, Taiwan.
All that things said, the reality is that a lot of economics expert stated that the
upcoming presidential election in 2019 will only have a little impact towards the
Indonesian economics other than new regulations.

As we quoted the governor of Bank Indonesia (BI) Perry Warjiyo who said “The source
of uncertainty of Indonesian economics will come mostly from the growth of the global
economics which related to the upcoming presidential election”

The same statement was also stated by Institute for Development of Economics and
Finance (indef) which stated “The effect would be relatively small, its around 0.1-0.2%
towards the Indonesian economics”.

Lastly, we quoted Tony Prasetantono from University of Gajah Mada (UGM) that
agrees with the statements we presented above. According to him the performance
of economics, let alone investment, has no relation at all with politics. In 2009
presidential election, It was true that the economics growth of Indonesia was having
a disruption. But it was never because presidential election, it was because the global
financial crisis that hit the world. Even in 2014, the pressure of economics were caused
by the impact of global factor like the soaring price of oil. At that time the oil price hit
$100USD/Barrel which give pressure on the state budget.

Conclusion
According to the analysis that we presented above, we believe that Indonesia’s
economic prospects in 2019 are rather in a mixed bag. If we are speaking in the short
term idea, the economic growth is expected to be in modest level given the Rupiah
depreciation, capital outflows, the widening of the trade and considering the impact
of the upcoming presidential election. Usually investors will hold themselves a bit after
the presidential election, the main reason is because the whole situation might turn
upside-down when there is a new president coming up with their new regulations
regarding doing business in the said country.

However, for a long-term investment, it might be the right time for the investors to
invest in the country, especially in its financial instruments. It’s because the
Indonesian stocks and securities are highly undervalued at the moment because of
the Rupiah depreciation and thus present a very interesting opportunity for
investment.

And as for the upcoming presidential election issue, we think that it won’t cause any
long-term instability in the Indonesia’s economics as long as there is no new twisted
regulations which can turn things upside-down.

REFFERENCES
https://www.bps.go.id/pressrelease/2019/02/06/1619/ekonomi-indonesia-2018-tumbuh-5-17-
persen.html

https://www.tempo.co/abc/3113/pemilu-2019-dinilai-kurang-pengaruhi-perekonomian-indonesia

https://www.kompasiana.com/afridamusaidila/5c2783bdbde57508f877b6f6/dampak-pemilu-
terhadap-perekonomian-indonesia

https://www.indonesia-investments.com/news/todays-headlines/indonesian-rupiah-approaching-
idr-14-000-per-us-dollar-level-why/item8752?

http://www.gbgindonesia.com/en/main/why_indonesia/2018/indonesia_s_2019_economic_outloo
k_challenging_times_amid_political_turbulence_11877.php

https://www.indonesia-investments.com/news/todays-headlines/what-about-indonesia-s-gdp-
growth-in-2019-and-beyond/item8977?

http://www.gbgindonesia.com/en/main/why_indonesia/2018/indonesia_s_economic_outlook_in_2
018_modest_optimism_challenges_remain_11830.php