Economic Outlook: Government Optimism vs Global Institutions Pessimism

Penulis: Safrezi Fitra

Editor: Safrezi Fitra

31/12/2018, 14.48 WIB

IMF, World Bank, global rating agencies, entrepreneurs and LPS are pessimistic about the Indonesian economic growth of 5.3 percent in 2019.

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Uncertainty of global conditions does not make the government pessimistic about next year’s economic growth target. It is still confident the economic growth in 2019 will be higher than this year. Meanwhile, economists and national and international institutions estimate the government will not be able to reach the target.

In the macro assumptions of the 2019 State Budget (APBN), the government and the House of Representatives (DPR) set the economy to grow by 5.3 percent. The Economic Coordinating Minister Darmin Nasution is even optimistic that Indonesia’s economy next year can grow higher than the target in the state budget. This year, the growth is predicted to only reach 5.2 percent, lower than the 2018 State Budget target of 5.4 percent.

“Next year, it can be a little higher than this year, reaching 5.3 percent-5.4 percent,” Darmin said at the Indonesia Stock Exchange Building on Friday (12/28). Sentiments for the political year will increase the 2019 economic growth. Consumption is still the main driving force for the economy. The political year will increase economic activity, especially from the consumption of the government and household.

World Bank and the International Monetary Fund (IMF) apparently did not support the Indonesian government’s confidence in its economy next year. The two institutions considered it difficult to achieve the 5.3 percent growth target. International rating agencies, such as Fitch and S&P, predict Indonesia’s economy will only reach 5.2 percent in 2019. In fact, Moody’s growth projection is only 4.8 percent, which is lower than this year. The reason is that Indonesia is still vulnerable to external sentiments.

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From within the country, the Deposit Insurance Corporation (LPS) estimates the economy will only grow 5.2 percent next year. The main obstacles to Indonesia’s economy are global uncertainty due to the US-China trade war and conditions of the European Union (EU) member countries.

Citing the World Economic Outlook, the global economy is likely to grow 3.73 percent this year, and fall to 3.70 percent next year. In particular, the US economy is also predicted to fall from 3 percent this year to 2.5 percent next year. Meanwhile, China’s economy is 6.6 percent this year and 6.5 percent next year. 

The US economy has begun to slow down. This can be seen from the employment data, which was far from expectations last month. The impact of President Trump’s fiscal stimulus in the form of tax cuts for industry has begun to show a decline. Aside from slowing down, the US economy is also expected to fall into recession in 2020.

Likewise, China also experienced a slowdown in its economy. Exports cannot be expected to support growth due to trade war with the US. The country’s main support is only on investment. As the domestic economy slows down, Chinese investors tend to target foreign markets, including Indonesia.

“The thing to look out for is investment that competes with the Micro, Small and Medium Enterprises [MSMEs] in Indonesia. There should be improvements in our MSME sector,” member of LPS Board of Commissioners Destry Damayanti said.

Consumption will still be the biggest contributor to domestic economic growth. It will boost bank loan to reach 12 percent growth. Government spending and foreign direct investment (FDI) are ranked second and third in contributing to Indonesia’s economic growth next year.

According to Destry, the FDI will be stagnant next year. The reason is that the national political agenda will make foreign investors hesitate to invest. Foreign investors will have the courage to invest in Indonesia in the second half, after the Indonesian President for the period of 2019-2024 is elected.

The stagnation of foreign direct investment has made Indonesia dependent on short-term portfolio investment, even though this hot fund in the capital market cannot be a foothold and is more volatile. On the other hand, domestic funding sources have limitations.

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