Editorial: Bracing for economic slowdown

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Indonesia’s economy expanded 6.4 percent in the second quarter, slightly higher than the 6.3 percent of the previous quarter, as robust domestic demand and strong investment, unaffected by the European debt crisis and weakening global economy, offset a decline in international demand for its exports.

The second-quarter growth could cushion the risk of a slackening economy in the second half, but it would be misleading for President Susilo Bambang Yudhoyono to set a growth target of more than 6.5 percent in his state budget proposal for 2013 to be unveiled on Thursday.

True, growth in the third quarter could remain fairly strong due to the Muslim Ramadhan and Idul Fitri festivities in July and August which usually fuel strong household consumption. But as the global slowdown bites deeper into our exports, the rate of expansion in the second half will at best be similar to the first six months.

Equally discouraging is the figure for government investment spending, which has always been very slow, reaching only about 30 percent of the budgeted total as of early this month.

Assuming an unreasonably high growth rate for 2013 amid the lingering economic crisis in Europe and reduced growth in the global economic locomotives — China and the United States — could skew tax receipt targets and send the wrong signals to businesses.

The economy will likely burst at the seams if the pace of growth is accelerated to over 6.5 percent, the rate of expansion achieved last year. Look at how most major seaports and main highways in Java and Sumatra have been reduced to giant gridlocks, thereby hindering the movement of goods and people.

Yet more discouraging, there is unlikely to be any significant improvement in the condition and supply of basic infrastructure because of the long delay in the issuance of government regulations to implement the 2011 Land Acquisition Law. The regulation was issued only last week, eight months after the enactment of the law.

Most analysts have predicted for the rest of the year a steep decline in the international demand for natural resource commodities such as coal, palm oil, rubber, cocoa, nickel and tin which make up the bulk of Indonesia’s exports.

The third consecutive monthly trade deficit recorded in June, due partly to the surge in raw-material imports revealed the economy had either expanded beyond its production capacity or domestic manufacturing is not competitive enough to enter the international market. In the past years, an expansion in raw-material imports was always followed by a surge in manufacturing exports because the country’s manufacturing industry has always depended largely on imported basic materials and intermediate goods.

As commodity prices will likely continue to fall for the remainder of the year and even into next year, most natural-resource companies will book smaller profits, thereby reducing tax revenues for the government.

A worsening trade deficit could strengthen the downward pressures on the rupiah, fueling stronger inflationary pressures (through imported inflation) and causing jitters among already skittish foreign portfolio investors.

The distortion in the structure of business incentives caused by the commodity boom over the past two years has eroded the country’s competitiveness, hindering skills development, job growth and prosperity.

However, it is rather unfortunate that, as the government launched bold policies to remove the distortion by focusing on adding value to natural resource exports through export surcharges on unprocessed commodities, global demand has been slumping amid the weakening world economy.

Given the extremely unfavorable external conditions, it is well advised for the government to proceed step-by-step with its latest reform policies in the mining sector, using Deng Xiaoping’s oft-quoted principle of “crossing the river by feeling for the stones”.