N

o, this is not an article about the weather. Rather it is about the cooling global economy, its impact on Indonesia and what we can do to survive.

The International Monetary Fund recently revised its global growth forecast to 3.2 percent from 3.4 percent. The previous estimate was only three months old! Most of the decline will come from developed economies. And the US is not spared.

Europe has been in trouble for some time and does not seem to have recovered from the 2008 global crisis. The main problem there is how to deal with the massive amounts of bad loans in the banking system. With the banking system in disarray, monetary policy is not effective.

In Japan, the promises of Abenomics have fizzled. The Bank of Japan’s move to negative interest rates has not boosted inflation and has weakened the yen.

But the biggest surprise is the US economy. Unemployment was declining and growth until the third quarter last year appeared robust. Then in the fourth quarter, growth stuttered following the global upheaval emanating from China. But the Fed raised rates anyway toward the end of the year. US exports slowed down along with the rising US dollar. Furthermore, the decline in the US dollar value of US offshore firms’ profits added to the decline in fourth-quarter gross domestic product (GDP). The early release of first quarter results is a low 0.5 percent versus 2.4 percent for the whole of 2015.

Meanwhile in emerging markets, several large ones like Russia and Brazil are in recession. Only China is showing some signs of stabilization. But this needs careful scrutiny. The recent gains are due to recent stimulus that in the past has proven to be unsustainable. China needs to deal with excess capacity, a property bubble and rising nonperforming loans.

Indonesia’s first-quarter GDP growth figure at 4.92 percent is disappointing but not alarming. The worry is about consumption spending. It has held up at around 4.9 percent. But indicators like household credit growth and vehicle sales are on a downward trend. On the bright side,the purchasing manager’s index and manufacturing production index are both rising. Another bright sign is the rise in the construction sector.

Decline in Japan and Europe should prompt more monetary stimulus. Examples include buying corporate bonds for Japan and expanding the existing program in Europe. In the case of the US, we hope to see the Federal Reserve refrain from hiking at least until the fourth quarter this year.

There are two implications of these developments for Indonesia. First, dim growth prospects means commodity prices will not recover any time soon. The other implication is on emerging market currencies. This depends on who makes the first move. If Japan and Europe ease further, the US dollar will strengthen. This will be at the cost of emerging market currencies. But if the Fed delays hiking its rate then the US dollar will weaken. And this will benefit emerging market currencies.

As regards capital flows, global investors are likely to remain in risk-off mode. Only brave investors will raise their exposure to emerging market assets now. Those that do will be extra selective. Still, we continue to believe Indonesia is high on the list of favorable destinations.

How should Indonesia face the global economic slowdown? A frontiersman facing the depth of winter would spend more time indoors. And make sure there is enough heating inside his cabin.

We should, therefore, focus on maintaining and raising domestic demand. How to do this when the government is facing revenue shortfall? It should think in the long term and be more careful with spending.

There are two criteria to prioritize. First is raising income for a large segment of the population. And second is to raise potential GDP in the medium term.

Programs in the first criterion include measures to contain spikes in staple food prices. Another example is programs involving many people to repair farm and village infrastructure.

For the second criterion, the suggestion is to spend with care. Huge sums of money have been spent on education without getting the intended improvements. International standardized scores are clear evidence. We can use randomized experiments to seek out what works and what doesn’t.

Business as usual is definitely out.

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The writer is chief economist of state securities company PT Danareksa, Tbk. The views expressed are his own.