The Jakarta Post
The Indonesian economy is expected to face continued external challenges stemming from uncertainty in the global environment, as developed economies are expected to further tighten their monetary policy while tensions between the United States and China have yet to be resolved beyond the recent détente from the two countries.
The Jakarta Post looks at the economic prospects of 2019 to assess Indonesia’s potential in the challenging global environment. This is the first part of the outlook, compiled by Marchio Irfan Gorbiano, Norman Harsono, Rachmadea Aisyah, Riska Rahman, Riza Roidila Mufti, Stefanno Reinard Sulaiman and Winny Tang.
The government said it would prioritize stability over growth in 2019 amid ongoing global economic turbulences expected to come from the same sources as in 2018 – namely the ongoing trade tensions between United States and China as well as the US Federal Reserve’s (Fed) monetary policy normalization, although the Fed has signaled a slightly more dovish stance on rate hikes in the new year.
The United Kingdom’s divorce from the European Union, a process expected to be completed by March 29, could add uncertainty to global markets.
The government’s pro-stability stance reflects in its growth target, which was set at 5.3 percent in the 2019 state budget, lower than the 5.4 percent target in 2018, as well as the planned fiscal deficit, which was trimmed to 1.84 percent to the gross domestic product (GDP) – the lowest since 2013.
Finance Minister Sri Mulyani Indrawati recently said the government would retain a degree of flexibility in managing its fiscal policies amid the government’s desire to seek and maintain economic stability.
Meanwhile, Bank Indonesia (BI) will make stabilizing the rupiah’s exchange rate against the US dollar a priority. BI Governor Perry Warjiyo’s catchphrase of a monetary policy that is “pre-emptive, frontloading and ahead of the curve” is likely to continue to guide the central bank in 2019.
After relaxing macroprudential regulations for the housing sector in 2018, the central bank plans to relax macroprudential policies concerning small and medium enterprises (SMEs), tourism and other export-oriented sectors this year.
The Finance Ministry’s Directorate General of Taxation has an ambitious target for tax revenue, aiming to collect 1.58 quadrillion (US$108.55 billion) by the end of the year. That figure looks optimistic given that the government likely missed its 2018 target.
Director General Robert Pakpahan has predicted that only about Rp 1.35 quadrillion in taxes, or 94.87 percent of the state budget target, would be collected in 2018.
Nevertheless, Robert remained confident that tax revenue in 2019 would fare better, because of expected higher consumer spending during the presidential and legislative elections to take place in April.
Increased consumer spending during the elections, particularly for merchandise items for election campaigns such as T-shirts, would boost value added tax (VAT) collection, Robert added.
However, some challenges remained, said tax revenue and compliance director Yon Arsal, given that the government had cut taxes for SMEs and offered tax refunds to boost investment and business activity and improve cash flows.
Bawono Kristiaji, tax research partner at the Danny Darussalam Tax Center (DDTC), said external factors, such as monetary tightening by the US Fed, the US-China trade tensions and commodity price volatility, could affect Indonesia’s economic growth and, eventually, tax revenue next year.
With these threats in mind, he said, tax revenue next year would likely reach around Rp 1.45 quadrillion to Rp 1.49 quadrillion, or 91.9 percent to 94.5 percent of the state budget target.
Indonesia Stock Exchange
The external factors influencing Indonesia’s macroeconomy will also loom large over stocks included in the Jakarta Composite Index (JCI) in 2019, analysts predict.
Analysts believe that, if Indonesia can keep the rupiah stable and reduce the current account deficit, combined with a good financial performance of companies listed on the bourse, the JCI could hover between 6,500 and 6,800 points next year, rising from around 6,100 points in December. (kompas.com/File)
However, there might also be positive sentiment from the global environment, with many analysts expecting the Fed to be less aggressive in increasing its policy rate in the new year amid signs of softening in the US economy.
Should the Fed be less aggressive about raising interest rates, this could help the rupiah strengthen against the US dollar, which in turn would reduce the pressure on BI to raise rates.
Analysts believe that, if Indonesia can keep the rupiah stable and reduce the current account deficit, combined with a good financial performance of companies listed on the bourse, the JCI could hover between 6,500 and 6,800 points next year, rising from around 6,100 points in December.
The growth of loan disbursement and third-party funds (DPK) of Indonesian banks will improve next year, while the nonperforming loan ratio would decrease, the Financial Services Authority (OJK) has projected.
The OJK based its projection on the improving performance of Indonesian banks toward the end of 2018 as well as the forecast that the Fed will dial back plans for future rate hikes next year, amid a slowdown in the global economy.
"Most banks project that credit growth will be better than in the previous year. I am still optimistic that – amid existing challenges – next year’s credit growth will reach 12-13 percent,” Heru Kristiyana, head of the OJK’s banking supervisory division, said recently.
Based on their corporate business plans (RBB) submitted to the OJK, many Indonesian banks are expecting double-digit credit growth in 2019.
In addition, the regulator forecasts that banks’ DPK would increase by 11 percent in 2019, despite the fact that the DPK slowed down in 2018 while banks’ liquidity tightened.
In 2019, banks will focus on optimizing their digital channels to ensure higher DPK next year. Apart from digitalization, banks will also benefit from the government regulation requiring exporters to repatriate their export earnings and place them in domestic banks, which is part of the government’s latest economic policy package.
Nevertheless, the OJK predicts the gross non-performing loans (NPL) ratio this year to decline to 2.2 percent from 2.6 percent in November 2018, because some banks have restructured loans.
The Industry Ministry estimates that industry growth outside of the oil and gas sector will reach 5.4 percent this year. That target looks modest against the 2018 growth figure of 5.67 percent but may be explained by global uncertainty that could take a toll on demand.
The Industry Ministry expects industry growth outside the oil and gas sector to slow down to 5.4 percent. (JP/Dhoni Setiawan)
Similar to previous years, the ministry is looking to the food and beverage sector, which caters mostly to the domestic market, to record the highest growth rate in 2019 at 8.71 percent.
Other sectors are not likely to achieve the same growth rate, such as the metal, computer, electronics and machinery sector at an expected 4.02 percent, the transportation equipment sector at 3.67 percent, the chemicals sector at 3.40 percent and the textiles and garment sector at 1.64 percent.
Industry Minister Airlangga Hartarto said he would focus his efforts on skills improvement for the local workforce as well as intensifying the implementation of the so-called Fourth Industrial Revolution, also dubbed Industry 4.0, to cope with the challenges.
The Trade Ministry has yet to issue a forecast for the 2019 trade performance, even though experts believe it is going to take a while for the government to recover from the trade deficit recorded in 2018.
The University of Indonesia’s Institute for Economic and Social Research (LPEM UI) wrote in a recent research note that a significant improvement in the trade balance was unlikely next year. The 2018 deficit amounted to $7.52 billion as of November.
One challenge for Indonesian exports lies in continued uncertainty stemming from trade tensions between the United States and China, which are not only the world’s two largest economies but also Indonesia’s two biggest export destinations, accounting for a quarter of Indonesia’s exports in 2017.
In November, the government introduced final income tax cuts in its 16th economic package for exporters depositing their earnings (DHE) in government-appointed bank accounts, so as to allow some foreign exchange liquidity to flow into the domestic financial system.
The policy, slated to take effect in early January, stipulates that export earnings from mining, plantation, forestry and fishery businesses must be deposited with domestic lenders. In return, the exporters would pay lower taxes during the period of the deposit.