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Indonesian economy: Weakening resiliency and growth?
The Fed and the International Monetary Fund (IMF) have explicitly stated that the current monetary policies have not been tight enough.
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Pile it high: A truck drives past stacks of containers at Tanjung Priok Port in North Jakarta on Aug. 18, 2023. Indonesia’s current account fell back into a deficit of US$1.9 billion in the second quarter of this year after experiencing a surplus for 11 consecutive quarters (Antara/M Risyal Hidayat)
T
he Indonesian economy has been hailed as being resilient in the first half of 2023. In the face of geo-economic fragmentation and de-globalization gripping the global economy, Indonesia’s gross domestic product (GDP) grew 5.1 percent in the first half of 2023, strong growth by any measure.
Inflation fell to a historic low, pushed down by a combination of good harvests in the agriculture sector, intensive government intervention in smoothing out food supply in regions and rupiah appreciation. A combination of high growth and low inflation is a coveted objective for every decisionmaker.
Net portfolio investment flows turned into a positive US$3 billion in the first quarter, after a negative of $9 billion in 2022. The rupiah appreciated 2.4 percent, while foreign direct investment (FDI) flow was steady at above $3 billion every quarter. These were achieved despite aggressive monetary tightening by the United States Federal Reserve (Fed) that resulted in the narrowing of the spread between the Fed rate and Bank Indonesia (BI) rate from 1.25 basis points (bps) in January to 0.5 bps in June.
The fiscal surplus until July, which totaled Rp 154 trillion (0.7 percent GDP), has reduced the government's need to borrow. Government debt has been declining both in nominal terms and as a share of GDP. Most of the debt (88 percent) is long-term with an average tenor of 8.6 years and most of it (72 percent) was rupiah-denominated. The share of domestic sovereign bonds (SBNs) held by foreign investors came down from 38 percent in 2019 to 16 percent in July 2023.
All these are supposed to make the economy less vulnerable to exchange rate and capital volatility in the event of market turbulence.
But the question now is how long this resilience can go in the middle of unsettling global uncertainties.
The continuing global tight monetary policy will test the resiliency of the Indonesian economy. The Fed and the International Monetary Fund (IMF) have explicitly stated that the current monetary policies have not been tight enough. Inflation remains well above the Fed’s target while services and core inflation are stubbornly high.
