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The economy in 2023: Bracing for bigger global challenges
As the end of the year approaches, a number of events have led to a tumultuous global economy. The Russia and Ukraine war, complicated by sanctions imposed by the United States and the European Union, disrupted the world-pandemic recovery process. The war caused severe supply shocks that in turn caused commodity prices to rise.
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s the end of the year approaches, a number of events have led to a tumultuous global economy. The Russia and Ukraine war, complicated by sanctions imposed by the United States and the European Union, disrupted the world-pandemic recovery process. The war caused severe supply shocks that in turn caused commodity prices to rise. This is adding fuel to the already burning-hot inflation caused by recovering demand amid supply chain disruption. Central banks across the world have been forced to tighten financial constraints to fight inflation. This means central banks have had to start normalizing the loose liquidity/monetary policy seen during the pandemic earlier than expected to tame rising inflationary pressure.
In 2023, the global-economic situation will still be tough as uncertainties arise. Several lingering risk factors may potentially hamper global-economic growth, i.e. geopolitical tension, stubbornly high inflation, climbing interest rates and likely, recession. Inflation and increasing interest rates have led to declining confidence in the prospect of growth. Sharp hikes in interest rates, especially in “developed” nations such as the US, the United Kingdom and European countries, brought renewed concern that the global economy is now even more likely to fall into recession.
Adding to the pressure, one of the largest economies, China, recorded worse-than-expected economic growth, as the country continues with its zero-COVID policy, which led to partial lockdown of the economy. Slowdown in the world’s largest economies will have significant consequences on the global outlook. International Monetary Fund projected growth to slow from 6.1 percent in 2021 to 3.2 percent this year. The economy is projected to slow further to 2.9 percent in 2023.
Risk of global slowdown, or worse, recession, will eventually impact Indonesia’s economic recovery. The economy up to this point has been predominately supported by recovering demand and also by the windfall revenue from commodity exports. The government has been trying to minimize the spill-over impact of global inflation by keeping subsidized-energy prices unchanged for a period of time, reallocating some of the windfall revenue for additional subsidy.
Yet, the whole global-economy situation is highly uncertain. Global slowdown could impact export performance; thus, the commodity windfall currently enjoyed may not be sustainable. This is the main reason that the government finally decided to adjust fuel prices. The adjustment in the fuel prices will additionally impact inflation by around 1.7 percent, which will likely be followed by interest-rate hikes by the central bank. The impact of these adjustments in macroeconomic variables may contribute to a slowdown in economic growth next year.
Further, the economy will face more challenges and uncertainties next year as stagflation remains the bigger risk for the global economy. Potential slowdown or even recession could lower economic activities and global demand, which will eventually lead to a correction in commodity prices. We have seen the oil price decline slightly to below US$100 per barrel in the past weeks. Coal and CPO prices have also declined, though they are still relatively high compared to pre-pandemic levels. This gives rise to the risk of a narrowing trade surplus going forward, reducing the cushion for the economy to weather the global shock.
Another challenge is the normalization of the liquidity in the economy. Next year, monetary normalization and fiscal consolidation will continue for Indonesia, as the economy recovers from the pandemic. From the monetary side, Bank Indonesia (BI) has started the normalization of banks’ liquidity by imposing the reserve requirement ratio (RRR) hikes.
The RRR has already been increased to 9 percent, which is estimated to absorb around Rp 200 trillion (US$13.32 billion) to Rp 300 trillion of excess liquidity in the banking system. Furthermore, anticipating the potential increase in inflation due to the fuel price hike, BI has also increased the BI Rate in August, for the first time since February 2021. These policies will impact liquidity, which may potentially be tighter than expected.
From the fiscal perspective, the government is on track with its plan to bring the fiscal deficit back to the limit of maximum-ratio 3 percent of the GDP by next year. The consequences? Of course, there will be an adjustment in spending, as spending related to the pandemic stimulus will gradually be phased out.
On the bright side, the robust-demand recovery has led to a higher collection of tax revenue. Commodity windfall may be smaller in 2023, but should still support government revenue, thus providing more fiscal space. Hence, the negative economic impact of this fiscal-consolidation effort should be relatively minimal.
Nonetheless, amid these challenges and uncertainties, opportunity to grow still exists. Indonesia currently still pursues structural reform, developing downstream industries, to bring higher added value to the economy. The government has also begun Phase 1 of basic-infrastructure construction for the Nusantara Capital City (IKN) project, which is expected to provide a catalyst for growth, especially in East Kalimantan.
Furthermore, as the pandemic is increasingly under control, economic sectors that related to mobility -- such as food-and-beverage, tourism and services -- may still recover quickly going forward. Therefore, despite the challenges, Indonesian economic growth is expected to still be able to maintain 5 percent growth in 2023.
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The writer is a senior economist at Bank Mandiri
