Indonesia’s Economy is Continue to be Weaken in 2020

By: Fitri Nur Arifenie

The slowing down of the global economy has been shadowing the growth of Indonesia's Gross Domestic Product (GDP). This year, Indonesia targeted economic growth by 5.3% as written on the state budget. However, the performance of economic growth until the third quarter of 2019 is not too encouraging. Based on the data of Badan Pusat Statistik (BPS), the economic growth was only 5.02% in the third quarter of 2019.

Many factors caused Indonesia's economic growth was getting weaker including exports and trade deficit. The number of export was not very pleased as Indonesia's main trading partner countries experienced the economic slowdown as well. China, which is Indonesia's export destination country with a portion of 17.2%, recorded a slowdown in economic growth from 6.5% in the third quarter of 2018 to 6%. Likewise, the United States, which exports 11.5%, also recorded a slowdown in economic growth from 3% to 2% in the same period.

Aside from being global, domestic factors such as the realization of government spending also affect Indonesia's economy. In the third quarter of 2019, the realization of government spending was only 22.75% of the budget ceiling. Also, some industries are slowing down such oil and gas as well as coal due to the lower price in the global market.

Looking at these factors, Indonesia will miss the target of the state budget. The Ministry of Finance estimates Indonesia's economic growth in the full year 2019 will be at the level of 5.05% or lower than 2018 which was 5.17%. The momentum of domestic economic growth is still supported by inflation, which is predicted at the end of the year to be maintained at the level of 3.1%. Then it is combined with the number of unemployment decreases and the poverty ratio continues to run low.

Similar, Bank Indonesia also predicts that the economic growth in 2019 will lower than in 2018 with the maximum number at 5.1%. The declining economic growth is contributed by the global influence which caused the number of Indonesia's export negative. Yet, Bank Indonesia sees that domestic consumption is still strong.

It is not only the Government cut the estimation of the economic growth but also other international organization such as the International Monetary Fund (IMF) and World Bank. IMF revised the projection of economic growth from 5.2% in April 2019 to be 5% in October 2019. Meanwhile, the World Bank has lowered its prediction from 5.1% to be 5%. World Bank sees that the slowing down in the investment growth has affected Indonesia's economy. Also, instability politics in Indonesia will drag down the economy.

Indonesia's economic growth in 2020 is not expected to be much different from the conditions this year. Yet, the Ministry of Finance is optimistic that economic growth will only be at the level of 5.2%. Therefore, the government will focus on improving Indonesia's trade balance. It is hoped that, through new policies, the trade balance deficit will shrink.

Some export policies adopted by the government to boost the trade balance are: (1) determining leading export-oriented commodities, (2) procedural simplifications to reduce costs and time, and (3) economic diplomacy and increasing market access through the addition of trade pacts and strengthening markets intelligence abroad. Also, the government will do procedural simplifications such as policies to reduce export restrictions facilitate logistics efficiency, reduce commodities that require surveyor reports and logistical efficiency.

Meantime, policy to reduce imports is including implementing the B30 policy starting in 2020. This aims to reduce oil and fuel imports. Then, the government will tighten import restrictions and impose trade security measures such as dumping and safeguards to protect domestic interests. Besides, the government will add products that are included in the mandatory SNI and increase the level of domestic content (TKDN).

The government will maintain the rate of domestic consumption by monitoring the prices of basic commodities. Nevertheless, the rate of domestic consumption will decrease because 2020 inflation is projected to be higher. This is due to the government's plan to raise non-subsidized electricity tariffs and cut the 3kg LPG subsidy. Also, in 2020 the government increased BPJS Kesehatan contributions by 100% and cigarette excise by 23%. The positive factor that support consumption is maintained is the momentum of the elections in 270 regions covering 9 provinces, 224 districts and 37 cities in September 2020.

Investment growth is likely to increase given that the anxiety over the election has diminished and the priorities of the new government have become clearer. Policy reform efforts, for example, are the Omnibus Law and the revision of the negative investment list will serve as a positive driver for investment, although it is unlikely to have a significant impact on the numbers for 2020. The Omnibus Law will include several changes in tax laws, including corporate income tax; dividends and interest income are lower.

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