Optimism Embraced, Reality Forgotten
Yopie Hidayat (Contributor)
AN optimistic outlook has gained traction, saying that Indonesia’s economic statistics in Q2 2021 will show a rapid growth. The government even went as far as to predict over seven percent growth. This is certainly a good sign. However, statistics can trick those who do not read them carefully. One should read the bright statistics at the end of Q2 2021 just as the starting point. How the economy will grow in the following quarters should be the real focus.
The explanation is simple. The basis of economic growth predictions for Q2 2021 is the economic condition at the end of Q2 2020. At that time, Indonesia’s economy was at its lowest point due to the damage from the Covid-19 pandemic; the country experiencing a contraction of minus 5.2 percent. This low reference point will make the Q2 2021 growth prediction looks incredible, even though the economic performance is nothing out of the ordinary.
Contrary to that prediction, in recent weeks, there are more risks threatening the market and the Indonesian economy. The biggest one is the uncertainty about the end of the pandemic. While in the United States the situation appears to be under control, our nearest neighboring countries must once again lock themselves down due to the spread of the much more dangerous Indian variant.
Without a doubt, economic recovery is closely linked to the end of the pandemic. Yet it is so hard to predict when the pandemic will end and how far the damage it will cause to the economy. The best strategy should be to prepare ourselves for the worst-case scenario. The investors could possibly take a wrong step if they let themselves besotted by optimism just because of one growth statistic at the end of the quarter.
There is still another risk that looms just as large. Massive vaccinations in the US have successfully reduced the number of new cases and restored public trust so that the economy can move. Inflation has sharply risen. One of the main indicators for the Federal Reserve in making monetary policy is the core inflation that does not include food and energy prices due to their volatility. This indicator came out on Friday, May 28. As of April, year-on-year core inflation in the US has reached 3.1 percent, the highest since 1990. The US economy is heating up.
Next up in the chain of consequences, the risk that has loomed large over the emerging economies for so long, including Indonesia, will continue to grow larger. The warming up of the US economy will push The Federal Reserve to begin their tapering, reducing liquidity injections into financial markets which currently amounts to US$120 billion per month. When the liquidity flow to the financial market is reduced, the risk of capital flight from emerging economies will increase. The exchange rate of the rupiah will be under pressure and interest rates will soar soon after.
Therefore, it is safe to assume that Indonesia’s economy is still in a very precarious position. The government must continue to provide stimulus to prevent the economy from slumping.
However, there is a limit to what the budget can do. The government cannot possibly increase stimulus by taking on more debt. The government is drawing on new debt of up to Rp1,060 trillion this year. This limit cannot be crossed because its cost is already massive enough. The burden of interest on the government this year has surpassed Rp374 trillion, sucking out 21.4 percent of its total revenue.
Actually, amidst all the limitations, the government still has room to increase the stimulus, as long as it is willing to choose. Expenditures that have a bigger effect on the economy should become a priority. For instance, labor-intensive simple infrastructure construction projects will surely have a bigger impact to help the struggling populace than building a new national capital with a grand palace. Another example: the defense budget this year is Rp137 trillion. If these funds are used to import fighter jets, that will actually reduce growth.
All of these more rational choices are still not apparent until now. Embracing optimism, the decision makers seem to be forgetting the reality.