The macroeconomic assumptions of a recently released 2022 state budget draft reflect the expectation that Indonesia’s economy will largely return to pre-pandemic conditions by 2022, a postponement of predictions outlined in the 2021 budget.
The 2022 draft presumes that some key macroeconomic indicators such as gross domestic product (GDP) growth, the inflation rate and the poverty rate will return to levels seen in 2019 or earlier by next year, but economists warn that downside risks loom.
The government expects GDP to grow up to 5.5 per cent next year on the back of reforms set in motion, in part, by the Job Creation Law. The forecast matches the approximately five per cent growth seen in the years before the pandemic.
Finance minister Sri Mulyani Indrawati told an online press conference on August 16: “Of course, this requires hard work, including quite deep reforms so that our economy becomes more productive.
“The reforms are related to [human development], education, healthcare, social protection and infrastructure for mobility, connectivity and productivity, as well as bureaucratic and regulatory reform, such as the Online Single Submission system.”
The 2021 state budget, too, predicted that Indonesia’s GDP would grow by some 5.5 per cent, but the government has slashed the best-case projection to 4.5 per cent following the enactment of multi-tiered public mobility restrictions (PPKM).
The 2022 budget forecasts that consumer prices will rise three per cent that year, a level last seen in 2018, alongside a predicted rebound in demand.
The 2021 state budget draft predicted three per cent inflation for this year as well, but the government has lowered its expectations to between 1.8 and 2.5 per cent.
The finance minister said 2022 inflation “is expected to be [caused by] a combination of aggregate demand that will start strengthening next year, usually followed by global commodity prices.
“We hope Bank Indonesia [BI] and the government will keep medium-term inflation stable,” she said.
BI has not set an inflation target for next year, but the pandemic has muted consumer price growth, and inflation stood at 1.68 per cent last year, below the central bank’s target of between two and four per cent.
“I think the inflation target within that [BI] range is still in line with the supply and demand conditions next year, when we expect to enter the economic recovery phase,” Piter Abdullah, an economist at the Centre for Reform on Economics Indonesia, told the Jakarta Post on August 18.
“Inflationary pressure above three per cent [is expected to occur] as unemployment falls in line with the recovery in the economy,” he added.
The unemployment rate, however, is not expected to return to normal levels by 2022. The government predicts it will range from 5.5 to 6.3 per cent in 2022, higher than the levels seen from February 2018 to February 2020, just before the pandemic.
In February of this year, the unemployment rate was 6.26 per cent, up 1.32 percentage points from a year earlier, Statistics Indonesia (BPS) data shows.
The 2022 state budget predicts that the poverty rate will range between 8.5 per cent and nine per cent next year, matching the under nine per cent seen before the pandemic and reversing a three-year record-high poverty rate in 2020. The annual rate is expected to be between 9.2 and 9.7 per cent this year.
The 2022 state budget predicts an exchange rate of 14,350 rupiah per US dollar next year, approaching the average of 14,146 rupiah per US dollar recorded in 2019, according to the Jakarta Interbank Spot Dollar Rate (Jisdor).
The 2021 state budget predicted an exchange rate of 14,600 rupiah per US dollar this year. The rate was 14,383 rupiah per US dollar on August 16, according to Jisdor.
Ten-year government bond yields are also expected to remain competitive at 6.82 per cent next year, compared to the 7.29 per cent expected this year. On the morning of August 18, the yield was 6.33 per cent, according to Bank Mandiri data.
The outlook for both the exchange rate and bond yields builds on a narrow current account deficit, recorded at 0.36 per cent of the country’s GDP in the January to March period, partly thanks to a large trade surplus, BI data shows.
While imports bounced back, Indonesia still pocketed a trade surplus of nearly $2.6 billion in July, BPS reported on August 18.
Josua Pardede, chief economist at publicly-listed Bank Permata, said that while the exchange rate and bond yield assumptions were in line with the latest trends, a faster-than-expected normalisation of monetary policy by central banks in rich countries, including the US Federal Reserve, would pose a downside risk.
But the current account deficit was forecast to stay below two per cent, Josua said, the typical level seen before the pandemic, even if the economy bounced back and imports rose as investment picked up.
“The assumption regarding the exchange rate reflects that the government is confident it can achieve the economic growth [target], which can build investor confidence again,” Josua told the Jakarta Post on August 18. “It will therefore limit the depreciation of the rupiah and pressures on financial markets.”
THE JAKARTA POST/ASIA NEWS NETWORK