Indonesia briskly rebounded as the economic growth jumped from -0.74% YoY in 1Q21 to 5.01% YoY in 1Q22. For 1H22, we predict it will grow at 4.7% YoY emphasizing the consistent economic recovery amid the pandemic. Ahead, 2H22 will be more challenging due to the higher inflationary pressure and rising global economic and political turmoil where VIX index grows at 44.3% YtD. Global monetary normalization puts Bank Indonesia (BI) on the risk as well as BI is among the world’s least hawkish central banks. However, we believe Indonesia is standing still despite of global turbulence although we are revising our economic growth slightly down from 4.9% to 4.8% YoY due to main four challenges below.
1. Covid-19 to monkeypox
The fear of pandemic subsides although the 7-day average of the daily cases rose by 34.2% in a week to 4,863 per day as of July, 25th 2022. In response, the National Economic Recovery (PEN) fund, the foremost pandemic stimulus by the Government of Indonesia, has been spent as much as Rp124.5 tn in 1H22 or 27% of the total allocation at Rp455.6 tn in 2022. It seems that the realization of stimulus will be underrealized as the Covid-19 cases recede. Unfortunately, WHO just declared monkeypox as current global health emergency with 16,000 cases in 75 countries. This is important to watch as Indonesia is hosting many international events this year. Back to the stimulus, we expect the government can allocate the fund for other priority programs or next year pandemic handling fund.
2. Prolonged Russia-Ukraine war
UN records 12,272 civilian casualties (5,237 killed and 7,035 injured) between Russia-Ukraine war since it began. The tension escalated again after Russia hit the Ukrainian port just 24 hours after signing a deal committing to the safe passage of grain on July, 25th 2022. This is a massive drawback as both countries have just agreed upon the resumption of vital grain exports from Ukrainian Black Sea ports to Turkey in order to ease the global food crisis. The attack prolongs the supply side disruption especially on commodities. Deeper, Ukraine remains on its food export ban until YE 2022 especially on wheat, oats, millet and sugar. This is important as Russia and Ukraine built up 59% of total cereals imported by Indonesia in 2021.
3. Rising protectionism
Many countries are more inward looking for long-term food security through protectionism for instance export ban and non-tariff barrier. Besides, due to the pandemic lockdowns, these countries start to reconsider to integrate into global value chain (GVC) as their production can be halted whenever one country impose lockdown just like what China did. This is important as Ying, et al (2014) found that 100 bps in globalization increase lifts 1.48% of economic growth in ASEAN countries. For Indonesia, this will be a loss especially through globalization, we reap economic spillover such as transfer knowledge and tech advancement. Alongside with the pandemic and the war, this leads to the supply chain disruption.
4. Monetary tightening
Market frets about BI’s strategy on maintaining inflation, curbing capital flow, and managing foreign exchange simultaneously under the global monetary policy normalization. Instead of policy rate hike, BI chose to sell Rp390 bn of bonds last week and would continue selling while BI still serves as a standby buyer in government bond auctions. Next, BI aims to sell about Rp70 tn of bonds with maturities of five years and below in order to soak up excess market liquidity and increase bond yields alluring investor to come. For comparison, last week, BI was holding Rp1,263 tn of bonds, up from Rp273.2 tn in 2019 or before the pandemic.
Showing true mettle
All first three challenges above put inflationary pressure that make us to raise our inflation rate forecast from 4.2% to 4.8% YoY. It gives pressure on household consumption and it leads them to save more money under the uncertainty ahead. This brings us to cut our household consumption forecast growth from 5.4% to 4.8% YoY in 2022. Finally, we revise our GDP growth forecast slightly down from 4.9% to 4.8% YoY for FY 2022. With 4.8% of growth, we see this is quite sufficient to say that Indonesia blooms its true mettle amid global economic adversity.