NEWS

The World Bank in its report titled Global Economic Prospect 2016 states that Indonesia's economic growth throughout 2016 is expected to be better than in 2015.

For information, the realization of economic growth in 2015 is estimated to only be at the level of 4.7% -4.8%. This is the lowest achievement ever achieved.

The low growth achievement is inseparable from the decline in purchasing power, contraction in export performance, stagnation in the realization of private investment, and the lack of government capital expenditure.

External Factors

Although Indonesia's economic growth will be better in 2016, several uncertainties, especially from the external side, are ready to head off. So, if there is no anticipative policy to withstand this external uncertainty, then improvement in growth in 2016 could face a steep road.

There are at least three external factors that will affect Indonesia's growth improvement. First, the economic recovery of the United States (US) which continues. Many US macroeconomic indicators have verified this recovery, such as the decline in the unemployment rate (unemployment rate), the improvement in the level of household income (real earning), the recovery of employment, home sales, and consumer confidence index.

The recovery of the US economy will open up space for the Fed to continue raising the federal funds rate (FFR) quickly or gradually (gradually).

The Fed has signaled this, when the first time (17/12) hoisted the FFR by 25 bps to a level of 0.5%, after being held at a very low level since 2008.

The impact of raising the FFR will hoist up the US dollar index (super dollar) and continue to this day. Of course, this will have an impact on depressed exchange rates, as happened in 2015.

The escalation of pressure on the rupiah can increase, given the high dependence of the domestic economy on global funds that are reflected in foreign ownership in the portfolio market (stocks and SUN0 and foreign debt (ULN) owned by the private sector.

With this reality, the government and Bank Indonesia (BI) are expected to produce consistent and credible policies to maintain investor confidence levels.

In 2015, the government and BI could do this enough. This is reflected in the relatively low exchange rate depreciation compared to several other emerging countries.

The second slowdown in the Chinese economy. Based on the projections of several world financial institutions, the decline in Chinese economic growth in the future is projected to continue. This is caused by the turnaround of the turnaround growth model from investment and exports to consumption and services. This is done by the Chinese government to look for more sustainable growth.

The results of a survey conducted by AFP recently stated that China's economic growth in 2015 was only at 6.7%. Down from 2014 at the level of 7.3%. Nomura Bank estimates that only China's growth can touch the level of 5.8%.

For Indonesia, the implications of the slump in Chinese economic growth will erode export performance, bearing in mind that China is Indonesia's largest trading partner, especially in commodity transactions.

So, if there are no quick steps to reorient products and markets and encourage innovation, then it is certain that the trade balance deficit in 2016 can widen, bearing in mind the import conditions in 2016 will be better, as investment is growing, especially those carried out by the government.

In addition to slowing growth, some groups also paid great attention to the devaluation of the yuan. The devaluation of the yuan is in the spotlight, due to the lack of openness and communication made by the government and the People Bank of China (PBoC) with market participants.

That is why, when an impromptu yuan devaluation occurred in August 2015 and January 2016, it immediately caused panic in the stock market which not only knocked down the Chinese stock market, but also caused global exchanges to plummet with billions of US dollars in investment to evaporate. In short, the devaluation of the yuan will be a source of uncertainty which will add weight to the uncertainty that has been detected at this time.

The third factor is falling oil prices. Until now, oil prices have not shown a recovery trend. Conversely, world oil prices have been cut by around 20% since this year (year to date / YTD) and are currently below the level of $ 30 / barrel.

Slumping demand amid an oversupply of global oil stocks and added geopolitical (Iran and Arabic) pressure are factors that will depress oil prices. Goldman Sachs in its report titled "lower for even longer" states that the world oil price in 2016 could reach the level of $ 20 / barrel.

For Indonesia, the decline in oil prices could be a double-edged sword. On one hand, it becomes an opportunity to cut fuel subsidies and reduce prices so that it is expected to improve the government's fiscal space and encourage increased purchasing power.

However, on the other hand, it can have an impact on the reduction in revenues to the state budget, bearing in mind that investment in the upstream oil sector has so far contributed significantly to the state budget revenues.

Locomotive Growth

Therefore, amid external uncertainties that will still rumble throughout 2016, the government is the key to driving the locomotive of growth and is expected to be as expected at the 5% -5.3% level.

To that end, the government must ensure that the absorption of spending, especially infrastructure spending, must be maximized. The government must also encourage the active role of SOEs to expand into areas with limited infrastructure. This will stimulate investment from the private sector.

Of course, for this expenditure acceleration to be sustainable, the government must be able to secure the revenue side, particularly from the taxation sector, both through asset revaluation, tax amnesty, and an increase in personal taxpayers.

Furthermore, the government must be able to keep inflation low. This is expected to encourage purchasing power and can impact on lower interest rates, especially MSME rates. The stretching of MSMEs is expected to contribute to growth.

Finally, the government must be consistent in implementing various series of economic packages that have been released in 2015. Considering, the package contains various incentives. However, during a sluggish economic cycle, providing incentives is an apt strategy for attracting investment.

Written by: Desmon Silitonga-Analyst PT. Capital Asset Management