Facing 2014: Strengthening Resiliency
    Category: Column By : Prof. Firmanzah Read : 526 Date : Monday, December 02, 2013 - 07:27:28

    Prof. Firmanzah

    As we near the end of 2013, the Indonesian economy looks to be resilient from external shocks. Some indicators show that the economy is still recording promising prospects. Economic growth is expected at 5.7% while inflation rate could be maintained below 9%. The fiscal deficit has been managed through adjusting the fuel price in the second quarter. Moreover, investment realization until the third quarter has increased by 28% and has reached more than Rp 293 trillion. In terms of monetary policy, Bank of Indonesia has been quite successful in maintaining national reserves, interest rates as well as the currency rates.

    Even though the economy is showing resiliency from external shocks in 2013, the government as well as monetary authorities continue to anticipate some external challenges in the beginning of 2014. As we know, the U.S. government will begin to negotiate the debt ceiling with the U.S. congress in mid-January. The results of this negotiation would be critical to global financial stability. The situation could be worsened if the U.S. Federal Reserve does a tapering-off of its quantitative easing policy and ends it completely by mid-2014. If this were to take place, policymakers all over the world should prepare a certain level of resiliency to deal with the impact.

    Some precaution policies have been taken by policy makers to mitigate the negative effects of the next global financial shocks. To strengthen the rupiah, Bank Indonesia signed agreements with China and Japan monetary authorities for bilateral swap arrangements to provide additional liquidity in times of financial emergencies. So far, Indonesian policymakers have also been successful in stabilizing the rupiah, current account deficit as well as national reserve through a mix of monetary and fiscal policies. For example, Bank Indonesia's latest data showed that national currency reserves increased by $1.3 billion and reached $95.7 billion by the end of October.    

    As for global trade, some forecasts show a smooth recovery in 2014, which would help Indonesia improve exports. We expect any recovery in China and India will increase commodity prices. Indonesia will have general elections in 2014. Considering previous general elections in 2004 and 2009, political spending contributed 0.5 to 1.0% to growth. The government will take several important measures to assure political stability and security critical to economic performance next year.     

    Strengthening Indonesian resiliency means strengthening domestic industry and the domestic market. For now, inflation is still the main focus for Indonesian policymakers. Managing the inflation rate in 2013 would be beneficial in the face of high demand due to political spending, the volatility of global food prices, and cyclical factors such as Ramadan and holiday seasons. The combination of trade, fiscal and monetary policies can be mobilized to manage inflation and improve domestic purchasing power. After high inflation in July (3.3%), the rate has reduced significantly and even became deflation in September (negative 0.35%).

    To deal with the increasing uncertainty of the global economy and to strengthen the domestic economy, the government is committed to implementing structural reforms. After launching policies to stimulate the real sector and domestic purchasing power, recently the government also launched a package to improve the business and investment climate. By doing so, in the medium-term, Indonesia will focus on producing more value-added products for both export and domestic markets. Strengthening the domestic structure of industry will improve the trade and current-balance deficit by reducing the import of capital goods.