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Rising inflation, food scarcity are main threats to Indonesia’s economic growth: panellists
Even as Indonesia enjoys the benefits of a triple surplus in trade, current account balance and fiscal space, the looming threat of inflation and food scarcity loom over the economy for the immediate future, a group of speakers noted at Maybank’s Invest Asean conference.
“A prolonged war between Russia and Ukraine will escalate the prices of oil and commodities, especially wheat and soy beans,” said Jeffrosenberg Chen Lim, the head of research as Maybank Sekuritas Indonesia.
“Food inflation in May 2022 was over 5 per cent, transportation costs have also risen by more than 5 per cent and this will have an impact on the economy,” he added.
According to I Made Budhi Arta, the head of global markets and corporate treasury at Maybank Indonesia, rising prices will affect the country’s lower-middle class group the hardest.
“The government has disbursed 150,000 rupiah (S$15) each to 30 per cent of the country’s households to mitigate the impact of rising fuel and food costs, but this will add pressure on the government to hold prices steady,” he said.
In April, President Joko Widodo announced a ban on crude palm oil exports to ensure a sufficient domestic supply of cooking oil as prices soared. The ban was lifted in May as prices stabilised.
The government had earlier revised its 2022 Budget to provide a cushion for subsidies to be enlarged, especially for fuel and energy. But Lim noted that inflation remains a major threat to sustained economic growth.
“If inflation is not as transitory as the market thinks, it would add a lot of pressure on Bank Indonesia to raise interest rates,” he said. “Our house view is that the central bank will raise interest rates by 75 basis points this year, and another 75 basis points in 2023.”
Despite increasing costs, household consumption growth remained strong in the first quarter, especially in commodity-producing regions such as Sumatra, Kalimantan and Sulawesi.
The panellists also noted that Java, which accounts for nearly half of Indonesia’s total population and nearly 60 per cent of its GDP, faces some challenging times ahead.
“West Java is a major manufacturing base for Indonesia and we have seen major layoff of workers,” Lim said. “As a result, purchasing power has come down in the province.”
Maybank is forecasting Indonesia’s overall GDP growth to come in at 5.1 per cent in 2022, and 5.2 per cent next year.
“The growth is coming from outside Java. If coal and crude palm oil prices remain high, it will be an extra bonus for the country,” Lim said.
Source: https://www.businesstimes.com.sg/asean-business/rising-inflation-food-scarcity-are-main-threats-to-indonesias-economic-growth