Economic engine: President Joko
"Jokowi" Widodo delivers remarks at the 2016 Indonesia Infrastructure
Week in Jakarta on Wednesday. The President has shared his optimism that the
country will reach its economic growth target this year despite the slowdown in
the third quarter. INSIGHT: Trump’s economic policy and impact on
Indonesian economy
There are many questions about
United States president-elect Donald Trump’s economic policy and how it will
affect the Indonesian economy. Although there has been speculation about what
the Trump administration will actually implement compared to what he promised
during his campaign, two things will take place and have consequences on the
Indonesian economy.
First is the “American-First”
policy on Indonesia’s trade. The Trump administration aims to create jobs via a
fiscal stimulus through an expansion in infrastructure projects ranging from
the development of roads, reconstruction of airports, housing complexes, water
supply and energy. At the same time, it will cut income and business taxes.
What does this mean? He will find other sources of government revenue to
finance his infrastructure projects, most likely by increasing the coverage of
tax revenue as it will rely more on domestic products, implementing
anticurrency-manipulation measures and increasing and imposing tariffs.
The America-First trade policy will
hit China’s exports to the US. Goods from China accounted for 22 percent of
total US imports in 2015, while its imports from Indonesia only accounted for
0.89 percent in the same year. While Indonesia’s exports to the US increased
from US$11 billion in 2001 to $21 billion in 2015, the US’ share of the
country’s total exports declined from 17 percent in 2001 percent to 12 percent
in 2015. Similarly, the share of Indonesia’s imports from the US as a
proportion of total imports also decreased from 10 percent to 5 percent over
the same period. This shows that while trade between Indonesia and the US is
growing, trade with other trading partners (e.g. Singapore, China and South
Korea) is growing even faster.
Indonesia’s exports to the US have
been largely dominated by apparel, which contributed about 25 percent of the
total exports to the country from 2001 to 2015. The other main Indonesian
exports to the US are rubber (11 percent), electrical machinery (12 percent)
and footwear (5 percent), which the US needs for its direct consumption or as
components for its automotive and machinery industry.
The US will likely increase its
tariff rates on Chinese imports particularly on consumer goods, but it will
most likely apply the same rates as it has for Indonesia. First, it applies
quite high tariffs for consumer goods, which range between 10 and 13 percent
for apparel and 9.5 percent for footwear as Indonesia has just recently
graduated from the generalized system of preference (GSP). Second, at the same
time, the US imposes low tariffs on intermediate components of only 0.35
percent for rubber and 0.09 percent for electronic machinery parts. Thus, there
will not be any significant changes in Indonesia’s exports to the US both in
terms of value or volume (and types of goods).
Simultaneously, US exports to
Indonesia, which are largely in the form of machinery and electrical equipment,
contributed about 23 percent of its total imports. While it is expected that US
trade policy will have no significant direct impact on Indonesia’s exports to
the US, the indirect impacts resulting from the decrease in Chinese and
Japanese exports to the US as a result of increased tariffs and the
implementation of currency-manipulation evaluation methods could be quite
significant.
Second are the consequences of the
US Federal Reserve interest-rate policy on investment in Indonesia. Regardless
of the pressure that Trump puts on the Fed chairman Janet Yellen, as the US
economy gets stronger and the unemployment rate declines to 4.9 percent (by
June 2016), the Fed will be likely to raise interest rates gradually by 0.25
basis points in December, with inflation reaching toward 2 percent, and another
0.25 basis point by mid-2017.
The expectation of the increased
interest rates has dried up liquidity in capital markets in emerging economies.
India, Thailand and Indonesia are among those hit hardest. Indonesia, for
example, recorded net sales of $1 billion in local debt and $444.2 million in
equity according to Bloomberg on Nov. 22. In terms of foreign direct investment
(FDI), there will be no significant impact on US FDI in Indonesia. The US is
the fourth-largest investor in Indonesia, contributing 4 percent of the total
accumulated FDI in Indonesia from 2005 to 2015, after Singapore (42 percent),
Japan (28 percent) and the UK (5 percent). US FDI decreased from $3.4 billion
in 2005 to $444 million in 2015.
Indonesia will remain strong in
2017-2018, albeit slightly affected by exports and foreign investment.
Regardless of the volatility in the world economy in 2017-2018 until 2021,
Indonesia still aims to have an average of 5.3 percent economic growth, which
will largely be supported by strong disposable income, and the commitment of
the government to shift the energy subsidy toward more capital spending, more
openness toward foreign investment, improving the trade and investment climate,
and improving access to capital and labor by managing interest rates and
developing vocational schools.
REFERENCE:
http://www.thejakartapost.com/academia/2016/11/29/insight-trumps-economic-policy-and-impact-on-indonesian-economy.html
