2022 is a year of momentum for Indonesia to accelerate economic growth. The global economy is heading towards a normalization phase, and Indonesia will be in an acceleration phase in 2022. Over the period of f 2020 to 2022 there are three important phases: the pandemic phase in 2020, then the recovery phase in 2021, and will continue with the normalization phase in the global market and acceleration of the Indonesian economy in 2022.
Gross Domestic Product
The Indonesian GDP is predicted to grow in the range of 4.7% to 5.5%, an improvement from the expected growth of 3.2%-4% this year. The growth will rebound in 2022 as the normalising health situation allows consumer demand and investor confidence to return. However, delays in securing vaccines and vaccinating the eligible population would risk further health crises, slowing the recovery and placing policy under pressure.
The economic recovery would largely be supported by the rising export if commodities supercycle continued along with the rising demand in developed and developing countries. Capital investment should increase should demand in domestic and export markets recovered post Covid-19 pandemic. Government spending would still grow but at lower pace compared with 2021 as the decrease in spending on social assistances. Private consumption had been increased since the fourth quarter of 2021 and it is expected to accelerate next year. All industry sectors would begin to recover in line with the improving economy, declining Covid-19 outbreaks easing social activity restrictions.
Inflationary pressure would heighten but at manageable level in 2022 and inflation rate is estimated to increase to 3% from 1.87% in 2021. The Inflation would be triggered by several factors, such as stronger economic recovery momentum, the possibility of administered prices hikes on fuel and electricity, the impact of increased Value Added Tax, and increases in the price of raw materials passed on to consumers causing an increase in selling retail prices. Core inflation (excludes administered price and volatile goods) would be heightening in line with the economic recovery and the start of rising domestic demand. If producers already see a stronger economic recovery, they will be more confident of raising prices.
Rupiah exchange rate in 2022 is expected to strengthen modestly at the level of Rp14,350 per US dollar. The downside risk is related to the potential pressures of global financial markets due to efforts to normalize US government policy as the US economic recovery would be faster than expected. In 2022, the rupiah outlook tends to be stable, in the sense that it will not be too strong or too weak. The US Fed’s hawkish policy will still be a negative catalyst for the rupiah as it triggers capital outflow from emerging markets includes Indonesia. The fundamental of rupiah would be stronger if trade surplus and rising exports of high price commodities continued.
As the era of global economic normalization happens in 2022, the world’s central banks also made policy direction adjustments. Interest rates are expected to increase gradually while keeping a close eye on pandemic-related conditions. Central bank communications and signals will be crucial, especially amid uncertainty over a surge in inflation. So far, markets have anticipated a rise in U.S. Treasury yields and two Fed rate hikes in 2022. In Indonesia, monetary policy rate (BI Rate/BI 7 Days Repo Rate) is predicted to rise by at least 25 bps to 3.75% from 3.5% in 2021. With expectations of a higher inflation, Bank Indonesia has a room to consider raising interest rates in the fourth quarter of 2022. However, BI may decide to keep its current interest rate policy if inflation and the rupiah exchange rates are under control.