Assessing the Current State of the Indonesian Economy
Lately, conversations regarding the Indonesian economy have sounded increasingly grim. The Rupiah remains weak, energy prices are high, financing costs have not decreased, layoffs are a frequent topic of discussion, while major corruption cases continue to erode public trust.
On social media, the conclusion is even swifter: the Indonesian economy is heading towards a crisis. Is this truly the case? Perhaps we need to distinguish between an economy facing pressure and an economy entering a genuine systemic crisis.
Two economists who studied crises extensively, Milton Friedman and Ben Bernamed, provide a relatively simple way to see the difference. Friedman, a University of Chicago economist and 1976 Nobel Prize winner in Economics, along with Anna Schwartz, studied the Great Depression in America.
One of the key lessons is that a shock does not automatically become a depression. Problems become far more severe when monetary policy errors and banking disruptions amplify that shock.
Bernanke later complemented that explanation. The former US Federal Reserve Chair and 2022 Nobel Prize winner in Economics demonstrated that a crisis is not merely a matter of the money supply. What is decisive is whether the credit engine is still functioning.
When banks become reluctant to provide credit, companies struggle to obtain financing. Investment is delayed, production weakens, hiring decreases, consumption slows, and financial sector pressures eventually seep into the everyday economy.
Through the lens of Friedman and Bernanke, Indonesia’s current condition does not yet show such a pattern. Market data up to the end of August does indeed show pressure. The Rupiah remains in the range of Rp17,700 per US dollar and the 10-year SBN yield is around 7%. However, the JCI (IHSG) is around 6,500 and Indonesia’s CDS is approximately 84 basis points.
These figures certainly do not mean all problems are resolved. The cost of capital remains high. Global uncertainty is significant. Energy prices still require monitoring. However, the financial system has not ceased to function. The bond market is still operational, the banking sector continues its intermediation function, and the government still has access to financing.
Therefore, the more useful question is not, “Will the Indonesian economy collapse?”, but rather, “Is the current pressure being managed well, or is it slowly beginning to enter the real sector?”
This is where the quality of policy becomes important. Corruption is not just a legal and moral issue. If capital flows into less productive projects, transaction costs increase, and business certainty decreases, investment returns also fall.
Complex bureaucracy also comes at a price. Frequently changing policies have a price. Uncertainty has a price. Ultimately, all of this can manifest in the Rupiah, bond yields, risk premiums, bank credit, investment, and employment.
Consequently, I am actually more worried when I hear entrepreneurs say, “I will delay investment for now,” than when the JCI drops by a few per cent in a single day. I would also be more vigilant if banks began to be reluctant to finance companies that are actually healthy.
Because that is where Bernanke’s lesson becomes relevant: financial problems begin to transform into real economic problems. Indonesia is not there today. However, that is no reason to feel comfortable.
Friedman taught the importance of maintaining monetary stability. Bernanke reminded us of the importance of keeping the credit engine running. Indonesia’s challenge now is to ensure both continue to function, while safeguarding one thing that is becoming increasingly valuable: trust.
Thus, we do not need to be too quick to say that Indonesia will be destroyed. However, we must also not be too quick to say that everything is fine. What must be maintained is that money continues to flow, credit continues to move, investment continues to occur, and the public still believes that the future is worth financing.