In for a perfect storm

Growth prospects next year are subject to the significant downside risks of weaker global demand and tighter global financing conditions.


December 30, 2022

JAKARTA – The Indonesian economy, seen as a beacon amid the series of global shocks, is projected to have experienced robust growth of 5.2 percent this year thanks to the post-COVID-19 reopening of the economy, commodity price rises and the unleashing of the pent-up demand during the peak of the pandemic. Growth is predicted to average about 5 percent in the next few years.

Growth this year has been boosted by a sharp acceleration in consumer spending following the lifting of mobility restrictions, and fiscal consolidation has been helped by high revenues due to commodity earnings and lower spending on COVID-related measures. For the first time perhaps in a decade, tax revenues this year exceeded the target owing to the windfall from commodities.

Despite the global shocks the economy still benefits from being less intensively dependent on the global economy as its growth is driven mainly by the household spending of its 275.5 million population. This has made Indonesia’s economy relatively resilient to international crises.

Yet Southeast Asia’s largest economy will still face a perfect economic storm in 2023 in the form of a global economic slowdown, high inflation and geopolitical tensions with global economic growth projection revised by multilateral development banks down to 2.7 percent in 2023 from 2.9 percent estimated earlier in July.

However, it is encouraging that the economics ministers and the central bank have not allowed the international commendation of Indonesia’s stable and robust growth to go to their heads. They have instead warned on many public occasions against complacency and called on the people to brace for a slightly slower economic expansion, but not the recession that has been foreseen for many advanced economies.

Growth prospects next year are subject to the significant downside risks of weaker global demand and tighter global financing conditions. Furthermore downward pressure on the rupiah will increase due to aggressive money tightening in the United States, which could set off high capital outflows from the country. Hence, domestic consumers and businesspeople have to gear up for higher borrowing costs as Bank Indonesia is likely continue to gradually raise its policy rate possibly up to 6 percent, from 5.5 percent now, in the first half of the year.

Windfalls from commodities will decline and consequently tax revenues will not be as robust as this year. Therefore, the government has to tighten its budget spending priorities, especially because the state budget deficit will have to return to below the legal 3 percent of GDP ceiling next year.

Analysts and multilateral development agencies have suggested that in order to prevent a sharply worsening situation the government should strengthen the social protection system to help households manage rising living costs, thereby maintaining strong domestic private consumption, and to continue reform measures in the tax administration and trade policy framework.

Political preparations for the presidential and legislative elections in February 2024 will begin to weigh on the Cabinet next year and the economic management will run on automatic pilot as many ministers will be preoccupied with the agendas of their respective political parties. But we still rest assured of fairly stable macroeconomic conditions thanks to the past good record of strong synergy and good cooperation between the finance minister and the Bank Indonesia governor.

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