December 27, 2023
JAKARTA – Strong consumption has helped Indonesia achieve relatively good economic performance this year despite having to face the beginning of the end of the commodity boom early this year, which has dragged down exports, a key gross domestic product (GDP) growth driver in the previous year.
Exports were one of Indonesia’s main sources of economic buildup, with 16.28 percent year on year (yoy) growth in 2022, a year in which the country saw higher than expected GDP growth of 5.31 percent amid a tanking global economy, according to Statistics Indonesia (BPS) data.
At that time, prices of coal, crude oil and natural gas surged to multiyear highs, following uncertainty and supply disruptions, partly caused by the war in Ukraine. This includes crude palm oil (CPO), as the war disrupted vegetable oil supply.
However, commodity prices plummeted throughout this year, following weak global demand, despite remained higher than pre-pandemic levels.
As of November, commodities such as coal were down by 62.94 percent yoy to US$126.8 per tonne, while CPO was down by 12.19 percent yoy to $830.5 per tonne, according to the World Bank.
Indonesia, whose two largest export commodities are CPO and coal, saw its average export growth fall to 1.55 percent yoy nine months into this year, while its average GDP growth hovered at 5.05 percent yoy.
Analysts believe Indonesia’s growth could be as low as 4.9 percent this year, but the government maintained it could remain above 5 percent until the end of this year, despite being lower than the 5.3 percent target set in the state budget.
In early November, Finance Minister Sri Mulyani Indrawati said that the government projects 5.04 percent GDP growth for this year and to attain that it has deployed several tools to stimulate economic activity, including exempting value added tax (VAT) for housing purchases.
The International Monetary Fund’s (IMF) World Economic Outlook in October forecast that Indonesia’s economy would end up at the annual rate of 5 percent flat this year and, likewise, the World Bank also projected a similar figure.
Wael Mansour, a senior economist at the World Bank for Indonesia and Timor Leste, said on Dec. 12 that 5 percent “is a really resilient growth, given the global environment”. He continued by explaining that this progress was a result of “rebounding domestic demand”.
The Indonesian economy has been anchored in household consumption, which consistently contributes around 50 percent of the country’s GDP.
Household consumption growth has remained resilient, averaging 4.94 percent during nine months of this year, almost unchanged compared to an average of 4.93 percent in 2022, according to BPS.
However, Mansour pointed out that government spending was very low up until October, despite its role in boosting demand. The World Bank also expected the fiscal deficit to be much lower than what the government had planned.
According to the Finance Ministry, spending realization remained below 85 percent of the target as of Dec. 12, two weeks before the year draws to a close.
Meanwhile, the budget deficit remained at a mere 0.17 percent of GDP, far below the planned 2.84 percent deficit set in this year’s budget law, which the government later projected could decline to 2.28 percent or less.
Considering that “very low deficit”, Mansour said that Indonesia’s fiscal policy had more room “to look at spending”.
He went on to say that Indonesian fiscal policy was proven to be good at absorbing shocks by creating stimulus packages during the pandemic, providing social safety net subsidies and giving out rice aid.
However, it has been less successful in creating pro-growth programs such as investing in infrastructure or human capital, he said.
“[The Indonesian government was] very good at absorbing shock and being prudent, which is something it should be commended for. But there’s more room to think about fiscal policy that accommodates more growth going forward,” said Mansour.
The World Bank said the risk of slower growth will likely intensify next year, citing prolonged weakening international trade and global growth as well as a high interest rate environment.
It projects Indonesia’s growth may hover around 4.9 percent throughout the next three years.
The Institute for Development of Economics and Finance (Indef) set an even lower prediction for 2024 of just 4.8 percent, as it anticipates the potential impacts of continued weakening of global growth and weaker government spending.
“Government spending [in 2024] will not be optimum because policymakers will start to concentrate on the endeavor of election succession,” Indef said in its report published on Dec. 6.
Indonesia will hold a general election in February next year and the president-elect will enter office the following October, creating an 8-month transition period, Indef said.
Furthermore, many ministers in President Joko “Jokowi” Widodo’s cabinet hold significant roles in political parties as well as in the ongoing presidential race.
A political year normally holds investment back as investors take a “wait and see” position to ensure certainty, Indef said, adding that, paired with the global economic slowdown, it would take a toll on 2024 growth.
International Market Assessment (IMA) Asia wrote in its report in December that Indonesia’s strong commodities sector and prudent budget management will leave the government well placed to support growth and contain risks next year.
It also expects regional elections in late 2024 to trigger more spending, while extra election funds will be injected into the economy next year if the presidential race requires a runoff.
IMA’s report showed that Indonesia could book much higher growth next year because of improved global conditions, such as lower inflation and expected central bank rate cuts.