Growth should be robust despite headwinds
Despite a weakening global environment, Indonesia’s growth is set to be robust in 2023. The economy will continue to benefit from the recovery in private consumption (56% of GDP) which has followed the gradual lifting of Covid-related measures and the return of international tourism in 2022. Accordingly, tourism-related services, including catering, hospitality, and transport, are especially expected to expand. The recovery will be helped by improvements in the job market. Indonesia’s jobless rate was 5.9% in the third quarter of 2022, down from the 7.1% posted in the same quarter of 2020. Although it should remain elevated in 2023, due to the hike in fuel prices implemented in September 2022 and the economic recovery, consumers should also continue to benefit from manageable inflation. Having said this, faced with the depreciation of the Indonesian rupiah against the US dollar and rising headline and core inflation, Bank Indonesia started to tighten its monetary policy in August 2022. As at end-January 2023, the central bank had raised its policy rate by a cumulative 225 basis points. Tighter monetary conditions are likely to weigh on household demand. Private investment should also be affected by this. In addition, a law passed in December 2022 allows the central bank to buy government bonds on the primary market in times of economic crisis to hence finance public debt. This could raise concerns among investors as the measure weakens central bank independence.
Nevertheless, the continuation of the economic recovery, and the expected entry into force of the Omnibus Act, which seeks to deregulate foreign investment rules and labour reforms, will drive private investment. Meanwhile, public investment will be supported by infrastructure projects, notably in transportation, digital, and the construction of the new capital city. The healthier tourist industry and elevated commodity prices – Indonesia is a net exporter of palm oil, coal, and gas, among others – should support exports (23% of GDP). However, the latter will grow at a slower pace amid weaker global demand. Moreover, export performances are at risk of new or stricter export restrictions. In order to curb rising prices, the government has used such measures for palm oil in 2022 and 2023, with palm oil exporters forced to ship six times their domestic sales volume as of 1st of January 2023, down from eight previously. Meanwhile, a ban on bauxite is expected to take effect in June 2023, this time in order to enhancing local processing.
Fiscal policy will remain prudent
The budget deficit narrowed to 2.4% of GDP in 2022, significantly lower than initially planned thanks to post-Covid reopening and spiking commodity prices. In an bid to lock in fiscal consolidation and return the public deficit to below 3% of GDP, the government announced spending cuts for 2023. Government spending will focus on enhancing long-term growth prospects through education (20% of total spending), and eradicating poverty and inequality (16%). However, the normalisation of raw material prices and slower GDP growth is expected to weigh on revenue, resulting in an increased public deficit.
After the small surplus in the previous two years, we expect the current account to swing back to a slight deficit in 2023. The trade surplus will narrow from a record high in 2022 on back of commodity price normalisation and global economic slowdown. Meanwhile, tourism receipts will help lower the services deficit, whereas that of the primary income balance, which contributes the most to the overall current account deficit, will widen, fuelled by higher profit repatriation following accelerated GDP growth in 2022 and higher debt interest payments. Investment, especially in the form of FDI, should cover the deficit. Foreign exchange reserves should therefore remain adequate, standing at 6 months of imports (at December 2022).
The end of the Jokowi presidency looms
President Jokowi was re?elected for a second five?year term in April 2019. His legislative and governmental coalition centred around the Indonesian Democratic Party of Struggle (PDIP), which was originally created from nationalist groups and Christian-based parties, controls more than 80% (471 out of 575 seats) of the lower house (Dewan Perwakilan Rakyat). His popularity among the population remains high and has increased. A poll conducted at the start of 2023 gave him an all-time high approval rating of 76.2%. The PDIP will, however, need to find another leader ahead of the 2024 elections, as the Indonesian constitution does not allow the President to run for a third term. Meanwhile, some of the coalition parties are expected to announce their own candidates, which could unsettle the government’s last year in office. On the external front, Indonesia has remained neutral over the Ukraine-Russia war. After hosting the G20 summit meeting in October 2022, Indonesia will play a central role at regional level, taking over the chairmanship of ASEAN in 2023.