Economic hurdles await new president
Weak consumption and geopolitical risks among challenges for Prabowo
Indonesia’s president-elect Prabowo Subianto will face a challenging economic landscape when he takes office in October, marked by slowing growth and heightened geopolitical uncertainties.
The Indonesia Chamber of Commerce and Industry (Kadin) and economists say weak domestic consumption, high interest rates, falling commodity prices, geopolitical tensions, rising debts in state-owned enterprises and China’s struggling economy are among the many hurdles.
“Kadin Indonesia is closely monitoring global external challenges filled with uncertainty due to escalating global geopolitical issues and the global macroeconomic state, driving a high-interest rate era, particularly in the United States,” said Kadin chairman Arsjad Rasjid.
“We see that global geopolitical escalation [creates] challenges for global commodity prices…,” said Arsjad, who nevertheless was optimistic that the country’s economic growth would be “solid.”
Kadin projected economic growth for 2024 at around 4.9 to 5.1 per cent, driven by domestic consumption and investment. This is slightly lower than Finance Minister Sri Mulyani Indrawati’s forecast of 5 to 5.2 per cent.
On Friday, Reuters quoted Sri Mulyani as saying that financial authorities had discussed geopolitical developments to anticipate risks that could affect the economy, including tensions in the Middle East, the war in Ukraine and elections in other countries.
Sri Mulyani expects second-quarter growth to slow to 5 per cent, slightly below the 5.11 per cent in the first quarter.
Siwage Dharma Negara, a senior fellow at the Singaporebased ISEAS-Yusof Ishak Institute, said Indonesia’s economic outlook was “less optimistic” than the government had reported.
“Consumption has been weakening due to inflation and currency depreciation, and investment has been stagnant due to weak external factors and uncertainty in domestic politics,” said Negara.
China, which is Indonesia’s largest trade partner, continues to struggle with its economy and Negara expects Indonesian exports to China to decline.
“At the same time, we expect investment from China will also decline,” he noted. “Exports also do not look very good, given the slower global economy,” said Negara, adding that the government seemed to be unable to avoid a rising budget deficit and higher debt levels.
Indonesia has laws mandating that the annual budget deficit cannot exceed 3 per cent of GDP, and has set a maximum debt-to-GDP ratio of 60 per cent.
Manggi Habir, an independent economist and former fellow at the Regional Economic Studies Programme of the ISEAS – Yusof Ishak Institute, said Indonesia’s debt-to-GDP ratio had risen to some 39 per cent.
“It’s still manageable, but [Indonesia] needs to be cautious about it going up further given global market uncertainty,” he added.
Manggi said investments were currently in a holding pattern until there was clarity over Prabowo’s cabinet, which would come in during the last quarter of 2024. He described the country’s economic outlook as “mixed, but cautiously more good than bad.”
“Interest rates have peaked and should be trending downward next year, which is good for consumption and investment,” said Manggi.
One challenge for Prabowo is the rupiah currency, which has fallen by almost 6 per cent against the US dollar since the end of December 2023. It traded at 16,200 rupiah to the US dollar on Friday, a level last seen during the 1998 Asian financial crisis.
However, unlike 1998, Indonesia’s current financial indicators are healthy and stable. “So, a crisis like 1998 is unlikely to happen,” Negara said.
Kadin’s Arsjad Rajid said the rupiah’s depreciation had increased the burden on businesses as prices of raw material, logistics and transport had spiked, potentially disrupting supply chains. It had also resulted in higher prices for consumer goods.
He said the chamber had urged businesses to continue adjusting their operations for efficiency and to consider measures including foreign exchange hedging, debt restructuring or converting dollar debts into rupiah as well as to delay expansion and seek alternative raw materials.
However, Arsjad expects the depreciation of the rupiah to benefit exporters of Indonesia’s key commodities, including palm oil, coal and nickel.
“We see that the exchange rate influence boosts the competitiveness of commodities, driving foreign exchange inflows into Indonesia …” he added.
Arsjad said Kadin would produce a white paper on recommendations for strategic development for the new government for the period from 2025 to 2029 this October.
Prabowo will also inherit heavily indebted state-owned enterprises (SOEs) thanks to the various government infrastructure projects undertaken during President Joko Widodo’s 10 years in office.
“The SOEs were tasked with building several big infrastructure projects, which require significant capital costs and long payback periods,” said Negara.