Brief overview of Indonesia’s economic landscape
Indonesia’s economic prospects for 2024 show promise, albeit with some accompanying risks and challenges. The anticipated growth trajectory suggests a 4.8% expansion in 2024, followed by a modest increase to 5.0% in 2025, as the commodity boom tapers off and domestic demand stabilizes. Notably, private consumption is poised to lead this growth surge, buoyed by a resurgence in tourism, remittances, and enhanced consumer confidence. Moreover, reforms and new government initiatives are expected to catalyze business investment and spur public spending, further propelling economic activity.
In terms of inflation, the outlook suggests a moderation to 3.2% in 2024 from an average of 3.7% in the preceding year, aligning within the target range set by Bank Indonesia. This downtrend in inflation is attributed to softening commodity prices and a return to normalized growth rates in domestic demand post-pandemic. However, there remains a degree of upward pressure on food prices due to the El-Niño weather pattern, which could disrupt food production in certain regions.
The external balance of Indonesia’s economy foresees a mixed picture, with services exports poised for growth amidst a recovering tourism sector, while goods exports face headwinds due to lower commodity prices and global economic softness. The current account deficit is anticipated to marginally widen to 1.9% of GDP in 2024, though it remains manageable, supported by foreign direct investment and portfolio inflows. The stability of the exchange rate and sufficient foreign exchange reserves further bolster the country’s external position.
Fiscal policy is expected to strengthen, with government revenues projected to rise owing to tax reforms, while spending gradually returns to pre-pandemic levels. The fiscal deficit is slated to narrow to 3.5% of GDP in 2024, adhering to fiscal rules that limit deficits to 3% of GDP by 2025. Moreover, Indonesia’s government debt-to-GDP ratio is forecasted to peak at 39.5% in 2024 before declining, comfortably below the legal threshold of 60%.
Monetary policy is anticipated to remain accommodative in 2024, with Bank Indonesia maintaining a policy rate of 3.5% unless inflationary pressures escalate. Continued collaboration between the central bank, government, and financial sector is expected to uphold economic recovery and financial stability. However, risks loom, particularly from external factors such as prolonged high interest rates in major economies and global geopolitical uncertainties, which could disrupt value chains and weigh on Indonesia’s economic performance. Moreover, challenges persist, necessitating structural reforms in human capital development, public spending efficiency, economic diversification, and environmental sustainability to ensure long-term prosperity and resilience.
This performance is attributed to key factors, notably a surge in household consumption, comprising over half of Indonesia’s GDP, driven by increased mobility and tourism following the easing of pandemic restrictions. Furthermore, export growth, fueled by elevated global commodity prices, contributed significantly, particularly in coal, palm oil, iron, and steel shipments. The nation’s economic resilience positions it as an exciting player on the world stage, with sustained growth anticipated in the years ahead.
Indonesia’s Economic Performance 2023
Indonesia’s economic resilience shines amid a global economic slowdown, driven by robust domestic demand and sustained positive export performance. Notably, the Transportation and Storage sector spearheaded industry growth, fueled by increased community mobility and a rise in foreign tourist arrivals. Despite inflation standing at 4.97% (YoY) in March 2023, slightly above the Bank Indonesia target range, the nation’s economic outlook remains promising, underpinned by strong domestic demand. Investment in 2023 reached IDR 328.9 trillion equivalent to 23.5% of the annual target, with contributions from regions outside Java, particularly Central Sulawesi, emerging as a top foreign direct investment (FDI) destination due to its rich mineral resources. However, concerns arise about potential impediments to Indonesia’s progress, given the global economic weakening.
In the third quarter of 2023, Indonesia’s GDP exhibited a growth of 4.94% (y-to-y), with household consumption as the primary driver, accounting for 52.62% of total GDP growth. The processing industry sector dominated contributions to GDP at 18.75%, followed by agriculture, forestry, and fisheries (13.57%). These five key industries collectively represented 65.32% of the Indonesian economy. Despite a slight dip in growth compared to the second quarter, Indonesia’s economic landscape reflects a diversified structure. Meanwhile, the annual inflation rate decreased to 2.61% in December 2023, staying within the central bank’s target range for the eighth consecutive month. The unemployment rate also demonstrated improvement, dropping to 5.32% in August 2023, marking a 0.54% decrease from the previous year, with 7.86 million people unemployed.
As Southeast Asia’s largest economy, Indonesia has achieved remarkable economic growth and poverty reduction, becoming the world’s fourth most populous nation and the 10th largest economy in terms of purchasing power parity. The nation’s proactive role in assuming the G20 Presidency reflects its commitment to fostering global cooperation for a robust and sustainable recovery from the impacts of the COVID-19 pandemic. With ambitious economic goals, Indonesia seeks to maintain its growth momentum and contribute to a stronger, more resilient global economic landscape.
Opportunities for Indonesia in 2024
Positive GDP Projections
Real GDP growth will pick up slightly in 2024 as moderating inflation and interest rates spur household spending. Bank Indonesia (the central bank) will loosen monetary policy in the second half of 2024, supporting economic growth from the latter part of that year. Before he steps down in mid-2024, the president, Joko Widodo (known as Jokowi), will double down on efforts to attract foreign direct investment into downstream heavy industries and into infrastructure development in the country’s new capital city, Nusantara. His administration will make only token gestures on other pressing political matters, including addressing the political strife in Indonesia’s eastern provinces and reducing corruption.
Forecasts and factors contributing to positive growth
Indonesia’s robust performance indicates that economic policy responses to the COVID-19 pandemic were successful. One factor which played a role in Indonesia’s success is a rising middle class with purchasing power. Middle class consumption has supported Indonesia’s economy for a long time, including during the pandemic. According to the World Bank, people with daily expenditures between US$7.75–US$38 are classified as middle-class. This group of 52 million Indonesians is sometimes called the concrete middle class.
Advancements in the Technology Sector
Indonesia has produced its own multi-billion-dollar tech platforms, a home-grown “super-app”, and numerous tech startups. It has one of the fastest-growing e-commerce markets in the world, on track to reach $360 billion in value by 2030. By one estimate, Indonesia ranks sixth in the world in terms of the number of startups with about 2,500 in 2023. Indonesia has also used digitalization to accelerate inclusive development, reaching the poor with better-targeted social assistance, national identification programs, and financial services.
Leveraging digital transformation for economic gains
Indonesia’s digital economy is expected to bounce back to its pre-pandemic levels with e-commerce steadily leading the path in both growth and profitability. The digital economy in Southeast Asia is on course to grow, in terms of Gross Merchandise Value (GMV), to US$300 billion by 2025 – and a further $600 billion by 2030 – from $218 billion at the end of 2023. Indonesia’s growth will largely be fueled by e-commerce due to the country’s success in controlling inflation and the “sticky” behavior of Indonesian online consumers.
Infrastructure Development
The year 2024 will be the last year of the administration of Joko Widodo. So, the government is urged to complete the strategic programs and projects that have been carried out in the last few years. It is important to ensure that the government transition will go smoothly and continuously. To work on infrastructure projects in 2024, the government has allocated a budget of 422.7 trillion Rupiah from the 2024 state budget (APBN), which is the highest infrastructure budget in the last five years. The amount is 5.8% higher than the 2023 infrastructure budget realization forecast that reaches 399.6 trillion Rupiah. Infrastructure budget in 2022 reached 373.1 trillion Rupiah. In 2021, the budget increased by 31.2% to 403.3 trillion Rupiah after decreasing by 22% to 207.3 trillion Rupiah in 2020 from 394.1 trillion Rupiah in 2019.
Government initiatives and projects
The Indonesian government has entrusted its state-owned company, Pelindo II, with the development and operation of an extension to the Tanjung Priok harbor in North Jakarta, the busiest trading port in the country. This new port, known as New Priok Port or Kalibaru Port, is envisioned to be a world-class facility, aimed at enhancing both the quality and quantity of Indonesia’s infrastructure.
Another significant infrastructure endeavor in Jakarta is the Mass Rapid Transit (MRT) project, a USD $1.7 billion initiative designed to alleviate the severe traffic congestion in the capital city. Upon its completion, the MRT system is expected to accommodate approximately 450,000 passengers daily, operating along two corridors: the North-South corridor and the East-West corridor. Currently, construction efforts are concentrated on the North-South corridor, which is being executed in two phases.
Additionally, Jakarta’s infrastructure development includes the Flyover Roads project, which entails the construction of two elevated non-toll roads approximately ten meters above existing thoroughfares. These roads will link Blok M to Antasari in South Jakarta and Tanah Abang to Kampung Melayu in East Jakarta. With a budget of USD $140.8 million, this public project aims to mitigate the persistent traffic congestion in Jakarta.
Sustainable Energy Opportunities and Investments in renewable energy sources
Indonesia has formally initiated its plan to raise a $20 billion investment fund dedicated to de-carbonization, marking a decisive step in its journey toward embracing clean energy. Spearheaded by the US and Japan, along with other global leaders, financing for the fund is channeled through Indonesia’s JETP initiative. The country aims to slash CO₂ emissions from its on-grid power sector by 250 million tonnes by 2030, while ambitiously targeting to increase the share of renewable energy in its power mix to 44%, a significant leap from the 12% recorded last year.
Despite strides towards renewable energy, coal still dominates Indonesia’s electricity mix, constituting 60% of its generation capacity, according to data from the International Energy Agency. Profits from the coal industry remain substantial, with the country earning $46.7 billion from coal exports in 2022 alone. Nevertheless, projections from the CIPP suggest that emissions from on-grid coal generation will peak well before 2030. By the end of the decade, Indonesia is anticipated to witness a reduction in coal capacity to levels observed in 2020, as renewables and gas, a comparatively cleaner fossil fuel, are embraced on a larger scale.
Enhanced Global Trade Partnerships
As Indonesia seeks to join and move up Global Value Chains (GVCs), a critical focus is on improving the efficiency of its services sector which currently represents only 11% of gross exports. Indonesia’s sourcing from GVCs is lower than would be expected given the country’s economic characteristics, which deprives the country of potential productivity gains. Putting in place quality infrastructure that facilities international trade is crucial. This requires boosting investment in transport and logistics. In addition, more investment in knowledge-based capital (KBC) is needed. Were Indonesia to fully implement measures in the WTO Trade Facilitation Agreement, it could reduce trading costs by as much as 15%, and facilitate wider participation in GVCs.
Expanding trade relations and agreements
Indonesia is a party to the region-wide Association of Southeast Asian Nations (ASEAN) Free Trade Area. ASEAN, and by extension Indonesia, also has preferential trade agreements with Australia, China, Hong Kong India, Japan, Korea, and New Zealand and concluded text-based negotiations of the Regional Comprehensive Economic Partnership in November 2019. Indonesia has signed bilateral free trade agreements (FTAs) with Australia, Chile, Mozambique, as well as with Iceland, Liechtenstein, Norway, and Switzerland under the European Free Trade Association, but as of the end of 2019, none of these FTAs are yet in force except with Chile. Indonesia recently concluded negotiations with Korea on a Comprehensive Economic Partnership Agreement. Indonesia is negotiating other FTAs with the European Union (EU), India, Tunisia, and Turkey as well as reviewing its trade agreements with Japan and Pakistan.
Navigating Challenges for Indonesia in 2024
Global Economic Uncertainty
Despite global economic instability and an anticipated slowdown in global growth to 2.1%, Indonesia’s economy maintains relative stability. Economic growth is projected to ease slightly to an average of 4.9% over 2024-2026 from 5% in 2023 as the commodity boom loses steam. Inflation is expected, influenced by easing commodity prices and tightened monetary policy. As the global economy experiences a slowdown, Indonesia faces potential declines in export demand and investment. Such circumstances could exert pressure on the rupiah exchange rate, rendering imports more costly. Inflation averaged 3.7% in 2023, according to World Bank, potentially eroding consumer purchasing power and Inflation is expected to ease to 3.2% in 2024, within the target band of Bank Indonesia. The government must strike a balance between curbing inflation and sustaining economic growth. Indonesia’s economic growth has been significantly driven by commodity prices in recent years. However, expectations suggest a moderation in commodity prices in 2023, which could adversely affect the incomes of Indonesians reliant on commodity production and exports.
This strength, however, is driven by robust domestic consumption, with key manufacturing sub-sectors including basic metal, machinery, leather and footwear, textiles, transportation tools, electronics, pulp and paper, and food & beverage. These sub-sectors also support various downstream industries such as energy, information technology, communication, transportation, and logistics.
Governance and Corruption Challenges
Since the fall of General Suharto’s regime, Indonesia has embarked on a comprehensive and unprecedented process of decentralization, devolving almost overnight enormous responsibilities to regional, provincial and local governments. In spite of considerable achievements, the Indonesian decentralization process continues to face major challenges of state capture by the local elites, a deeply entrenched patronage system and widespread petty and bureaucratic corruption. The emergence of stronger civil society and a free media constitute promising trends that, combined with further reforms aimed at promoting transparency, community participation as well as reinforcing upwards and downward accountability mechanisms, could ensure that decentralization fully yields the intended benefits.
Infrastructure Development Challenges
Indonesia witnessed a notable surge in its economic performance ranking, soaring by 13 points from 42nd to 29th, as highlighted by the President. Additionally, the country’s business efficiency experienced a commendable advancement of 11 ranks, elevating from 31st to 20th. Meanwhile, government efficiency also improved, moving up 4 ranks from 35th to 31st. In terms of infrastructure, Indonesia secured the 51st position in the rankings. Since late 1990s, expansion of Indonesia’s infrastructure has not been able to keep up with robust economic growth that occurred after the recovery from the Asian Financial Crisis amid the lucrative commodities boom. As a consequence, Indonesia’s economic growth fails to reach its full potential.
Demographic Dividends and Challenges
As a country with the world’s fourth-largest population, the archipelago of Indonesia brims with youth and energy. With over 70% of its population aged between 15 and 64, Indonesia is benefitting from a demographic advantage often referred to as the ‘demographic dividend’. This statistical event is a potent catalyst of economic growth and an attractive pull-factor for global investors. Demographic dividends have historically correlated with an influx of foreign direct investment and Indonesia is no exception.
Managing the youth population for economic growth
‘The youth of today are generally healthier, better educated, more urbanized, enjoy greater access to knowledge, and are more connected with the rest of the world than the preceding generations. A growing body of research attributes this marked improvement in the life situations of young people to socio-economic development and the ensuing prolonged transition to adulthood.
With 52% of Indonesia’s population of 270 million consisting of young people between the ages 18 and 39 years old, Indonesia’s youth will shape the nation’s future. Combined with Indonesia taking a more visible position on the world stage.
Overall based on the research findings, young people are optimistic about their personal futures but are experiencing a lack of momentum, with half of the youth expressing that life in Indonesia has not improved since their parents were the same age. A number of recommendations designed to amplify the voices of young Indonesians and support better youth policymaking is a need of the hour in Indonesia.
Industry-Specific Challenges
The major challenge, in a word, is productivity. Most of ASEAN manufacturers including Indonesia have labor costs lower than China’s, but they have lower productivity rates as well. If Indonesia wants to become attractive to manufacturing multinationals and turn the cost advantage it still enjoys into the basis for a robust manufacturing economy, the country cannot compete on low wages alone. It will have to dramatically improve its industrial productivity.
What Indonesia Must Do?
Economic Diversification
Economic diversification is seen as making a positive contribution to economic representation, developing a multi-sector economy, balancing the structure of the national economy, stabilizing socioeconomic conditions including enhancing people’s living standards, and making the country’s economy more open. Global economic trends lead to economic diversification, which is shown by the decline in the contribution of the agricultural sector to the economy. The solution to increasing the non-government sector in promoting economic growth is through increasing the regional economy through diversification. Why is regional diversification so urgent? Because besides being believed to be able to increase the driving force of the economy, it is also hoped that it will become a special strategy in supporting quality and sustainable economic growth in Indonesia.
Promoting diverse industries for resilience
Indonesia is preparing future taxes on nickel products and will continue pursuing its local industry capabilities, despite the looming trade retaliation from its trading partners. President Widodo’s announcement of plans to ban bauxite exports, starting in June 2023, indicates a doubling down on the forced down streaming strategy despite trading partners’ and the WTO’s concern. The government offers various fiscal incentives to encourage further investment in the EVs industry, including ten years of tax holidays. Still, building its EV industry will take a long time as the market remains relatively small. One critical market opportunity is in the motorcycle industry, as the country had more than 120 million motorists in 2021. With the rising cost of petrol, it is timely to encourage the shift towards EVs. For this, Indonesia needs to continue investing in EV infrastructure, such as charging stations, to unlock this $48 billion potential market. Most importantly, its effort to develop EVs needs to be synergized with the national energy transition agenda. The government will need to gradually reduce fuel subsidies, to provide incentives for the EV industry and other green and renewable energy alternatives.
Measures to improve transparency and reduce corruption
Every year, corruption diverts millions of dollars away from public spending and into the pockets of private individuals and accelerates socioeconomic disparities. The United States and Indonesia are working together to reduce and prevent corruption by enhancing public oversight, expanding civic engagement, and strengthening integrity in the public and private sectors.
Despite a number of successes over the last decade, Indonesia still faces challenges in addressing corruption. Licensing and procurement irregularities lie at the heart of 23 percent of cases handled by the Corruption Eradication Commission (KPK) in the last ten years. In addition to harming the economy, corruption in procurement and licensing can also cause significant and long-term damage to the environment, public health, and peoples’ livelihoods.
The USAID Indonesia Integrity Initiative (USAID Integritas) is a five-year, $10 million program managed by KEMITRAAN in partnership with Indonesia Corruption Watch (ICW), Transparency International-Indonesia (TI-I), and the Basel Institute on Governance. The project works closely with relevant Government of Indonesia (GOI) agencies and the private sector at the national level and in the priority provinces of North Sumatra, South Sulawesi, East Java, and East Nusa Tenggara, as well as in DKI Jakarta.
Accelerating projects to overcome bottlenecks
The Southeast Asian nation announced in 2019 that it would build a new capital, Nusantara, on Borneo Island, replacing an overcrowded and sinking Jakarta. The new city is expected to cost a total of $32 billion by the time it is fully completed in 2045. Accelerating these projects would pave the way for the economic development of Indonesia.
Human Capital Development
The Government of Indonesia’s Vision for 2045 sets an ambitious path that will require significant investments in human capital and social protection Indonesia continues to set ambitious goals for its growth and development. The Government of Indonesia’s vision for 2045, when the country celebrates 100 years of independence is to achieve high-income status and reduce poverty to nearly zero. In addition to sustained growth and income opportunities for all, an inclusive and efficient social protection (SP) system will be essential to meet these ambitious goals. In most countries today, effective risk-sharing and SP policies play important roles in building equity, resilience, and opportunity, and in strengthening human capital. Indonesia is no different. Risk-sharing interventions can reduce and prevent poverty, and make growth more equitable by safeguarding households’ human and physical capital.
Balancing economic growth with environmental preservation
The Indonesian government has established a bold target of achieving net-zero emissions by 2060, with an interim goal of attaining net-zero emissions in Forestry and Other Land Use by 2030. Encouragingly, the country’s land use policies have started to yield results, evidenced by a significant reduction in deforestation. However, the journey ahead demands a balance, requiring coordinated efforts to mitigate greenhouse gas emissions, safeguard and restore nature, and sustain economic growth.
Central to this is the crucial role of the private sector. Leveraging their financial resources, industry expertise, and ability to drive grassroots initiatives swiftly, private enterprises are instrumental in advancing Indonesia’s sustainability agenda.
Conclusion
In summary, Indonesia faces a complex landscape of challenges and opportunities as it charts its course towards sustainable development. With promising economic growth projections, advancements in technology, and a youthful population, the nation is primed for progress. Yet, it must confront issues such as governance and corruption, infrastructure deficits, and the imperative to balance economic growth with environmental preservation. By prioritizing transparency, accelerating infrastructure projects, and investing in human capital, Indonesia can realize its full potential and emerge as a global leader in sustainable development, fostering innovation, equity, and resilience for generations to come.
