ECONOMICS (Radhika Rao)

New government: hitting the ground running.

The National Development Strategy, i.e., Golden Vision 2045, aims to transform Indonesia into a high-income country by the centennial of its independence. Market estimates and IMF’s studies suggest that reaching this goal will require an annual nominal GNI growth rate of 8-9%, which amounts to about 6-7% sustained real growth and modest inflation levels during this period. In his augural speech, President Prabowo vowed to lead Indonesia towards greater self-reliance on food and energy, while pushing growth towards 8% within this term.

The official strategy to achieve 8% growth involves three tracks (see table below):

Track 1: attract international leaders i.e., via higher exports;
Track 2: Energise Domestic champions;
Track 3: Empower SMEs (see table below).

Our framework

Taking a medium-term view, effort to boost growth above the steady state of 5% would likely comprise of a three ‘C’ framework –

• Capitalize on exports and China +1 reconfiguration;
• Capital investments and fiscal rationalisation;
• Consumption and improvement in human capital;

Capitalize on exports and China +1 reconfiguration.

At various engagements, President Prabowo underscored the importance of staying ‘non-aligned’ but maintain linkages with all its key global partners. Under the new government, we expect trade and investment activity to receive a fresh thrust to capitalise on the ongoing supply chain reconfiguration, fuelled by the China + 1 considerations.

Capital investments and fiscal consolidation.

Capital spending by the government was higher than subsidies in 2023, as shown in the chart. As the second chart highlights, this marks a significant change from the early 2010s when subsidies were nearly double of capital disbursements. Subsequent subsidy rationalisation efforts have helped to restrain the total subsidy bill since 2015-2017.

Consumption and improvement in human capital

Indonesia continues to enjoy favourable demographic dividends, against the backdrop of regional peers who face a fall in the working age population and rising life expectancy, resulting in fast-ageing societies. Home to the largest population in the ASEAN region, Indonesia has benefited from a consumption driven model of growth. Besides the quantity, the authorities will also be required to step up efforts to improve ‘quality’ of the labour force. This along with the prerogative to boost consumption will require a three-pronged approach.

2025 outlook

Impact of US election results on Indonesia.

Domestic bonds, rupiah and portfolio flows remain vulnerable to volatility in the global financial markets. Asian countries including Indonesia will seek to adopt a defensive posture and strengthen guardrails in the face of risks that the US will turn more protectionist on trade and impose tariffs on a host of triggers. We discussed trade and investment linkages of ASEAN-6, including Indonesia, with the US and China in ASEAN-6: Counting on trade, eye on risks and ASEAN-6: Tailwinds from supply chain reconfiguration.

Growth

Domestic demand is likely to be the main driver of growth into 2025. In the near-term consumption demand faces headwinds, with sentiments, retail sales and consumption loan growth point to tepid demand into late part of the year. Our proxy gauge for consumption (see chart) captures this downdraft. There are few positive catalysts in the pipeline.

Inflation and monetary policy implications

Average January-November 2024 inflation stands at 2.4% YoY vs 3.8% in the comparable period a year ago. Despite a small uptick in core inflation to 2.3% in November, there was a broad-based slowdown amongst the sub-categories. Energy and volatile (supply-side driven) inflation declined -0.3% YoY and -0.8% YoY, respectively, signalling tepid cost push pressures. Administered inflation was also modest at 0.8% YoY. Certain food types including chilli peppers, shallots etc. added to the headline. The demand-side impulse was also modest, posing little risk to the inflation outlook given the slack in the economy.

Macro balances

Risks of Indonesia deviating from its path of fiscal discipline subsided after the new President Prabowo reappointed Finance Minister Mulyani under the new cabinet. Even if these targets are maintained, fiscal deficits are on average likely to widen by 30-40bp going forward vs 2017-2019 pre-pandemic levels.

Risks

A resource-rich economy and a large consumer base have the provided Indonesia with natural strengths to lift the trajectory of its cyclical potential growth trend. As we highlight in this note, more work will be required to lift the medium term and durable growth path. All this will be required against an environment of heightened trade skirmishes and more countries adopting an inward-looking investment/ trade policy.


CURRENCY (Philip Wee)

Brace for volatility in 2025

Donald Trump will likely impose tariffs at the outset of his second US presidential term, which starts on January 20, 2025. Based on the US-China trade war in 2018, we expect the USD to remain strong globally in the first half of 2025, with the potential to prolong and extend its strength if unfavourable details of Trump’s trade plans emerge. 

Weaponizing tariffs in Trump 2.0

Trump’s tariff proposals after his victory in the US presidential elections on November 5 represented a significant expansion in both scope and scale compared to his first term. For example, the proposed 25% tariffs on all imports from Canada and Mexico were intended to address issues beyond trade, like illegal immigration and drug trafficking.

No tariffs do not imply immunity

During Trump’s first term, he did not target Indonesia with major tariffs. The country accounted for only an average of 1.5% of the America’s total deficit during his first term, which increased marginally to 1.7% during Biden’s tenure. In the first ten months of 2024, Indonesia ranked as the 23rd largest contributor to the US trade deficit.

Balancing US tariff risks and BRICS aspirations

Indonesia cannot afford to ignore Trump’s threat to impose 100% tariffs on countries perceived as undermining the USD’s global dominance and status. President Subianto’s non-aligned foreign policy seeks to strike a balance between fostering relations with major global powers and maintaining an independent stance – a strategy exemplified by Indonesia’s dual aspirations for BRICS and OECD membership.


To read the full report, click here to Download the PDF.