2023 economic projection: Small chance for 5% growth

This article has been translated by PwC Indonesia as part of our Indonesia Infrastructure News Service. PwC Indonesia has not checked the accuracy of, and accepts no responsibility for the content.

Bisnis Indonesia - Proyeksi ekonomi 2023: Asa sempit pertumbuhan 5%

4 April 2023

By: Annasa Rizki Kamalina & Tegar Arief

 

Bisnis, Jakarta – The opportunity for the government to realise an economic growth of 5.3% this year is decreasing due to the high global economy dynamic complexity.

Moreover, all international institutions recently forecasted that Indonesia’s gross domestic product growth this year would not reach 5%.

Organisation for Economic Cooperation and Development (OECD) in Economic Outlook Interim Report March 2023 estimates that the national gross domestic product (GDP) growth will only reach 4.7%.

Then, Asian Development Bank (ADB) in the December 2022 edition of Asian Development Outlook Supplement predicts that Indonesia’s economic growth will slow down to 4.8% in 2023.

Recently, the World Bank in East Asia and Pacific April 2023 Economic Update released last week predicts that the national economy will only grow 4.9% in this consolidation year.

Only the International Monetary Fund (IMF) is slightly optimistic about the national economy as they predict that growth will reach 5% this year.

IMF’s forecast can be realised if the government optimises fiscal instruments to boost consumption.

However, on the other hand, there is a consolidation demand that obligates the budget deficit to be under 3% of the GDP, so the expenditure policy cannot splurge.

World Bank Vice President for East Asia and Pacific Mnuela V. Ferro said that most countries in this area, including Indonesia, successfully averted the crisis from the Covid-19 pandemic.

However, all of the countries are currently facing another difficult challenge in the form of events that will cause economic shocks.

The events include the Russia-Ukraine war, food and energy inflations that have yet to be resolved, as well as the banking industry crisis that is reckoned to have a systemic impact.

“The larger economies in this area, which include Indonesia, are predicted to grow less in 2023 compared to 2022,” he said in a report received by Bisnis on Monday (3/4).

Ferro added that various strategies were required to secure the economic growth target this year, which include boosting innovations and improving productivity.

Until now, household consumption and investment or gross fixed capital formation (GFCF) are still the main contributors to the national economic machine.

Lacking momentum

This year, consumption and investment are lacking momentum.

The weak purchasing power due to the surge in inflation for the last several months will affect household consumption.

The investment sector is predicted to be barren as 2023 is a political year, so investors tend to wait and see until the establishment of the new government next year.

The decline in investment is reflected in the data from Bank Indonesia (BI) that logs capital erosion from foreign direct investment (FDI) in the real sector and investment in the money market.

According to BI’s data, Indonesia’s international investment net liability position declined from US$277.4 billion or 23.4% of the GDP in 2021 to US$252.2 billion or 19.1% of the GDP in 2022.

This decline was caused by the latest condition of the foreign financial assets that is higher compared to the foreign financial liabilities. 

In short, if the net liability position declines, then domestic global investment will be eroded.

Segara Institute Executive Director Piter Abdullah said that the decline was caused by external factors, especially the uncertainty due to the increase in the reference interest rate that boosts the surge in inflation.

“If the net liability position declines, that means global investment in Indonesia declines or investment in other countries increases,” he said to Bisnis.

Piter added that Indonesia was not the only country that is facing a decline in their international investment net liability position. Many developing countries are also facing a similar condition.

Meanwhile, regarding consumption, Centre of Reform on Economics (Core) Indonesia Executive Director M. Faisal sees that religious holiday allowance (THR) distribution will be a positive catalyst.

“THR will boost inflation as people will have more funds to spend. Demand will increase, which will also increase prices. Hence, inflation is expected to occur before Eid,” he said.

Hence, the government needs to supress it by supervising the stock of goods and foodstuff.

“At least it is not caused by a lack of supply, but due to other factors, which include the inflation expectation as there is more funds received by the people approaching Eid,” he explained.

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