How should Indonesia navigate 2023’s economic challenges?

PwC Indonesia releases Indonesia Economic Update - Q1 2023

Jakarta, 9 March 2023 - Despite the global economy's gloomy projections, emerging Asian economies are the exception, and Indonesia's economy is expected to experience only a mild slowdown in 2023. This is good news considering major world economies are expected to experience a recession in 2023 as the battle against inflation continues. 

Today, PwC Indonesia released the PwC Indonesia Economic Update - Q1 2023, its publication that analyses the trends and challenges of Indonesian economic conditions. In addition, the report also defines recent global economic dynamics and their impacts on Indonesia. 

Nick Forrest, PwC Global Economics Network Leader, added, "Looking ahead to 2023, we predict that the global economy will experience a slowdown although avoiding a global recession. We project the global economy to grow by 1.9% in 2023, which is slightly higher than half of its long-term average of about 3.5%. The majority of the G20 countries will experience tighter financial conditions as consumers, businesses, and governments react to rising interest rates. Furthermore, the world economy will enter a new phase of globalisation with increasing strategic competition among the world's largest nations. On a broader scale, this involves gradually reshoring some economic sectors while friend-shoring others by aligning supply chains with countries."

Julian Smith, PwC Indonesia Investment Director, stated, “The report reveals that, as we enter 2023, the global economy is expected to experience a mild slowdown compared to 2022. For 2023, among large Asian emerging economies, India is expected to be the fastest-growing G20 economy (5.4%), followed by Indonesia (4.8%) and China (4.7%). For Indonesia, this number is lower than the 5.3% growth in 2022. Nevertheless, the Government of Indonesia is prepared to mitigate potential adverse effects of economic uncertainty by prioritising investment opportunities while still making strides in its path towards a green transition. Economic growth was gaining traction and continued towards recovery, supported by strong exports, investments and household spending growth throughout 2022.” 

Julian added, “The most significant contributor to economic growth came from the increased consumption rate, which has contributed more than 50% of GDP over the last ten years. The government has successfully maintained purchasing power by shielding consumption from global inflation with various subsidies including fuel and electricity, combined with accommodative monetary policies. With these, we expect domestic consumption to remain strong.”

Denny Irawan, PwC Indonesia Head of Economic and Research, added, “Following the expected growth of Indonesia’s economy of 4.8%, inflation is expected to be at 4.0% or the upper ceiling of Bank Indonesia’s target of 2-4% in 2023. Looking back to 2022, the government was also shielding consumption from global inflation with various subsidies, which included fuel, electricity and social assistance. With inflation peaking globally and central banks worldwide remaining cautious, we expect Indonesia's domestic consumption to remain strong. A coordinated effort between fiscal and monetary policies is essential to maintaining purchasing power.”

The government budget is essential in maintaining Indonesia's economic growth. High commodity prices always have a dichotomous impact on Indonesia's fiscal budget. High energy prices, especially oil and fuels, have a negative impact, as the government needs to pay for more subsidies. However, this situation also brought significant windfall to government revenue since Indonesia’s exports are still dominated by commodities (coal and palm oil), and the government also receives significant revenue from these exports. We expect the government budget to stay strong in 2023, and therefore we expect there will be enough budget to sustain pro-growth and pro-job programmes and also subsidies to shield consumption and keep inflation under control.

In the short-term, Indonesia’s economic growth in 2023 (4.8%) is projected to decline compared to 2022 as inflationary pressure is expected to persist. High inflation expectation and aggressive monetary policy tightening would potentially reduce household consumption and erode businesses profitability in 2023. Slowing export growth could potentially arise from slowing global growth, but Indonesia’s core commodity exports (i.e., coal, palm oil, and nickel products) are likely to remain in demand as long as the Ukraine war continues. Downside risks, including weak global demand, capital outflow, currency pressures, and tight global financial conditions, could potentially hinder growth momentum from 2025 onwards.

Prof. Bambang Brodjonegoro, Ph.D., Senior Economist, stated, “The Indonesian government would need to improve their macroeconomic fundamentals to meet the long-term target. Bappenas targeted the Indonesian economy to grow at 5.1% to 5.7% rate per annum from 2016 to 2045. Currently, our growth rate is on track with Bappenas’ long-term target. Despite the failure to meet the expected targets during the COVID-19 pandemic in 2020 and 2021, last year in 2022, the Indonesian economy grew by over 5% and met Bappenas’ annual growth target.”

Bambang also stated, “To realise the economic potential in the long term, the Indonesian government must undertake sustained and effective investment in education and infrastructure. Underlying all of this is the need to take advantage of Indonesia’s large demographic bonuses, potential technological advances, and increasing economic competitiveness, which would create a secure and reliable climate for businesses to operate.”