Lots of Turmoil at the Beginning of the Year, Testing the Endurance of the Indonesian Economy

Despite many challenges, economic growth in the first quarter of 2024 is estimated to still reach 5.15-5.17 percent.

KOMPAS/TOTOK WIJAYANTO

The urban landscape of Jakarta filled with skyscrapers, Wednesday (28/2/2024). According to data from the Central Statistics Agency, in 2023, the Indonesian economy grew by 5.05 percent annually. This achievement is lower than the economic growth in 2022 which reached 5.31 percent.

JAKARTA, KOMPAS — Indonesia must face various economic risks throughout the first half of 2024 due to unstable global market conditions and the transition to regime change within the country. However, economic growth at the beginning of this year is estimated to still be able to reach the "safe level" of 5 percent, helped by a number of temporary factors.

The year 2024 is beginning with several risks and opportunities. On one side, Indonesia's external economic resilience is being tested amidst a sluggish global trade climate due to escalating geopolitical tensions, China's economic slowdown, and commodity prices decrease.

As a result, despite still recording a surplus for 47 consecutive months, Indonesia's trade balance surplus value decreased by 39.4 percent on an annual basis to 7.34 billion US dollars throughout January-March 2024. Export performance decreased more significantly than imports.

Also read: Government Beware of Impact of Global Uncertainty

At the same time as the surplus was running low, there was a capital outflow of 1.89 billion US dollars from the Indonesian bond market during the first quarter of 2024. This "runaway" capital occurred due to changes in market expectations regarding the interest rate policy of the United States central bank, The Federal Reserve (The Fed), and the escalation of geopolitical tensions.

Since the beginning of the year, the rupiah exchange rate against the US dollar has weakened to 2.96 percent year to date as of the end of March 2024. Foreign exchange reserves have also fallen by almost 6 billion US dollars from December 2023.

KOMPAS/TOTOK WIJAYANTO

Workers take a break on the cargo container dock of Tanjung Priok Port in Jakarta on Thursday (25/4/2024). Based on data from the Statistics Indonesia agency, Indonesia's trade balance in March 2024 recorded a surplus of 4.47 billion US dollars. Exports for March were recorded at 22.43 billion US dollars and imports at 17.96 billion US dollars. Indonesia has recorded consecutive trade balance surpluses for 47 months in a row.

However, on the other hand, the performance of investment was recorded as strong in the first quarter with the realization of direct investment (direct investment) reaching IDR 401.5 trillion or an increase of 22, 1 percent annually. Investment from abroad and domestically grew almost equally, showing that investor confidence in Indonesia as an investment destination is still maintained.

In detail, in the first quarter, foreign investment (PMA) contributed 50.9 percent of the total investment realization and grew by 15.5 percent annually, while domestic investment (PMDN) contributed 49.1 percent to investment realization and grew by 29.7 percent annually.

The Indonesian economy in the first quarter of 2024 can still grow 5.17 percent and throughout the year it will grow 5.07 percent.

Can grow 5.15 percent

According to Teuku Riefky, a Macro-Economist and Financial Market Specialist at the Institute for Economic and Social Research, Faculty of Economics and Business, University of Indonesia (LPEM FEB UI) on Saturday (4/5/2024), the combination of positive trends and challenges at the beginning of the year has enabled the Indonesian economy to still withstand in the early part of the year.

LPEM FEB UI also estimates that economic growth could be better than last year, namely reaching 5.15 for the first quarter of 2024 and 5.1 percent throughout 2024 (full year). For comparison, in the first quarter of 2023, the Indonesian economy grew 5.03 percent and throughout 2023 it grew 5.05 percent.

According to him, temporary factors from within the country helped support the economy from declining too deeply. ”There was an election, accompanied by several long holiday periods and the seasonal celebration of Ramadan which pushed up the level of consumption in general. "On the other hand, our investment realization which far exceeds the target also reflects the level of investor confidence," said Riefky.

The Head of Bank Permata's Economist, Josua Pardede, predicts that Indonesia's economy in the first quarter of 2024 can still grow by 5.17 percent and throughout the year by 5.07 percent. This is mainly due to the earlier shift of the month of Ramadan this year, which also shifts the pattern of demand growth to the first quarter instead of the usual second quarter.

Also read: Elections and Eid Support the Economy at the Beginning of the Year

”This shift causes a low-base effect (low growth base) thus contributing to higher growth. "Apart from that, there was also an increase in spending due to holding elections which pushed up spending by the government and non-profit institutions such as political parties," said Josua, Saturday.

Challenges in the first half

Moving forward, at least until the first half of 2024 (January-June), the Indonesian economy will still face complex challenges. Internally, there are challenges such as pressure on food inflation and a slowdown in household consumption due to the effects of El Nino.

KOMPAS/RONY ARIYANTO NUGROHO

The elected president and vice president, Prabowo Subianto and Gibran Rakabuming Raka, briefly answered journalists' questions after receiving their appointment letter as the elected president and vice president from the General Election Commission at the Open Plenary Meeting for the Appointment of the Elected President and Vice President for the 2024 Election at the KPU RI Building in Jakarta, Wednesday (24/4/2024).

There are also uncertainties post-2024 elections, especially concerning the transition process from the government of Joko Widodo to Prabowo Subianto, which could still affect investment climate and investor approach.

Externally, challenges such as global economic slowdown, potential escalation of geopolitical conflicts, and US interest rate policies that will persist until the first half of 2024, will increase economic risks.

Global financial market uncertainty will continue throughout the year, driven by higher for longer sentiment and the potential for escalation of geopolitical conflicts.

In April 2024 alone, there was a strong turmoil in the global financial market due to the US decision to maintain high interest rates longer than expected and escalating tensions in the Middle East. Capital outflows surged and the exchange rate of the rupiah reached its weakest point in the past four years at Rp 16,280 per US dollar in mid-April.

The significant weakening of the rupiah prompted Bank Indonesia (BI) to increase its benchmark interest rate to 6.25 percent, although so far the impact has not been significant in strengthening the rupiah exchange rate.

KOMPAS/PRIYOMBODO

Visitors queue at PT Valuta Artha Mas foreign exchange counter in Jakarta, on Tuesday (16/4/2024). The weakening rupiah is being taken advantage of by the public to exchange their US dollars.

Riefky assessed that global financial market uncertainty will continue throughout this year, driven byhigher for longersentiment and the potential for further escalation of geopolitical tensions. If it continues, the weakening of the rupiah could impact various aspects, disrupting the real sector, people's purchasing power and investor confidence.

"At least until early May, BI's efforts to fight against pressure on the rupiah exchange rate have not been significant due to greater external pressure. Going forward, the government must be very cautious in navigating external pressures and managing the rupiah," he said.

Meanwhile, Josua hopes that economic uncertainty can begin to decrease in the second half of 2024 (after June). If it goes according to prediction, the US will lower its interest rates, which will have an impact on strengthening the rupiah.

"External pressure is expected to gradually decrease so that direct investment and capital inflows are anticipated to increase," he said.