Additionally, from the fiscal side, despite efforts to foster growth through a budget stimulus, a realization of budget absorption which tends to accumulate at the end of the year reduces the effectiveness of such a measure. This indicates structural problems in budget management and execution that need to be addressed, in order to maximize its positive impact on the economy.
Furthermore, policymakers’ shift of focus to election preparations, at least in the first quarter, also potentially affected the concentration and effectiveness of economic program implementation. In an election year, short-term economic policies tend to receive more focus over long-term structural reforms, which can ultimately impair growth momentum.
Thus, Luhut’s statement should be understood as a hope, because almost no economic think tank or respected economist predicts that Indonesia’s economy can grow 6 percent this year. (FIGURE 3)
Post-election dynamic
On separate occasions, several economists stated that the single-round presidential election is likely to reinvigorate the economy sooner, one reason being that investors no longer have to be anxious about the election outcome and policy directions of a new government. Moreover, the victor is the one who has pledged to continue the current administration’s policies, most notably industrial downstream processing and infrastructure development, especially the ongoing development of Nusantara, the new administrative capital.
The hope is that a one-round election with clear winners will provide political certainty and clarity with regard to future policies. This can be seen when the Indonesia stocks jumped as a Prabowo win removes election risks. Investors can now assess post-election political and economic situations and quickly act on their pending investment plans. This will surely boost both domestic and foreign investment.
Investors will have a firm footing in making crucial investment decisions, ones that align with future government policies. However, this is not necessarily the case. If we look deeper, the growth of gross fixed capital formation (PMTB) as a proxy for indirect investment did not automatically skyrocket after the election.
As happened in 2019, PMTB growth declined quite significantly, from 5.03 percent in the first quarter to 4.08 percent in the fourth quarter, even before the election kicked into high gear. This negative trend shows that an early presidential election result does not necessarily spur investment growth. (FIGURE 4)
In 2024, amid a miasma of global uncertainty and an era of painfully high interest rates, PMTB growth may not be as high as expected, even though the presidential election is over, with conclusive results. The Fed is also expected to leave interest rates unchanged, currently at 5.5 percent. This policy is likely to be followed by most central banks around the world. The European Central Bank (ECB) still holds its interest rate at 4.5 percent. Meanwhile, BI rate currently stands at 6 percent.
In an investment-saving (IS) Keynesian macroeconomic model, there is an inverse relationship between interest rates and investment. This means that when interest rates rise, investment tends to fall, and vice versa. This happens because the costs of investing using bank loans become higher when interest rates rise, which in turn can suppress economic growth (assuming all other things remain constant).
Therefore, interest rate policy exerts a significant influence on the real sector. In a sluggish economy, the benchmark interest rate is usually slashed to stimulate growth. This approach was widely implemented following the onset of the Covid-19 pandemic, where low interest rates encouraged the private sector to borrow more from banks for business expansion and hiring purposes. However, as interest rates rise, the costs of expansion become higher, which can result in companies becoming hesitant to expand their businesses. High interest rates can also increase the burden on companies, especially those for whom investment is a crucial component to their business operations.