Empirically, Indonesia’s economic growth achievements in 2024 will remain positive, even though they are likely to be lower. Mired in multiple challenges, notably the Ukraine and Gaza wars, the global economy is projected to slow down to around 2.8 percent in 2024. This will certainly impact Indonesia’s economy, which is also at risk of sluggish growth. As a result, the business community will tend to adopt a wait-and-see approach before implementing their business expansion plans.
Domestically, Indonesia’s economic growth is projected to be down slightly due to suboptimal government spending as the policymakers are starting to concentrate on national leadership succession, sapping the focus away from economic programs. In addition, export-import performance may not provide the impetus for expected economic growth, as trade is expected to slump compared to 2023. The only hope for Indonesia’s economy lies in household consumption and investment. These are the stumbling blocks that will make achieving the 5.2 percent growth rate exceptionally difficult.
Based on past experience, the economy tended to slow down during election years, as was noted in 2014 and 2019. This means that the economy is greatly influenced by economic stability and political dynamics. Elections also tend to cause investors to hold off on decisions to realize their investments. Moreover, recent accusations of legal violations have made investors increasingly wary about the regulatory enforcement aspect and the safety of their investments, going forward. Historical data on household spending in the 2014 and 2019 elections also showed a decline. Instead of increasing spending in media, printing, information technology, textiles, and other support sectors, which actually does not contribute too much to household spending. As a result of declining investment, labor absorption is very low and wages stagnate.
Based on empirical data, the economic growth in 2014 fell to 5.01 percent, from 5.55 percent the previous year. Likewise, in the 2019 election, the economy weakened to 5.02 percent, from 5.17 percent. Based on these trends, INDEF projects that Indonesia’s economic growth in 2024 will mark 4.8 percent.
B. Inflation
Inflation is projected to be at a moderate level in 2024, in line with the trend in 2023. Empirically, the inflation figure in 2024 will be influenced by volatile food prices, which will be largely determined by supply and demand, production in food bowls, and the arrival of the rainy season. In addition, the reference interest rate is still high; this will impact loan disbursement. Moreover, if we look at the inflation rate in August, while there was 0.02 percent MoM inflation, it actually rose to 3.27 percent YoY. Core inflation reached 2.18 percent YoY, lower than that of the previous month while volatile food prices remained under control, and administered prices decreased to 8.05 percent YoY.
Looking at the past two elections, inflation also declined. In the 2014 election, high food prices caused inflation to remain high, while in the 2019 election, inflation was much lower than in the previous election. In general, the five-yearly democracy agenda will still stimulate inflation, especially as food production is at risk of disruption due to extreme weather while food demand rises during the elections. INDEF estimates that inflation in 2024 could be at 3.2 percent YoY.
C. Rupiah exchange rate
The Rupiah exchange rate against the greenback in 2024 is expected to weaken further. The average Jakarta Interbank Spot Dollar Rate (JISDOR) as the reference rate for foreign exchange trading from January 2 to December 4, 2023 hovered at Rp15,235 per US dollar, a depreciation of Rp435 from the Rp14,800 rate set in the 2023 APBN macro assumptions. This depreciation illustrates the considerable pressure on the exchange rate, especially due to the Fed rate hikes which occurred several times throughout 2023, prompting capital outflows.
In 2024, the Fed is likely to hold its benchmark interest rate until the middle of the year, even though the US economy continues to improve. This will of course have an impact on developing countries, including Indonesia, because the Fed’s benchmark interest rate serves as the reference for central banks around the world in their monetary policy decisions. Unfortunately, while monetary relaxation is likely to begin in the US in the second semester of next year, Indonesia in the same period generally sees increased demand for dollars, in preparation for the anticipated increase in economic activity at the end of the year. In general, this condition will heap more pressure on the Rupiah and require more intense currency defense measures. Moreover, the implementation of export receipts (DHE) regulation to beef up foreign exchange reserve as a cushion against exchange rate pressure, has so far been less effective.
INDEF projects the Rupiah exchange rate against the dollar to be at Rp15,500 in 2024, taking into account the lower global commodity prices which will impact export coffers, the moderate growth of investment during the election year, as well as the risk of capital outflow that could still occur due to Fed’s still high benchmark interest rate. For reference, the government in the 2024 APBN Financial Note tends to be more optimistic by setting the macro assumption for the Rupiah exchange rate at Rp15,000 per US dollar.
D. Poverty and unemployment rates
One of the indicators of welfare is measured by the poverty rate. Indonesia vows to eliminate extreme poverty by 2024, which is ambitious yet commendable. INDEF projects the poverty rate to fall to 9.16 percent next year. This can happen if the government maintain social assistance, implements targeted fuel subsidies, and increases spending during the elections, even though inflation is still above 3 percent. However, this figure is still way above the government’s 6.5 to 7.5 percent target as set forth in the 2024 APBN Financial Note.
The open unemployment rate (TPT) is also an important welfare indicator. INDEF projected that TPT will fall from 5.32 percent in 2023 to 5.01 percent in 2024, due to limited job prospects as businesses will tend to wait and as the global economic outlook remains dim, many exporting companies may carry out a retrenchment strategy to survive.
Based on the macroeconomic and welfare indicators discussed above, INDEF arrived at the following forecast for the Indonesia’s economic outlook in 2024. (FIGURE-3)