“We will use the strong foundation he has built, especially in the economic sector, to work faster, harder, to bring results as quickly as possible to the Indonesian people,” Prabowo said.

In this article, we will explore the significance of the outcome for the Indonesian economy.

The ground reality

Joko “Jokowi” Widodo came to office in 2014 by pitching a promise of raising the Southeast Asian country’s growth rate to 7%. Prabowo has taken the game higher by suggesting that a double-digit growth was possible.

However, the Q4 2023 data shows that Indonesia’s GDP growth settled at 5.0%. The economy grew 0.45% compared to the previous quarter, and economic activity picked up ahead of the election.

Household spending (up by 4.5%) supported the growth. Government outlays posted growth but were more modest, up roughly 2.8%. The economy also got a boost from fixed capital formation, which expanded 5.0%, thereby managing to post decent growth despite seeing borrowing costs at elevated levels.

While Indonesia’s growth remains resilient, supported by declining inflation and a stable currency, the World Bank states that the nation’s GDP growth will ease slightly to an average of 4.9% over 2024-2026 from 5% in 2023 as the commodity boom loses steam. Private consumption will be the primary growth driver, while business investment and public spending will also pick up due to reforms and new government projects.

However, the overall economic outlook still possesses downside risks, mostly due to external factors like higher-for-longer interest rates in major economies, which, apart from weighing on global demand, will increase borrowing costs and make it harder to borrow on world markets. Add the geopolitical uncertainties, which may disrupt supply chains.

The World Bank has some advice for the Southeast Asian country: speed up growth and strengthen resilience while transitioning into a low-carbon and climate-resilient economy that will eventually reduce poverty.

Despite being a resilient economy, achieving the 7% target looks like a pretty tough one for Indonesia as of now. The last time it achieved the milestone was way back in 1996, just before the Asian Financial Crisis. Since the Southeast Asian country transitioned to democracy in 1998, promises of higher growth have remained as empty rhetoric than the policies that could have supported the plan.

Looking back at the Jokowi rule

Widodo wasn’t able to complete his “7% growth” prophecy. However, he has achievements to flaunt. A decade ago, Indonesia used to be one of the “Fragile Five”, a group of emerging-market economies vulnerable to high interest rates abroad and a strong dollar. As of 2024, its current account is roughly balanced and its external debts are modest.

Jokowi’s omnibus bill, which cuts restrictions on foreign investment and simplifies licensing, finally became law in 2023. Also, Indonesia’s infrastructure has improved over the past decade, highlighted by the construction of thousands of kilometres of roads.

Jokowi’s other milestone is Indonesia’s nickel-focused industrial policy. The metal is used in electric vehicle (EV) batteries, and Indonesia has the world’s largest deposits. Indonesia, by banning the export of its raw ore, is now forcing companies to process and manufacture in Indonesia. BYD, Ford and Hyundai are now investing in the Southeast Asian nation.

Exports of ferronickel, a processed form of the metal, rose from $83 million in 2014 to $5.8 billion in 2022. However, as per Cullen Hendrix of the Peterson Institute for International Economics, lithium-iron phosphate batteries, which contain no nickel, are becoming more popular. Sodium-ion batteries, which need neither nickel nor lithium, could surpass both types. In 2024, JAC Motors, a Chinese carmaker, delivered the first lot of commercial vehicles powered by sodium-ion batteries to customers.

Despite reforms introduced by the omnibus law, rules requiring imports to be screened at particular entry points have remained at a 22% tariff, and as per the World Bank, the ratio is more than twice the South-East Asian average.

Compare Indonesia with its neighbours Malaysia, Thailand and Vietnam and there is a stark difference. The three countries place fewer restrictions on outside investors and are becoming obvious destinations for firms looking for alternatives to Chinese manufacturing. Indonesia is losing out big time here, as its exports of electronics are not just lower than any other large economy in Southeast Asia, but the sector’s overall growth ratio in the country has slowed down too.

However, not everything is bleak. Since 2014, the Indonesian economy has grown by an average of 4.2% every year. Take out the pandemic years of 2020 and 2021 that figure goes up to 5.1%. Economic activity has not remained entirely dependent on commodity exports, with growth being increasingly driven by a combination of consumption and investment.

According to World Bank data, net foreign direct investment averaged USD 15.5 billion a year from 2014 to 2022, and portfolio investment averaged USD 12.6 billion a year. Investment has come from a variety of sources and in a variety of forms. Domestic capital markets have flourished, especially the stock exchange, whose market cap has grown tremendously over the last 10 years, with hundreds of new companies having gone public.

On the infrastructure front, the count of toll roads, airports, power plants, and dams has gone up in 10 years. At the same time, fiscal reforms drove tax revenue up. Despite increased spending, Indonesia’s fiscal health is quite good. One can argue that the Jokowi era also saw wasteful public works projects, widespread corruption, and the prioritisation of economic growth over the interests of local communities and the environment. However, a 5% annual growth anchored by investment and consumption, combined with big spending on infrastructure and social welfare and financed by sound fiscal policies makes the outgoing President’s rule a fruitful one.

Indonesia has a goal of becoming a high-income developed country by 2045. To fulfil that, the nation needs a national programme capable of effectively harnessing Indonesia’s human capital and population characteristics. Widodo’s “Kartu Prakerja” programme has become a good example for the future Indonesian administration to advance the nation’s economy by harnessing human capital.

The programme, which aims to enhance the competence, productivity, competitiveness and entrepreneurial development of Indonesia’s workforce, has been made available for Indonesian citizens over 18 years who are not enrolled in formal education and do not engage with other welfare programmes.

The Kartu Prakerja programme, a conditional cash transfer scheme, started in 2020. Under it, participants get vouchers to purchase training courses and once they complete the training, they receive a cash incentive. In the pandemic-disrupted 2020, the initiative reached over 5 million. A further 17.5 million recipients were reached in the next couple of years through online training, with the beneficiaries getting digital wallet incentives through fintech companies and banks.

Reimagining things under Prabowo

What the Southeast Asian country needs is a series of reforms that will allow investors to deliver the jobs boom. These reforms can be as simple as regulatory changes like creating a truly level playing field between state-owned and private enterprises or allowing easier immigration avenues for skilled foreign labour. In short, reforms that will make the Indonesian economy a competitive one in a globalised world order. Also, Prabowo needs to ensure job creation, poverty reduction and price stability.

“Prabowo’s economic technocrats need to convince him, in the context of a still-underdeveloped tax base and limited domestic savings available to underwrite private and public investment, that alongside deepening Indonesia’s own capital markets, there is no alternative to inviting a bigger role for foreign investment in the economy if Indonesians’ expectations for growth, expanded public services and better employment prospects are to be met,” EastAsiaForum noted.

The former general has an ambitious plan to raise the tax-to-GDP ratio from 10% to 16% and become a food-exporting nation in the next four years. His 8% growth target is higher than the World Bank’s January 2024 forecast, which predicted Southeast Asia’s biggest economy to grow only 4.9% this year and next.

Bhima Yudhistira, director at the Jakarta-based Centre of Economic and Law Studies (Celios), while interacting with the South China Morning Post, called Prabowo’s 8% growth forecast a “delusional and unfounded” target that was reminiscent of Widodo’s promise of a 7% annual growth rate during his first presidential campaign a decade ago.

Prabowo intends to raise the budget deficit cap, currently set by law at 3% of Indonesian GDP, as well as increase the government debt-to-GDP ratio from the current level of 38.11%. He has pledged to uphold Widodo’s economic policies while urging the nation to adopt the best economic practices from major Asian powers such as China and India in order to progress. Additionally, he has promised to enhance the private sector’s contribution and promote efficiency in state-owned enterprises.

Prabowo has also sought advice from experts on potential new sources of tax revenue. As per the OECD, Indonesia’s current tax ratio of around 10% is lower than the Asia-Pacific average (19.8% in 2021). Bhima thinks that in case Prabowo raises taxes for the country’s 52 million middle class, the move will affect Indonesia’s purchasing power and household consumption.

Bhima credited outgoing Finance Minister Sri Mulyani Indrawati behind Indonesia’s sound fiscal discipline. However, it’s unclear that Sri will join Prabowo’s new cabinet as her relationship with the government soared since Widodo asked the veteran economist to allocate more spending to social assistance programmes ahead of the election.

In December 2023, Prabowo revealed that his programmes to modernise Indonesia’s ageing military were hindered by a lack of funding. This, as per the analysts, may have also hurt his ties with Sri.

“The future minister of finance must act as a brake on Prabowo’s populist programmes. If you can’t apply the brakes, there will be fiscal pressure that will be felt by all economic indicators, and capital outflow will occur,” Bhima told the South China Morning Post.

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President Joko Widodo explained the ban announced on April 22 as a short-term measure after domestic prices of palm oil-based cooking oil rose by more than 50%.

Indonesia’s trading partners have not yet formally protested the ban, but there are signs of dissatisfaction in countries like India and Pakistan. Its major importers include China, India, and Pakistan.

James Guild, Deputy Fellow of the S. Rajaratnam Graduate School of International Studies (RSIS) in Singapore told Al Jazeera that there are no official complaints yet as Indonesia will soon be hosting G20 in Bali later this year.

Governments around the world will have to accept this in the interest of achieving their domestic goals as Indonesia is the second-largest producer of palm oil in the world and it also holds all the cards.

Recently, it was suggested that almost 300,000 tonnes of suitable for eating palm oil designated for India have been trapped in Indonesia because of the ban.

Whereas, in Pakistan, it is feared that it would soon run out of palm oil by May.

According to the Indonesian Palm Oil Association (GAPKI), Indonesia exported 34 million tonnes of palm oil products in 2020, generating more than $15 billion in sales.

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The parliament also passed a monumental tax overhaul bill recently with an aim to improve its revenue stream. The bill means we could see the introduction of a new carbon tax and the cancellation of a planned corporate tax cut. We could also see a higher income tax rate for wealthy individuals.

According to Law Minister Yasonna Laoly, the new regulations will help the country improve its revenue which took a severe hit as a result of the Covid-19 virus.

Radhika Rao, an economist with DBS told the media, “Indonesia’s revenue dynamics are likely to get a boost from the proposed tax reforms depending on when these are implemented. A phased increase in the VAT rate will be less onerous on consumers, considering that the post-pandemic recovery will be fragile and uneven.”

However, many critics have argued if the timing was right for the bills to be passed in the parliament as the world is still recovering from the Covid-19 pandemic. Around 4 million people in Indonesia have tested positive for the Covid-19 virus and around 142,000 have died.

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Finance Minister Sri Mulyani Indrawati told the media, “Our PEN budget for 2021 will reach 688.3 trillion rupiah, which if you compare with 2020’s 579 trillion rupiah, shows a significant increase, especially in healthcare spending.”

Healthcare’s share would reach 173.3 trillion rupiah for 2021, up from 63.5 trillion rupiah last year, she added. So far, Indonesia has recorded more than a million of positive Covid-19 cases. The pandemic has resulted in an economic contraction of 2.1 percent. This was the first time, the Indonesian economy shrank in the last two decades.

Last month, it was reported that Indonesia’s fiscal deficit in 2020 is seen at 6.09 percent of gross domestic product (GDP) based on unaudited state budget realisation, the country’s finance minister.

During the fourth quarter of 2020, Indonesia’s economy shrank 2.19 percent year-on-year, slightly more than expected in the fourth quarter. In the third quarter, Indonesia witnessed a GDP contraction of almost -2 percent due to weak consumption.

Last year, Finance Minister Sri Mulyani Indrawati even said that Indonesia may witness a recession. She also stressed that her 2020 outlook remains the same which is between -1.1 percent to 0.2 percent.

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“Vaccination is important to break the chain of Covid-19 transmission and give protection to us and safety to every Indonesian and help accelerate economic recovery,” Jokowi said after getting jabbed. Indonesia authorised the CoronaVac vaccine from China’s Sinovac Biotech, earlier this week.

Minister of Health Budi Gunadi Sadikin revealed that nearly 1.5 million medical workers would be inoculated by February. He said that Indonesia needs to vaccinate 181.5 million people, or nearly 67 percent of its population to reach herd immunity. This means the two-shot vaccine would require almost 427 million doses, including the estimate that 15 percent may be wasted.

Coordinating Economic Minister Airlangga Hartanto has said that Indonesia’s economic situation is expected to improve soon, as the government is preparing a number of recovery plans.

During a virtual discussion the minister said that he expects Indonesia’s economy to pick up. He said, “The signs are already here. The Covid-19 vaccine’s arrival will increase the public’s confidence and sense of security, which should lead them to restarting their activities. The economy is closely related to people’s mobility.”

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The bank cut the seven-day reverse repo rate, its benchmark rate by 25 basis points to 5.75 percentage on Thursday. Bank Indonesia also slashed the lending and deposit rates to 6.5 percent and 5 percent, a reduction of 25 basis points.

Meanwhile, economic data revealed on Tuesday pointed that the Indonesian economy was slowing. Media reports attributed this slowdown as partly due to the ongoing US-China trade war.

Bank Indonesia while making the rate cut noted that the country needed to boost domestic growth while external pressure had eased. The decision was spurred by low inflation and the need to boost growth.

Speaking on the rate cut Bank Indonesia governor Perry Warjiyo said that the bank sees further potential for monetary policy easing taking into consideration low inflation and need to boost growth.

The Indonesian central bank had embarked on a monetary policy tightening cycle from May to November 2018. Bank Indonesia took the tightening stance to stabilise the country’s current account balance.

Warjiyo said that the monetary policy will be accommodative going forward. This means that the Bank Indonesia could further ease liquidity or cut the interest rate.

Although Indonesia had recorded two months of trade surplus to June, the country’s exports declined. Import of auxiliary raw materials also slowed reflecting slower production and therefore lower investment.

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The reason behind Indonesia’s request is to be able to better coordinate Chinese loans that are associated with BRI projects. During the Belt and Road Forum in April Indonesia offered China roughly 30 BRI projects worth $91 billion.

Indonesia’s request to China highlights a growing desire among the BRI participants to reshape the financing mechanisms and loan structures in their favour. President Joko Widodo met China’s President Xi Jinping on the sidelines of the G20 summit in Japan where the request was made.

Indonesia’s Finance Minister Sri Mulyani Indrawati has been handed the responsibility of coming up with a proposal to China on the size of the fund, its structure and also the criteria for loans. “I am currently doing a study about its form, its mechanism, the size of it and of course the consequences of its costs,” Sri Mulyani Indrawati told Reuters.

In recent years, China’s President Xi Jinping has pushed for the trillion-dollar effort to create a modern-day Silk Road. Indonesia, however, despite its strategic location has not been among the biggest beneficiaries. Indonesia’s biggest BRI project is the $6 billion railway project which links Jakarta to Bandung but the construction has faced problems related to land procurement.

Another project, a $1.5 billion hydropower plant funded by Chinese banks came under scrutiny as it is located in the heart of the Batang Toru rainforest on the island of Sumatra, home to the endangered Tapanuli orangutans. China proposed the Belt and Road Initiative in 2013 to improve regional integration, increase trade, and stimulate economic growth.

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Although Indonesia is Southeast Asia’s largest economy, it expanded only 5.07 percent in January to March. This reflects a slowdown from the previous year. Analysts polled by Reuters had expected a growth rate of 5.18 percent.

In the first quarter, the economy’s GDP shrunk 0.52 percent on a quarterly, non-seasonal adjusted basis. For this year, the official government growth forecast is 5.3 percent and the Central Bank’s forecast ranges between 5.0 and 5.4 percent.

Economists at HSBC on Monday had said that weaker investment could be one of the factors impacting the GDP rise.  Economists Joseph Incalcaterra and Maitreyi Das wrote, “The strong public infrastructure investment cycle has slowed and may only pick back up in 2020.”

Compared to the previous year, both private consumption and government expenditure increased in a measly manner on a constant-price based, Reuters reported.

Senior Asia economist Gareth Leather on Monday raised concerns whether the official figures are reliable because the growth rate has been ‘suspiciously stable at around 5 percent over the last few years’.

Last year, Indonesia’s GDP growth had beaten analysts expectations.

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Indonesia’s real GDP growth remained steady at 5.0 percent year-on-year in the second quarter of 2017, unchanged from the first quarter. Private consumption growth, which accounts for over half of Indonesia’s GDP, did not pick up in Q2 despite favorable conditions, partly because of a temporary spike in inflation due to electricity tariff adjustments in the first half of the year. Inflation has since eased, and is on track to meet Bank Indonesia’s target of 4 percent for the year.

Monetary policy continues to be accommodative with the recent cuts in the policy rate by Bank Indonesia, while fiscal policy also turned mildly expansionary following the revised 2017 budget.

After surging in the first quarter, export and import growth both slowed significantly in part reflecting easing commodity prices in the second quarter and the Idul Fitri holidays. Weaker export growth has contributed to a wider current account deficit.

An improved composition of expenditures has brought higher public infrastructure investment in the first half of the year. Investment was indeed a bright spot, growing most rapidly since the last quarter of 2015, led by investments in buildings and structures.

“Limited infrastructure has long been a major constraint for Indonesia’s development. More and better planned infrastructure will help the country boost growth and enable prosperity to be more widely shared,” said Rodrigo A. Chaves, World Bank Country Director for Indonesia.

While higher budget allocations to infrastructure are welcome, public resources alone are insufficient to meet the country’s infrastructure needs, even if revenue growth picks up as expected because of the ongoing reforms in tax policies. More participation from the private sector is therefore necessary.

“Leveraging private sector investment can help Indonesia meet its large infrastructure needs more rapidly and efficiently,” said Frederico Gil Sander, World Bank Lead Economist in Indonesia. “The Government has begun to take measures to address the issue, but accelerating the pace of private sector investments in infrastructure will require continued reforms”.

The launch of the October 2017 Indonesia Economic Quarterly is part of Voyage to Indonesia, the series of events leading up to the 2018 IMF-World Bank Annual Meetings in Bali.

The Australian Department of Foreign Affairs and Trade supports the publication of the report.

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