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Indonesia recession: Asian giant bucking global trend as BI navigates steady course despite worldwide economic headwinds

By Nicole Willing

Edited by Valerie Medleva

16:14, 19 December 2022

Bank of Indonesia (BI)
Bank Indonesia (BI) projects Indonesia’s GDP to grow by 4.37% in 2023 – Source: Mezario / Shutterstock

There is not expected to be an Indonesia recession in 2023 – even as the global economy looks to be heading for a period of sluggishness that threatens to weigh on growth in southeast Asia. The country’s central bank, Bank Indonesia (BI), estimates that Indonesia’s gross domestic product (GDP) could grow by 4.37% in 2023, down from 5.2% in 2022.

The global economy is projected to grow at just 1.6% in 2023 on tightening financial conditions, the ongoing impact of the Covid-19 pandemic on economic activity in China, and the impact of the Russia-Ukraine conflict on European energy supply, according to analysis by JP Morgan (JPM). 

However, Indonesia's Financial Services Authority (OJK) sees the potential for the global economy to slide into recession – defined as two consecutive quarters of negative GDP growth.

What will drive the Indonesian economy’s performance in 2023?

In this article, we review how the government is working to stimulate growth and avert an Indonesia economic recession.

Commodity exports limit Indonesia recession risk

What is Indonesia’s recession history? Indonesia is southeast Asia’s largest economy and a member of the G20 group of the world’s largest economies. The 2020 Indonesia recession caused by restrictions on activity during the Covid-19 pandemic was the first economic contraction the country had seen since the 1997-1998 Asian financial crisis. However, as analysts at Singapore-based DBS noted, in 2020 the Indonesia crisis was relatively limited as GDP and foreign exchange reserves were far stronger than in 1998, and debt-to-GDP was far lower.

Paulus Sutisna, President Director of PT Bank DBS Indonesia, said:

“In contrast to the political situation in 1998, which was very unstable, the current condition is far more stable, with President Jokowi serving his second term. In addition, the Jokowi government has issued various stimulus policies aimed at reducing poverty.”

 

Indonesia is the world’s largest exporter of palm oil, and also a key supplier of rubber, oil, gas, minerals and electrical appliances. Along with a strong tourism industry, exports have helped it to maintain GDP growth of around 4-7% for most of the past two decades and avoid an Indonesia crisis.

Indonesia GDP throughout years

The economy has rebounded from the Covid-19 pandemic since the third quarter of 2021, and Indonesia recession is not expected in 2023. While BI suggests GDP could grow by 4.37% next year, the Asian Development Bank (ADB) expects Indonesia’s economy to grow by 4.8%, just above the regional average of 4.7% for southeast Asia as a whole.

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How is the Bank of Indonesia fuelling growth?

The BI was created in July 1953 to replace the Bank of Java following Indonesia’s independence from the Netherlands and to issue the Indonesian rupiah. BI was a commercial bank as well as the national bank until it was granted the status of a central bank in 1968.

The BI has raised its key interest rate, the BI 7-Day Reverse Repo Rate (BI7DRR), by 175 basis points since August, matching its last tightening cycle in 2018. The most recent rate hike was a 50-basis point hike to 5.25% on 17 November, its third consecutive increase, which was in line with economists’ expectations.

The interest rate hike came after inflation data showed consumer prices rose by 5.71% in October, close to September’s seven-year high, as the government cut its fuel subsidy and global food prices remained high. Inflation softened to 5.42% in November, slightly below expectations, although that remained above the BI’s target range of 2-4% and a source of Indonesia’s economic problems.

“The decision to raise the policy rate was taken as a front-loaded, pre-emptive and forward-looking measure to lower inflation expectations, which are currently overshooting and return core inflation to the 3.0%±1% target range earlier, specifically in the first half of 2023, while simultaneously strengthening exchange rate stabilisation policy in line with the rupiah's fundamental value in response to the strong US dollar and elevated global financial market uncertainty amid strong and growing domestic economic demand,” the bank’s Board of Governors stated

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“Currency pressures are escalating with increasing global financial market uncertainty. The outflows of foreign portfolio investment exacerbate exchange rate pressures in EMEs, including Indonesia.”

 

The rupiah has shed 8.5% against the US dollar this year. Aggressive US interest rate hikes and geopolitical uncertainty have driven investors to pull funds from other assets in favour of the greenback. 

Strong exports are expected to continue to offset the impact of the weaker rupiah against the US dollar, according to the Bank of Indonesia economic forecast.

USD/IDR 5-year chart

“Externally, solid export performance is expected to endure, specifically in terms of coal, crude palm oil (CPO), iron and steel, as well as export services, in line with strong demand in several key trading partners and strong government policy support… strong economic growth is still projected for 2023 on the back of solid domestic demand and positive export performance despite the risks posed by deeper global economic moderation,” the board added.

Indonesia projects robust economic growth

"What we have learned in 2022 is that our economic condition is relatively good compared to other countries in Southeast Asia. This is reflected in increased intermediation performance in banking and financing receivables that have improved and are stable," said Mahendra Siregar, chairman of the OJK’s Board of Commissioners. The authority met with the financial services industry last week to assess its “readiness in mitigating monetary policy tightening that could increase liquidity risk” to reduce the chances of an Indonesia economic crisis.

The country will avoid the direct impact of the global recession as it does not depend on commodities from Russia and Ukraine, according to the Indonesia economic outlook from Deddy Priatmodjo Koesrindartoto, lecturer at the Bandung Institute of Technology’s School of Business and Management. 

“The impact of the global recession will be felt indirectly in various ways, such as economic disruption in export destination countries and reduced export volume due to reduced demand. Also, different monetary policies of major countries, such as the increase in the Fed’s interest rates, will have an impact on the weakening effect of the Rupiah against Dollar and can lead to the increase in interest rates in Indonesia.”

 

Analysts at Dutch bank ING expect that the BI could increase interest rates by 25 basis points at its next meeting on 22 December, noting: “BI will need to sustain rate hikes but softer-than-expected headline inflation could mean that the central bank also slows the pace of its tightening. BI may also need to hike rates to support the rupiah which has faced some pressure after the recent strong support provided by sterling export growth appears to be fading fast.”

ING predicted that Indonesia’s GDP growth could decline to 4.1% in the second quarter of 2023, down from 4.9% in the fourth quarter of this year, but then rebound to 4.7% by the end of 2023. GDP growth could then stabilise at 4.7% in 2024 and average 4.5% in 2025. The bank’s Indonesia interest rate forecast estimated that BI could raise the BI7DRR by another 25 basis points this week to 5.5% and then introduce a final 25 basis point increase in the first quarter of 2023 to a peak of 5.75%. The rate could then move back down to 5.50% in the third quarter, ending the year at 5.25%. The BI7DRR could fall further to 5% in the fourth quarter of 2024 and 4.5% by the fourth quarter of 2025.

Fitch Solutions’ Indonesia economic forecast projected that “Indonesia’s political landscape in 2023 is likely to become more conducive for foreign investment and fiscal sustainability, but we… remain cautious about the medium-term outlook for reform given lingering uncertainty about policy continuity beyond the presidential election in early 2024.” 

President Joko Widodo has a year left in his final presidential term, with the next general election scheduled for February 2024. In contrast with Widodo, his potential successor, Defence Minister Prabowo Subianto, “previously advocated economic 'self-reliance', and a more 'Islamic foreign policy'. An avowedly economic nationalist agenda could make foreign investors more cautious about entering the market,” Fitch stated.

The bottom line

Whether or not Indonesia will go through a recession in the future remains to be seen. Keep in mind that geopolitical and economic volatility means that analysts and forecasters can and do get their predictions wrong. 

We recommend that you always do your own research. Look at the latest market trends, news, technical and fundamental analysis, and expert opinion before making any investment decision. Remember that past performance is no guarantee of future returns. And never invest or trade with money you cannot afford to lose. 

FAQs

Is Indonesia in an economic crisis?

Indonesia has emerged from a recession caused by the Covid-19 pandemic, returning to a gross domestic product (GDP) growth rate of around 4-5%.

Does Indonesia have a good economy?

As of December 2022, Indonesia has the largest economy in southeast Asia and is a member of the G20. 

How long does a recession last?

A recession is defined as two consecutive quarters of negative gross domestic product (GDP) growth and can last for around a year.

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