What is the state of Indonesia's economy heading into elections?

The next president will inherit one of the fastest-growing economies in Southeast Asia.

Over 200 million Indonesians in the world’s third-largest democracy will head to the polls on Wednesday (Feb 14), with the winning candidate inheriting one of the fastest-growing economies in Southeast Asia.

The nation’s annual economic growth fell slightly last year to 5.05 per cent – lower than the government’s 5.3 per cent target – on the back of contracting exports and falling commodity prices.

However, the central bank is confident of a pickup in 2024, projecting a gross domestic product (GDP) growth in the range of 4.7 to 5.5 per cent, buoyed by election-related spending.

According to local media, the government has already spent US$1.5 billion as of last December to cover expenses related to the ballot.

The General Elections Commission said the 18 political parties contesting have so far spent about US$10.4 million on their campaigns.

EMPLOYMENT A KEY CAMPAIGN ISSUE

Experts say maintaining growth at above 5 per cent is crucial to create enough jobs for the more than 1 million Indonesians newly entering the workforce each year. 

The jobless rate in August last year – the latest data available – was at 5.32 per cent, down more than half a percentage point from a year earlier. 

But employment figures have yet to return to pre-pandemic levels.

With young voters making up more than half of the electorate this year, jobs and wages are among the key campaign objectives for the candidates.

All three presidential hopefuls have emphasised the creation of millions of new jobs as part of their campaign promises. 

Voters also cite the cost of living and welfare as top concerns.

INFLATION HOLDS STEADY

The country's inflation rate has stayed in check for the past few months at less than 3 per cent, falling within the central bank's target range, with higher-for-longer interest rates taking a toll on consumer demand. 

Bank Indonesia raised interest rates by a total of 250 basis points between August 2022 and October 2023 in a bid to fight inflation and maintain currency stability.

Since then, the central bank has kept rates unchanged at 6 per cent as inflation slowed.

Indonesia has also seen strong growth in foreign direct investment (FDI) since the pandemic, attracting more than US$47 billion last year, a 13.7 per cent on-year increase, amid a surge in funding in its nickel processing industry.

INDONESIA’S NICKEL POLICY

The nickel boom comes on the back of President Joko Widodo's resource nationalism push.

Indonesia has the world's biggest reserves of nickel but exports of the metal were banned in 2020 to capture more of their value. 

The so-called “commodity downstreaming”, where natural commodities are processed onshore, is a bid to establish more domestic smelters and produce more nickel products instead of just exporting raw nickel.

Nickel is used in the making of stainless steel or batteries.

Outgoing shipments of nickel products hit US$30 billion in 2022, more than 10 times what they were in 2013, boosted by demand for batteries used in electronic vehicles (EVs). 

JOKOWI’S LEGACY

The last decade saw numerous structural reforms and changes that improved the Indonesian economy, said Ms Pranjul Bhandari, chief economist of India and Indonesia at HSBC.

In addition to the nickel policy, Mr Jokowi’s onimbus law that aimed to attract investments and create jobs, as well as mega infrastructure projects, could become part of his legacy. 

Nusantara, the nation’s planned new capital in East Kalimantan, also attracted more than US$2.6 billion worth of investment last year.

Ms Bhandari said manifestos from the main parties contesting in the election look set to continue with the current administration’s economic policies.

“Almost all the presidential hopefuls are supportive of the downstreaming strategy. Many other laws, for example the omnibus law, has now been enshrined so those benefits will continue to see the light of the day,” she said.

POST PANDEMIC GROWTH

Dr Siwage Dharma Negara, senior fellow and co-coordinator of the Indonesia Studies Programme at the ISEAS Yusof Ishak Institute, said Mr Jokowi’s biggest achievements go beyond infrastructure development.

“Jokowi started the presidency by promising he will improve the infrastructure quality. But then the pandemic hit and the administration managed to bring Indonesia back from the crisis to a growth rate – a significant achievement,” he told CNA’s Asia Now on Friday.

“Beyond that, the government also managed to improve social protection programmes … and push investment in education and health.”

Ms Bhandari is optimistic about growth prospects following the election and in the next few years.

“Already, we are seeing credit growth faster than before. There are a lot of FDIs waiting on the sidelines – our own estimate is about US$45 billion in the EV space that could come in post-elections,” she said.

“Elevated palm oil and coal prices, and ambitions of further downstreaming in the whole nickel industry, is a good combination that's going to benefit Indonesia's economy for the next couple of years.”