Indonesia Economic Update Report
Quarter 1, 2024
In this issue:
Indonesia’s Q1 2024 GDP Growth Reached 5.11% (YoY), the highest growth in the first quarter in the last five years.
The country’s economic growth in the first quarter of 2024 improved to 5.11% (YoY), higher than the growth of 5.04% in the last quarter of 2023. The growth of 5.11% was the highest economic growth in the first quarter from 2019 to 2024.
The increase in household consumption by 4.91% (YoY) in Q1 2024 compared to 4.47% (YoY) in Q4 2023 was one of the two main contributing aspects to economic performance. This growth was driven by controlled inflation, increased economic activity during Ramadan, increased salaries for civil servants, provision of holiday allowances, and various activities related to the 2024 General Election. This component was still the main contributor to economic growth in terms of expenditure, reaching 54.93% of gross domestic product (GDP), and was the highest since 2022.
Secondly, the growth of 17.56% (YoY) of Government Expenditures. The strong performance of employee spending in the State Budget supports this robust growth, especially through the increasing salaries of civil servants and the holiday allowances in the first quarter of 2024. On the other hand, goods, and social spending, which are part of the State Budget, also increased significantly. The government expenditures contributed 1.1% to economic growth in the first quarter of 2024.
With the largest contribution to the economy (19.28%), the processing industry sector’s growth increased slightly to 4.13% (YoY) in Q4 2023 from 4.07% (YoY) in Q4 2023 due to strong domestic demand and the success of downstream policies. The success of the downstream policy is reflected in the basic metal industry sub-sector, which continues to grow at double digits, namely 16.57% (YoY) in the first quarter of 2024. Other manufacturing industry sectors that are also growing highly due to the above-mentioned factors are chemicals and pharmaceuticals.
On the other hand, the export-oriented manufacturing industrial sectors, such as textile products and furniture, have started to take pressure amidst high price volatility. Most industrial players in CPO, rubber coal, and nickel emphasise efficiency in their operations to maintain the profit margin amidst high price volatility. The economic performance of two Indonesia’ largest import markets, China, and the US, has affected the country’s export performance.
During the first quarter, the investment growth was recorded at 3.79% (YoY). Government capital expenditure activities related to infrastructure encouraged the building investment activity. The growing sustainability of natural resource downstreaming policy, excellent macroeconomic performance and socio-political stability maintain Indonesia’s attractiveness as an investment destination. The private sector investment performance grew positively as well, reflected in the realisation of Foreign Investment and Domestic Investment in the first quarter.
Like the previous year, Indonesia saw a 22.07% (YoY) growth as the country attracted a total of USD 24.17 billion in the first quarter of 2024. This performance equals 24.33% of the president’s investment target. The distribution of investment ownership (foreign vs local investment) and investment destination areas (Java Island and non-Java Island) was close to even. The top five investment sectors are as follows: base metal, metal goods, non-machinery, and equipment; transportation, warehouse, and telecommunication; mining, property, and food and beverage. As for the origin of foreign direct investment, Singapore led the FDI (Foreign Direct Investment) with a contribution of USD 4.2 billion, followed by Hong Kong and China with USD 1.9 billion equally. In contrast to prior elections, this year’s election had no noticeable impact on the country’s investment performance. This anomaly can be attributed to the ongoing implementation of the industrial downstreaming policy, a strategy set to persist under the newly elected president, Prabowo.
Looking ahead, several global risks still need to be handled, including the direction of interest rates from the Fed, escalation of geopolitical tensions in various regions, and global supply chain disruption that has not yet fully recovered. The government will continue to monitor and assess the potential impact of global dynamics on the domestic economy and fiscal conditions. The State Budget is expected to be optimised as a shock absorber to maintain consumers’ purchasing power and economic growth momentum.
Trade Performance
During the first quarter, the country could still maintain the positive trend of its trade surplus with a total value of USD 7.41 billion. This achievement meant that Indonesia has recorded a trade surplus for 47 consecutive months since May 2020, and should the country extend its performance to April, the government will match the longest surplus record from the late 70s to early 80s. Regardless, the exports from Indonesia experienced a slight decline, so the trade surplus has narrowed. The export component contributes 21.37% to Indonesia’s economic growth structure.
Based on destination country, non-oil and gas exports to China, the United States and India remain the main contributors to Indonesia’s exports; however, Indonesia’s non-oil and gas export performance to China – as the main destination country – in the first quarter of 2024 fell sharply by 16.24% compared to the same period the previous year. Nevertheless, exports to China still contributed the most to Indonesia’s export performance, with 22.91%. Regarding the overall destination country-based export contribution, China represented 22.91%, followed by the US and India with 10.78% and 8.73%, respectively. At the regional level, ASEAN and the EU contributed 17.39% and 7.34%.
In the past, commodities such as coal and crude palm oil greatly influenced Indonesia’s trade performance. However, the surplus trade balance has continued due to nickel downstream factors. With the expansion of the downstream policy, the country expects to add value by extending the supply chain, thus creating diversification in export products. This policy is projected to maintain the momentum of trade surplus performance in the future.
To avoid the risk of an economic slowdown in countries that have been export destinations, such as China, the government is also considering diversification by promoting exports to other countries. The government has selected 12 new export priority markets, such as: Saudi Arabia, Netherlands, Brazil, Chile, China, Philippines, India, Kenya, South Korea, Mexico, United Arab Emirates, and Vietnam. While the top priority export products are as follows: fish and processed fish, processed coconut and coconut, processed coffee and spices, vegetable ingredients and margarine, cocoa, processed food, cement, chemical products, rubber and rubber products, leather and leather products, pulp and paper, textiles and footwear, precious metals and jewelry, electronics, automotive, furniture, toys, etc.
Is this the demise of the textile industry in Indonesia?
Indonesia's textile industry has long been recognised as one of the country's economic pillars, providing employment opportunities to 3.7 million people and contributing significantly to export earnings.
In 2023, the textile industry accounted for 5.83% of the GDP of Indonesia’s manufacturing sector or 0.98% of the total GDP. With a GDP of US$1.39 trillion in 2021, the industry reached a value of US$13.57 billion.
The textile industry’s export performance over the past six years has been characterised by fluctuations, with a notable decline post-COVID-19. Despite efforts to recover, export figures have not returned to pre-pandemic levels, signalling a concerning trend. The substantial drop in export orders from key markets like America and Europe is particularly troubling, resulting in significant layoffs within the sector. During 2022-2023, there were 46 factories that carried out mass layoffs with more than 68,000 employees losing their jobs.
Internally, the industry struggles with longstanding challenges, including prolonged manufacturing and delivery times, rising minimum wages, financial constraints, reliance on imported materials, and outdated machinery. These issues exacerbate inefficiencies, contributing to the industry’s decline.
To address these issues, the government has implemented support programs to alleviate industry burdens since 2019. Incentives include expedited access to machinery and raw materials, vocational education initiatives, and recent measures like safeguard import duties and anti-dumping tariffs. However, conflicting regulations about import control measures issued by the two ministries have sparked controversy and uncertainty within the industry. The later issued regulation from the trade ministry might cause potential harm to the local textile industry.
On the global stage, Indonesia’s participation in initiatives like The Indo-Pacific Economic Framework and ongoing negotiations for the Indonesia-EU Comprehensive Economic Partnership Agreement (CEPA) signal potential opportunities for future trade expansion. Although the Indo-Pacific Economic Framework does not include any tariff-lowering benefits, however, the government notes that it is a major step for further discussion in the near future. While for the Indonesia-EU CEPA, the progress will be described in the following part.
In total, Indonesia has established 18 Free Trade Agreements and with Middle East and Africa set as the new target destinations for textile, the government is working out to realize similar cooperation for both parties. Until the end of 2024, the government is targeting to conclude 3 Free Trade Agreements, which are: Indonesia-European Union Comprehensive Economic Partnership Agreement (IEU-CEPA), Eurasian Economic Union (EAEU), and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The Ministry of Trade has also placed more efforts to the business players, such as socializing the benefits of the Free Trade Agreement, providing market intelligence to local business players, bringing potential companies (including textile) to major trade fairs within their working areas, among others. Additionally, efforts to tap into Middle Eastern markets via the outreach of Indonesia Trade Promotion Center as well as involvement in regional trade fairs have shown promise for diversifying export destinations.
Despite challenges, recent data indicate a positive uptick in industry performance, with both foreign and domestic demand growth. The performance of the textile and clothing industry grew positively by 2.64% throughout the first quarter of 2024 due to strong foreign and domestic demand. In the first quarter of 2024, foreign demand experienced an increase in volume of 7.34% (Y-o-Y) for textile products and 3.08% for apparel. The export of textile and textile products reached USD 2.95 billion in the first quarter of 2024. Based on the BI’s Prompt Manufacturing Index (PMI-BI), the textile and apparel industry increased and expanded with an index of 57.40%.
Investment in the sector is also rising, with a notable increase in foreign interest, particularly in Central Java province. The investment in the textile and apparel sector reached USD 917.11 million in 2022 and USD 1.04 billion in 2023, while the first quarter of 2024 saw investment in the textile and apparel industry reach USD 257.24 million by which the contribution of foreign investment increased by 70.2% (YoY). It shows that there is still positive interest towards the textile industry in Indonesia; however, most new investors would prefer to place their production facilities in the Central Java province nowadays since the minimum labour wage is still relatively low compared to the West Java province and Banten province.
Moving forward, the industry’s resilience provides a foundation for strategic growth initiatives. To enable growth, a few key strategies need to be addressed, including —but not limited to—prioritising sustainability, embracing technological innovation, diversifying product offerings, enhancing design and branding, fostering partnerships, and ensuring a supportive regulatory environment.
By pursuing these strategies, Indonesia aims to position itself as a leading global textile manufacturer by 2030, capitalising on opportunities for growth and sustainability in the evolving market landscape.
Progress on the EU-Indonesia CEPA: Approaching Finalization?
The Indonesia-European Union Comprehensive Economic Partnership Agreement (IEU CEPA) marks a significant development in the economic relations between Indonesia and the European Union. Negotiations for this extensive trade deal commenced in 2016, with the shared objective of bolstering bilateral trade and investment opportunities while addressing assorted challenges and barriers. As a contextual backdrop, Indonesia-EU trade reached USD 30.8 billion in 2023, with Indonesia’s exports to the EU valued at USD 16.7 billion and imports from the EU totalling USD 14.1 billion.
A primary aim of the IEU CEPA is to foster economic cooperation and fortify trade and investment ties between Indonesia and EU member states. The agreement encompasses various sectors, including trade in goods and services, investment, intellectual property rights, competition policy, and sustainable development.
Throughout the negotiation process, Indonesia and the EU have engaged in constructive dialogues to tackle diverse trade barriers and challenges. These discussions have centred on issues such as market access, tariffs, non-tariff barriers, and regulatory disparities. Notably, the 17th negotiation round of the IEU CEPA, which occurred earlier this year, underscored the significance of addressing trade barriers to facilitate smoother trade flows between the two parties. The agenda for the latest negotiation round encompassed a wide array of topics, ranging from trade in goods and services to technical barriers to trade and intellectual property.
A notable point of contention in the negotiation process has been the European Union’s stance on certain trade-related matters. Indonesia has advocated for fair treatment from the EU, stressing the necessity for equitable and mutually advantageous terms in the agreement. Ensuring fair terms has been imperative for Indonesia to safeguard its interests within the framework of the IEU CEPA. The issue of the EU’s Deforestation-Free Regulation (EUDR) has been particularly contentious. However, the business community in Indonesia has pushed for negotiations on the EUDR to be separated from those related to the IEU CEPA.
Moreover, the European Union has raised objections regarding two of Indonesia’s key commodities, nickel, and palm oil, at the World Trade Organization (WTO). Disputes emerged over Indonesia’s ban on nickel ore exports and the EU’s classification of palm oil as high-risk for deforestation, which Indonesia perceives as discriminatory. This has adversely impacted Indonesia’s export position for palm oil. Indonesia has expressed concerns about perceived mistreatment, particularly given the smoother resolution of similar issues in other agreements, such as the Indonesia-EFTA Comprehensive Economic Partnership Agreement.
Despite the inherent challenges and complexities in the negotiation process, Indonesia and the EU remain committed to achieving a mutually beneficial agreement. The IEU CEPA harbours the potential to unlock fresh avenues for trade and investment between the two parties, fostering heightened economic growth and prosperity. With 11 out of 20 chapters already accepted, both parties are optimistic about concluding the agreement soon while the remaining unfinished topics are under negotiation. The Indonesian government has set a target for concluding the IEU-CEPA this year before any impending governmental changes.
About this report
This report was compiled with contributions from the team of business experts in our Indonesia office.
ARC Consulting, a division of ARC Group, is an advisory firm specialised in supporting western companies operating in Asia. Our mission is to bridge between the business ecosystems of Asia and those in Europe and the US. Our services cover market entry and expansion, production and sourcing, cross-border M&A as well as ESG and operational improvement and compliance.
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References
Breaking News! BPS Lapor Ekonomi RI Tumbuh 5,11% di Kuartal I-2024 (cnbcindonesia.com)
Ini Faktor Pendorong Pertumbuhan Ekonomi Kuartal I 2024 | Republika Online
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Indonesian Textile Exports Drop 14.78% In Previous Year – Textile Insights
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Indonesia’s textile industry requires regeneration, innovation (business-indonesia.org)
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