Indonesia Economic Update Report
Quarter 2, 2023
In this issue:
Indonesia's economy grew 5.17% year-on-year (YoY) in Q2 2023, beating the consensus forecast
Benefiting from the strong domestic demand, Indonesia's economic growth in the second quarter of 2023 once again beat market expectations, growing 5.17% year-on-year (YoY), exceeding a 5% YoY growth for seven consecutive quarters. The forecasted gross domestic product (GDP) growth in the Q2 of 2023 was between 5.0% and 5.1%
Indonesia’s economic recovery continues. Although, its GDP growth slightly slowed down in the Q2 compared to 2022, which registered 5.44% YoY growth in the same quarter, as a consequence of the impending global economic slowdown and key commodities exports decline, the GDP in Q2 2023 grew from the 5.03% recorded in the previous quarter, and expanded 3.86% quarter-on-quarter, beating market expectations.
From the production side, the Transportation and Storage sector recorded the highest growth, which reached 15.59% YoY. The second fastest growing sector was in the Accommodation and Food & Beverages sector (11.55% YoY). This development highlights the continuing recovery of domestic mobility and tourism. Meanwhile the Government Consumption Expenditure Component saw the highest growth of 7.53% from the expenditure side.
However, the upcoming president election 2024 in Indonesia may have brought turbulences in Indonesia’s economic performance. There are signs that investors may be more conservative with investments in the country. Bank credit grew only 9.39% in May on yearly basis, missing the 12% target. The slow growth continued in June with only a 7.76% growth YoY. Meanwhile, investment in the first half of 2023 grew by 16.1% YoY, achieving only 48.5% of the total annual investment goal.
Indonesia’s exports plunge following a decline in global demand
Trade in Indonesia slowed in the first half of 2023. Cumulative exports reached $128.66 billion, down 8.86% YoY, of which non-oil and gas exports were $120.82 billion, down 9.32% YoY; Imports were $108.73 billion, down 6.42%.
Exports contracted 2.75% in the second quarter on a yearly basis, in stark contrast to the previous quarter’s growth of more than 10%.
In June, Indonesia’s import value was $16.69 billion (up 10.71% YoY), while the export value was only $15.36 billion (down 16.44% YoY). According to Indonesia’s Central statistics agency, the trade deficit of $1.33 billion was largely due to a sharp decline in the value of oil and gas trade.
Many analysts have forecasted that, due to the ongoing decline in commodity prices, the total export may be less than import in 2023.
Household and government spending drives Indonesia’s GDP growth in Q2 2023
Indonesia’s economic growth in the second quarter accelerated unexpectedly to its highest rate in three quarters, shored up by strong domestic consumption demand and government spending, despite exports weakening amid falling commodity prices.
Due to high global commodities prices in the aftermath of the Russia-Ukraine war, Indonesia experienced quick export recovery from the effects of the COVID-19 pandemic, with shipments reaching a record high of $292 billion. However, the momentum is being gradually lost as prices for its top products, such as palm oil and coal, fell while global demand weakened. For example, by the end of H1 2023, average crude oil prices dropped to $70.64 per barrel, down by 33.21% YoY.
However, household consumption, which makes up over half of Indonesia’s GDP, expanded 5.23% on a yearly basis in Q2, registered the quickest pace since the Q3 2022.
The significant growth in domestic consumption is largely attributed to the spending for the Muslim fasting month and Eid al-Fitr festivities in late April and school holidays in June, according to the statistics bureau.
Turning away from the pandemic, retail sales got a boost and revitalization during the second quarter 2023. The average Consumer Confidence Index in Q2 increased significantly compared with 2022, rising from 123 to 128. According to Retail Survey, conducted by Indonesia Bank, in Q2 2023, the retail sector maintained relatively stable growth of 1.6% YoY on the back of slower contraction in retail sales of Automotive Fuel (-5.5% YoY), Spare parts and Accessories (-3.8% YoY) and Other Household Equipment (-6.1% YoY). At the same time, growth was witnessed in sales of Food, Beverage and Tobacco (up 4.6% YoY), and Clothing (up 13.2% YoY).
Meanwhile, in the Idul Fitri holiday, there are millions of people leaving their homes in the urban and suburban areas of the country to visit their places of origin for a few days. This typically gives rise to a great circulation of money from the urban areas to the suburban and rural areas.
Moreover, substantial growth was also in the government spending and country’s investments during this period, both more than doubling to 10.62% and 4.63%, respectively.
As of 2023 whole year, the Indonesian government had allocated around $25.6 billion for infrastructure, an increase of approximately $2 billion compared to the 2022 budget. During this quarter, the government expedited construction of roads and irrigation systems.
The realization of investment in the first semester of 2023 grew 16.1% YoY. Ministry of Investment reported that in the second quarter of 2023, investment realization reached $23 billion, an increase of 15.7% YoY and 15.7% compared to the previous quarter.
However, many analysts have forecasted that the second quarter data showed as a sign that economic activities had peaked and companies would likely pause investment decisions ahead of the elections, pointing to slower loan growth already shown in June. More favorable policies may need to be introduced in next semester to complete the annual investment goal of $90 billion.
Indonesia’s ambition in gas production sector
With Shell and Chevron exiting from two major gas exploration project, the Masela and Indonesia Deepwater Development (IDD) projects, Indonesia has introduced plans to revitalize its gas sector. It also set the goal to more than double its gas production to 12 billion cubic feet per day (bcfd) by 2030 in order to meet the increasing domestic consumption demand and reduce reliance on petroleum resources, despite climate and financial challenges.
These two projects, together estimated to cost $27 billion, are significant test cases for Indonesia to demonstrate its commitment in attracting investment in its oil and gas sector and turning a decade-long declining trend in gas output.
Located in the Makassar Strait off the island of Borneo, IDD owns nearly 3 trillion cubic feet of recoverable gas resources and the deepest offshore gas fields at water depths of up to 6,000 feet. The Masela gas project, located off the Tanimbar islands in Maluku, is expected to have production capacity of 9.5 million metric tons per annum at its peak.
However, these projects may face significant challenges in attracting investments. In the context of undersupply, to prioritize domestic gas consumption need, Indonesia now requires gas producers to sell 25% of their production domestically. At the same time, surging local demand has even led some government officials calling to halt gas exports entirely.
This export restriction surely deters foreign developers, weighing the limited profit room and the high costs of carbon capture and storage required to tackle global warming in new gas projects.
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. We are on a 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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