Indonesia's Q3 2023 GDP Growth Slows to 4.94% YoY, Slightly Below Expectations

Indonesia's economic growth decelerated to 4.94% YoY in Q3 2023, a dip from the 5.17% growth seen in the previous quarter. This slowdown is attributed to subdued household consumption, a decrease in exports, and reduced government expenditure. Achieving the government's revised full-year growth target of 5.1% appears challenging, with a 5% growth rate now seeming more realistic.

Indonesia’s GDP grew by 4.94% (YoY) in Q3 2023, falling short of the expected 5.0%. This slowdown from Q2’s 5.17% growth marks the lowest quarter growth since Q3 2021. Quarter-on-quarter growth also moderated to 1.6%, just below the forecasted 1.7%. Contributing factors include decreased household spending, falling export levels due to declining commodity prices, and reduced government spending.

Household consumption saw a softened growth in Q3 2023 at 5.06% YoY, compared to the 5.22% YoY growth in Q2 2023. As household spending accounts for over half of Indonesia’s GDP, this slowdown significantly impacted the overall economic growth. Despite general inflation remaining within the targeted 2-4% range, specific sectors, notably food, have seen price increases. Food inflation, particularly from a 13.8% YoY rise in rice prices, is attributed to higher global prices and the impact of the El Niño weather phenomenon on regional rice production. Consequently, consumer spending has become more rationalized, prioritizing essential needs and seeking value-for-money products

In addition to slow growth in GDP, Government consumption in Q3 2023 contracted by 3.76% YoY, a stark contrast to the 10.57% growth in the same quarter 2022. The government’s focus on health, social protection, and infrastructure aims to maintain fiscal sustainability, with a target to keep the budget deficit below 3% of GDP in 2023. The finance minister anticipates a 2.3% budget deficit relative to GDP for the full year of 2023.

While household spending and government consumption have softened, the investment sector and production industries have shown resilience. Gross Fixed Capital Formation (GFCF), indicating investment growth,  increased by 5.77% YoY in Q3 2023. This growth, driven by construction, vehicle purchases, and capital goods investment, surpasses the 4.63% growth in Q3 2022.

Graphs showing Weights of GDP per Production Industry in Q3 2023
Chart showing YoY Growth Q3 2023 vs. Q3 2022 per Production Industry

­­­­The manufacturing industry, as the largest contributor to Indonesia’s GDP, expanded by 5.20% YoY in Q3 2023. This growth was fueled by increased domestic demand for metal goods, computers, electronic products, optics, and electrical equipment, which saw a notable 13.68% YoY growth. The mining industry, buoyed by global demand for nickel and other critical minerals for the energy transition, especially from the electric vehicle (EV) industry, also outperformed expectations with a 6.95% growth in Q3 2023. Additionally, the communication and construction industries grew by 8.52% and 6.39% YoY, respectively.

Generally, achieving the government’s full-year growth expectation of 5.1%, revised down from the previous 5.3%, appears increasingly challenging, with market consensus leaning towards a more realistic 5% growth rate. Indonesia’s economic growth is expected to rebound , driven by end-of-year holiday spending. As the February 2024 elections approach, shifts in government spending patterns are anticipated, with increased fiscal disbursements and election-related spending, including social assistance to mitigate El Niño impacts and VAT discounts on new real estate purchases in 2024. These developments occur amidst a challenging global economic environment and softening consumer sentiment.

Trade Surplus Emerges Despite Export and Import Declines in Q3 2023 Amid Global Challenges

The third quarter of 2023 witnessed a downturn in Indonesia's trading activities, with both exports and imports experiencing significant declines.

Exports saw a contraction of 4.26% YoY in Q3 2023, a steeper drop than the 2.97% decrease in Q3 2022. This downturn, the most severe since Q4 2020, was driven by several factors: diminished global demand, ongoing trade tensions, a slow recovery from China (Indonesia’s primary trade partner), and falling prices for major export commodities such as coal, iron, steel, and crude palm oil.

Similarly, imports decreased by 6.18% YoY in Q3 2023, compared to a 3.80% decline in Q3 2022. This reduction is in line with a cooling in domestic demand. Despite these setbacks, the decline in imports contributed to a net trade surplus, providing a slight boost to Indonesia’s total GDP growth. However, the overall performance of trading activities remains subdued, reflecting the challenging global economic landscape.

Graphs showing Indonesia trade Q3, 2023

October 2023 Interest Rate Hike by Bank of Indonesia Targets Global Pressures and Inflation Control

Indonesian currency

In a surprising development in late October 2023, the Bank of Indonesia raised its interest rates by 25 basis points to 6%, representing the first hike since January 2023.

This decision was primarily influenced by the need to stabilize the Indonesian Rupiah amidst the tightening US monetary policy and escalating geopolitical tensions in the Middle East. This rate hike is part of a strategic approach to control rising import costs and to keep headline inflation within the targeted 2% to 4% range. As of September 2023, inflation was recorded at 2.56%, slightly up from 2.28% in August 2023.

Graph showing Indonesia's inflation, exchange and interest rates 2022-23

Navigating the balance between a weakening Rupiah and higher interest rates poses a significant challenge. The Bank of Indonesia’s proactive measures underscore its dedication to maintaining economic stability in the face of external pressures. With a trade surplus of $3.4 billion in September 2023, the improved external balance is expected to play a role in stabilizing the IDR. The Bank of Indonesia is projected to hold steady on interest rates until late November, utilizing the favorable trade surplus to manage currency fluctuations effectively.

Looking ahead, the second half of 2024 is expected to see the Bank of Indonesia beginning to ease its monetary policy. This shift aims to boost domestic demand, contributing to the overall stimulation of Indonesia’s economy.

Indonesia Emerges as a Prominent Force in the Global EV Market Amid Economic Headwinds

Despite facing an economic slowdown in the third quarter of 2023, Indonesia’s resilience is evident in its booming Electric Vehicle (EV) industry, which is rapidly becoming a significant aspect of its economy. Capitalizing on its status as the holder of the world’s largest nickel reserves, which account for 25% of global supplies, Indonesia is ambitiously positioning itself as a major player in the global EV market.

Since 2021, Indonesia has been on an upward trajectory in the EV sector, targeting the production of 300,000 four-wheelers and 1.2 million two-wheelers by 2025. The government has introduced substantial incentives to stimulate demand, reduce adoption barriers, and attract foreign investment. These include a subsidy exceeding $5,000 for locally manufactured electric vehicles, announced in December 2022. Further measures, such as a $500 incentive for e-motorcycles, a 10% VAT reduction for EV cars and buses, and the abolition of tax on battery electric vehicles from May 2023, have been implemented. These incentives apply universally to all EV manufacturers, including foreign entities, provided they have production facilities in Indonesia. Consequently, EV sales hit 45,000 in the first nine months of 2023, accounting for 7.8% of total vehicle sales. The introduction of hybrid models has further boosted EV market penetration to 5.9% of total vehicle sales by the end of September 2023, with hybrid models alone contributing 17,500 units in Q3 2023, half of the nine-month total.

Soldering in an Electronics factory

A noteworthy player in this dynamic landscape is BYD, a major Chinese automaker and one of the world’s leading producers of EVs and batteries. BYD is in final negotiations to invest in nickel mining, establish a battery factory, and set up EV assembly plants in Indonesia, following a memorandum with the government. Another example, Hyundai, is constructing its first EV plant in Indonesia with an annual capacity of 250,000 units.

Additionally, Tesla is close to finalizing a deal to establish an EV factory in Indonesia, aligning with the country’s vision for a comprehensive end-to-end electric-vehicle supply chain. VinFast, a Singaporean Vietnamese EV maker, plans a $200 million investment in a local assembly plant aiming to produce 30,000 to 50,000 cars annually from 2026. This is part of VinFast’s broader $1.2 billion strategy, drawn by Indonesia’s cost-effectiveness and raw material abundance, highlighting the country’s growing prominence in the global EV

Beyond witnessing robust sales and strong EV penetration, Indonesia is also attracting significant Foreign Direct Investment (FDI) in its EV sector, particularly for developing an integrated EV supply chain. The government envisions attracting $30 billion in investments into its EV battery ecosystem by 2026. This involves capitalizing on its natural resources, such as nickel processing, and includes incentives like tariff reductions for imported EV production machinery and materials, restrictions on raw nickel ore exports to promote domestic processing, tax allowances, and facilitation for land rights and licenses for nickel processing plants. These initiatives align with Indonesia’s strategy to become a global hub for battery production.

For example, BASF, a German chemical company, in partnership with Eramet, a French mining company, and PT Antam, an Indonesian state-owned miner, is building a High-Pressure Acid Leach (HPAL) plant in Weda Bay, Halmahera, expected to start production in 2023. This plant aims for an annual output of 42,000 tons of nickel and 5,000 tons of cobalt, supporting BASF and Eramet’s battery material business in Europe. Additionally, Hyundai Motor Group and LG Energy Solution’s $1.1 billion investment is creating HLI Green Power, a joint venture for a battery cell manufacturing plant in Karawang, Indonesia. This plant, operational by April 2024, will have a 10-gigawatt-hour capacity.

Through strategic initiatives and global partnerships, Indonesia is solidifying its role in the evolving EV landscape, marking its emergence as a key player in the era of electrified transportation.

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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