Indonesia Economic Update Report

Quarter 4, 2023

In this issue:

Indonesia’s Q4 2023 GDP Growth Reached 5.04% (YoY), Slightly Above the Government’s Projection
Trade Performance
The Development of Downstream Industry in Indonesia
Indonesia Election Year in 2024

Indonesia’s Q4 2023 GDP Growth Reached 5.04% (YoY), Slightly Above the Government’s Projection

Indonesia’s economic growth in the last quarter of 2024 was 5.04% (YoY), which was slightly above the projection of 5%. This growth outpaced the 4.94% growth seen in the third quarter, despite the persistence of several concerning trends.

Factors impacting economic performance include: 1) sluggish household consumption, declining from 5.06% (YoY) in Q3 2023 to 4.47% (YoY) in Q4 2023 due to weakened purchasing power and limited consumption growth amidst increased social and political spending before the General Election; 2) decelerating investment, dropping from 5.77% (YoY) in Q3 2023 to 5.02% (YoY) in Q4 2023, with slowdown observed in machinery, equipment, and motor vehicle investment, while building and infrastructure investment remained stable supported by government expenditure; and 3) slowing export-import performance, as the net contribution of exports to GDP growth decreased from 0.5 ppt in Q3 2023 to 0.4 ppt in Q4 2023, reflecting a higher increase in imports amid global economic slowdown and weak commodity prices.

Additionally, the processing industry sector’s growth slowed to 4.07% (YoY) in Q4 2023 from 5.20% (YoY) in Q3 2023 due to weakening global demand for industrial export products. The highest growth experienced by transportation and warehousing grew by 10.33 % (YoY) and other services grew by 10.15% (YoY). This is driven by an increase in users of passenger transportation services, an increase in the volume of export-import goods deliveries, an increase in tourist visits, and a series of preparations for the 2024 General Election. Other sectors also experienced notable growth, such as the electricity and gas at 8.68% (YoY), the construction sector with growth of 7.68% (YoY) in Q4 2023, followed by the mining sector at 7.46% (YoY).

During the last quarter of 2023, Indonesia’s domestic economic indicators showed resilience, including stable Manufacturing Purchasing Managers Index (PMI) expansion, high growth in electricity consumption, sustained consumer confidence and actual sales indexes. Economic growth projection remained at 5%, while unemployment decreased to 5.32% and poverty reached 9.36%. Overall, Indonesia’s annual economic growth was 5.05% (YoY), lower than 2022’s 5.31%, yet respectable given global economic challenges such as China-led slowdown, US Federal Reserve interest rate uncertainty, declining commodity prices, and conflicts in the Middle East.

The main contributor to this growth was the increased household consumption and investment. Household consumption, which is the largest component of Indonesia’s gross domestic product (GDP), grew by 4.82% (YoY) in 2023. The increase in the minimum wage and government social assistance are the primary factors for the increased household consumption.

Government spending increased by 4.40% (YoY), driven by infrastructure development programs. Greenfield and brownfield investment surged by 16.20% (YoY) to $23.42 billion, led by local players with a growth rate of 29.90%, while foreign investment remained stable at 5.32%. Key sectors attracting investment included basic metals, metal goods, mining, transportation, warehousing, telecommunications, housing, industrial and office areas, chemistry, and pharmacy. Indonesia’s political and economic stability, coupled with its vast market potential, continue to attract investors.

The government’s effective management ensured stable economic growth, evident in stable macroeconomic indicators such as inflation, the exchange rate of the Indonesian rupiah, and foreign exchange reserves. These factors are essential for maintaining purchasing power, enhancing export competitiveness, and supporting Indonesia’s economic and financial stability.

Bank Indonesia (BI) forecasts the national economy to grow between 4.7% and 5.5%, consistent with the projections of the IMF and World Bank at 5% and 4.9%, respectively. This growth is anticipated to be driven by robust domestic demand and sustained consumption growth, including the positive influence of upcoming elections. Increased investment, particularly in infrastructure like the ongoing development of National Strategic Projects such as the Nusantara Capital City, is also expected to contribute to economic expansion.

Trade Performance

Graph showing Indonesia export, import, and trade balance (2022 - 2023)

Since May 2020, Indonesia has maintained a positive trade balance trend. In late 2023, it recorded a surplus of $10.19 billion, marking a significant 16.81% decline compared to the same period in 2022. This decline in surplus was primarily attributed to external factors such as decreased world demand, fluctuations in exchange rates, and geopolitical tensions in Russia and the Middle East, compounded by a “wait and see” approach from trading partners awaiting the General Election outcome.

Despite this, non-oil and gas exports, particularly natural resource-based commodities like Crude Palm Oil (CPO), coal, precious metals, and tin, alongside machinery and electrical equipment manufacturing products, continued to perform well, with China, the United States, and India remaining key export destinations for Indonesia.

Throughout 2023, Indonesia’s export value was recorded at $258.82 billion, slightly below the export achievement in 2022 of $291.90 billion. Indonesia’s exports were still concentrated in China with a share of 25.66%, the United States with 9.57%, and India with 8.35%. Meanwhile, Indonesian exports to ASEAN and the European Union had a share of 18.35% and 6.78% of Indonesia’s total exports in 2023.

Indonesia’s imports in 2023 amounted to $221.89 billion, marking a 6.55% decrease compared to 2022. The slowdown was primarily driven by a decrease in imports of electrical machinery or equipment and their parts, while imports of mechanical machinery and equipment and their parts saw an increase in exports.

The Development of Downstream Industry in Indonesia

The export ban on nickel ores, coupled with the growth of the nickel downstream industry, has been pivotal in driving Indonesia's manufacturing development and economic progress.

Within a year of the ban, the country attracted approximately $30 billion in downstream investments from Chinese companies, a substantial increase from the $5.4 billion export value of nickel ore and its derivatives in 2013. By 2022, this figure rose to $35.6 billion, with 43 operational nickel smelters and over 40 more either under construction or in planning stages as of July 2023.

This policy has not only spurred economic growth but also facilitated development in underprivileged regions like Central Sulawesi and North Maluku, which have emerged as key hubs for the nickel downstream industry. Economic growth rates in these areas have nearly doubled, with Central Sulawesi seeing an increase from 7.5% to 11.7% between 2001-2014 and 2015-2022, and North Maluku rising from 5.7% to 11.9% over the same periods. This growth has significantly reduced unemployment rates in both provinces.

Furthermore, the policy’s implementation has led to multiplier effects, including increased value addition to domestic raw materials, heightened foreign investment, substantial foreign exchange earnings from exports, and expanded employment opportunities.

In 2010, Indonesia initiated downstream industry development across agro-based, mineral mining-based, and oil and gas sectors. This policy gained global attention, especially in the nickel sector due to high demand for EV batteries. Malaysia has since adopted a similar approach for inorganic chemicals, while the Philippines is considering it.

Timeline of Indonesia's downstream policies

The downstream industry has brought numerous benefits to various sectors. In 2010, Crude Palm Oil (CPO) processing plant capacity was at 25 million tons. Thanks to consistent downstream policies, by 2022, the capacity increased to 75 million tons. Biodiesel, oleofood, and oleochemical industries also saw significant growth, with installed capacities reaching 17.5 million tons/year, 2.7 million tons/year, and 11.6 million tons/year respectively. This industry employs 5.2 million workers and supports over 21 million people.

To further advance these industries, the government is planning to increase the value of minerals in Indonesia. This includes prioritizing local raw material purchases, refining and processing facility management, and implementing supportive fiscal and non-fiscal policies.

The government has outlined a downstream industry roadmap until 2040, covering 21 commodities such as coal, nickel, tin, copper, and others. However, the roadmap’s success hinges on an investment of up to $545.3 billion by 2040.

Table showing downstream investment targets

To reach its goals of escaping the middle-income trap by 2038 and becoming a top 10 economy by 2045, the country must prioritize industrialization and downstream industries. Government action is crucial, including providing tax incentives, credit facilities, and financial support for downstream ventures. Implementing ESG-related investment regulations will attract green investments, enhancing the country’s position in the global value chain.

Indonesia Election Year in 2024

This year can be considered a crucial year for the country to decide on its leader for the coming five years. In the region’s largest democratic country, 204.8 million eligible voters geared up for a crucial election.

Many people in business sectors considered that the 2024 election will be a crucial moment for Indonesia to become a developed country by 2045. They believe that the right leader is very important to encourage faster economic growth. Similar to the previous election years, businesses and investors are usually holding their “wait and see” stance before the election and this position is slightly affecting the businesses and market. The chairman of the National Bank Association (Perbanas), Kartika Wirjoatmodjo, assessed that the 2024 General Election could affect the risk appetite of investors and business actors because some will tend to wait and see while waiting for the election results. The certainty regarding the results of political contestation will determine the changes it causes, such as changes in policies and regulations of the elected government. The current global economic and geopolitical dynamics require strong leadership to navigate the complex situation at present.

Unlike previous election years, several businesses of Small and Medium Enterprises, such as the printing, media, transportation, logistics, food and beverage, and textile garment businesses, didn’t experience any surge in their orders. A new trend of online campaigns occurred during this year’s election as election participants preferred to allocate their funds to utilize social media/buzzers/influencers for campaigns. The majority of voters in this year’s election came from people aged under 40 as it represents 52% of the whole votes.

As the presidential election concluded in February 14th, the presidential candidates, Prabowo Subianto – Gibran Rakabumi Raka (02), led the vote with 58.91% compared to the other two presidential candidates with voting percentages of 24.08% and 17.01% respectively. A few dissatisfactions arose at the back of this year’s election; however, a smooth transition is anticipated for the region’s largest democratic country.

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.

If you are interested in exploring how we can support your business in Indonesia, reach out through our contact page, or leave your email below for a representative to contact you directly: