Siwage Dharma Negara – Indonesia weathered significant challenges in 2024. The country maintained 5 per cent growth through presidential and regional elections, while economic headwinds from El Nino caused rising food prices, higher energy prices and weakening consumer demand.
Indonesia held its general elections in February, which brought President Prabowo Subianto into power, followed by an almost nine month-long transition to the new administration. It also held simultaneous regional head elections in November.
Things improved in the second half of the year as pressure on food and energy prices subsided and external factors became less volatile. The country ultimately experienced a smooth leadership transition from former president Joko Widodo's administration to Prabowo's.
But Prabowo's administration faces four key economic challenges that threaten Indonesia's 2025 growth targets. These include weakening consumer spending, slower export growth, rising fiscal pressures and slow progress on reforms.
First, Indonesia struggles with weak domestic consumption. Household spending, the traditional backbone of Indonesia's economy, declined in 2024 as incomes stagnated and the job market worsened. Government assistance like cash transfers and subsidies provide limited relief, particularly to middle and aspiring middle-class households. Despite headline inflation showing a declining trend, higher food prices caused many households to feel the pinch.
The government has implemented some policies to encourage job creation and wage increases in sectors like manufacturing to help consumers maintain their purchasing power. But given the stagnant growth outlook of around 5 per cent and weak aggregate demand, job expansion will be limited.
Second, the country is facing slow export growth, with weak global demand for key commodities like coal, nickel and crude palm oil putting Indonesia's exports under pressure. Increased tariffs imposed by the United States and China have also adversely impacted its manufacturing exports, with textiles and textile products struggling to remain competitive in the global market.
Indonesia's effort to diversify its exports through downstreaming has had a limited impact on overall export performance. Its focus on increasing the share of domestic value added in exports instead of the export potential of industries is costly and misguided. While the country has been trying to promote trade deals with Asia and Europe, it continues to apply numerous non-tariff measures in the form of export-import approvals, local content requirements and restrictions on port of entry, imposing a significant burden on Indonesian exporters.
Various requirements were enacted to encourage investment in local production facilities, including smartphones, medical equipment and solar panels. Yet these policies hampered export competitiveness of export that require the use of high-quality inputs imported at international market prices.
Third, the new government contends with a tight fiscal space. The government's budget came under strain in the first half of 2024, with spending on subsidies and social programs pushing the deficit to 2.7 per cent of GDP. Public debt reached almost 40 per cent of GDP, excluding the government's contingent liabilities in state-owned enterprises. Concerningly, the public's debt service burden increased from 25 per cent of total tax revenue in 2015 to about 47.5 per cent in 2022, exceeding the International Monetary Fund's 35 per cent threshold.
These constraints, combined with higher global interest rates for borrowing, have forced Prabowo's government to prioritise its spending. Several infrastructure projects, like Jokowi's toll roads, were halted to finance big-ticket programs, including the free meal program and food estates. Prabowo also urged ministers to minimise unnecessary spending on overseas travel and ceremonial events.
On the revenue side, the government faces tough challenges in increasing tax compliance. Beginning in January 2025, a new initiative to use digitalisation to improve tax compliance will require an integrated, user-friendly and secure system. And plans to increase the value-added tax from 11 to 12 per cent for all goods and services was cancelled last minute due to public opposition. This led to a scaled back proposal targeting only luxury items, including private jets, luxury cars and properties priced at Rp 30 billion (US$1.85 million) or higher.
Finally, progress on reforms to improve the investment climate remains uneven. The Jokowi administration passed the Job Creation Law, aiming to streamline licensing processes and ease hiring and firing procedures for employers. But fresh uncertainty for investors arose in October 2024 after the Constitutional Court decided that the government must create a new, separate labour law. Inconsistent regulations will likely continue to hinder investors.
While energy security is high on the agenda, Prabowo's ambitious goals of phasing out coal and fossil fuels within 15 years lack clear implementation plans despite international funding commitments. Initiatives like the Just Energy Transition Partnership's US$21.6 billion pledge have not shown much progress in terms of new clean energy projects or the early retirement of coal-fired power plants. The high costs of the energy transition and limited infrastructure are not the only factors slowing things down, with a lack of political commitment to improving regulations and investment in the clean energy sector persisting.
As Indonesia enters 2025, it finds itself at a crossroads. The country must find the right policies to tackle its domestic structural challenges to achieve higher growth and position itself as a key player in the global economy. Indonesia's entry into BRICS presents opportunities and risks for national development. Growing dependence on Chinese trade, investment and technology should be anticipated and addressed by reforming trade and industrial policies as well as institutional governance. With its current high approval rating, the Prabowo – Gibran government should have the necessary political capital to implement these critical reforms.
[Siwage Dharma Negara is Co-Coordinator for the Indonesia Studies Programme and Coordinator for the Singapore APEC Study Centre at the ISEAS-Yusof Ishak Institute.]
Source: https://eastasiaforum.org/2025/01/31/prabowo-inherits-the-unfinished-business-of-jokowinomics