In 2023, Indonesia successfully held the ASEAN chairmanship and hosted the FIFA U-17 World Cup, the first FIFA tournament held in Southeast Asia. Indonesia also launched its first high-speed railway ‘Whoosh’ connecting Jakarta and Bandung, with a planned extension to Surabaya.
These highlights add to the popularity of Indonesian President Joko ‘Jokowi’ Widodo as his term approaches its end in 2024. Jokowi has shown that he is no longer just a ‘petugas partai’ (party officer), a term used by the Indonesian Democratic Party of Struggle (PDI-P) Chair Megawati Sukarnoputri to emphasise that the president should remain loyal to the party.
Jokowi has diverged from PDI-P’s stance by supporting Prabowo Subianto instead of Ganjar Pranowo in the 2024 general elections. Subianto has picked Gibran Rakabuming Raka — Jokowi’s son — as his running mate. Critics have stated Jokowi has started to build a political dynasty. But the more serious accusation is his manoeuvre to use state institutions to his advantage — like when he used the Constitutional Court to change the age limit of vice presidential candidates to accommodate Gibran’s candidacy. Interestingly, a nationwide survey in December 2023 showed that almost 40 per cent of Indonesians support Prabowo–Gibran, an increase of more than 8 per cent from August 2023.
Jokowi’s continued public support, is arguably due to his administration’s success in managing the economy, especially in controlling inflation and providing welfare to disadvantaged groups.
Like other nations, Indonesia is striving to revive its economy from the impacts of the COVID-19 pandemic. The Jokowi government has been trying to stimulate economic growth through massive infrastructure projects, investment incentives and other policy measures.
The global economic situation in 2023 deteriorated due to slower growth in major economies, including China. As a result, Indonesia’s exports and investments have slowed down.
In 2023, foreign direct investment (FDI) remained relatively muted, despite the passing of the Omnibus Law to streamline the investment process. Several factors contributed to the anaemic FDI flow, including the global economic situation, geopolitical tensions and the upcoming general elections.
Most investments in Indonesia come from domestic sources, including the government’s spending on various infrastructure projects and the new Capital City of Nusantara. Jokowi wants to ensure that basic infrastructure will be ready in 2024 when he plans to celebrate Indonesia’s anniversary in Nusantara. Nevertheless, private investors (both domestic and foreign) will likely hold off on committing new funding until the next government is confirmed.
While spending on infrastructure is needed to support growth, the government must implement a robust cost-benefit analysis before implementing any infrastructure projects. Arguably, state-owned enterprises (SOEs) have played a critical role in the success of Jokowi’s infrastructure completion, thus contributing to the President’s popularity. This reliance on SOEs has expedited projects’ implementation. Yet it has caused large financial debts for the SOEs, requiring capital injections from the state budget.
Going forward, reducing the large financial burden of state-owned companies and increasing private involvement in infrastructure projects may benefit the economy in the long run. Few private sector firms are interested in infrastructure projects due to unclear regulations, land acquisition difficulties and their lack of bankability. The government should develop innovative instruments to reduce the barriers to private sector involvement.
Healthy domestic consumption is reflected by continued growth in the digital economy, particularly in the e-commerce sector. The COVID-19 pandemic has accelerated the adoption of digital technologies and online commerce. Consumer preference for online shopping remains persistent after the COVID-19 pandemic. Finance Minister Sri Mulyani stated that in 2023 Indonesia’s digital economy would surge to US$82 billion, marking an 8 per cent increase from 2022. Mulyani noted that online commerce would continue to be the primary catalyst for digital sector expansion. Nonetheless, this growth prospect may need to be tempered as there has been significant consolidation among online commerce companies, with considerable layoffs. Investors have been demanding profits and positive cashflow instead of market share.
El Nino conditions disrupted food production, driving up food inflation, especially rice prices. The government responded with price stabilisation policies and social assistance to protect the purchasing power of the poor and vulnerable. Social assistance policies included an additional 2.7 trillion Indonesian rupiah (US$173.2 million) in food assistance and 7.5 trillion rupiah (US$481.5 million) in direct cash assistance to poor households.
On the monetary side, Bank Indonesia increased its policy interest rate to 6 per cent to defend the domestic currency and maintain price stability. Interest rates, together with other fiscal policy tools, were used to support small businesses. The government spent 177.5 trillion rupiah (US$11.4 billion) on People’s Business Credit, a subsidy program to support small-scale entrepreneurs, like street food vendors, amid rising interest rates.
Despite losing at the World Trade Organization, Indonesia will continue its downstreaming program through the export ban policy. After banning nickel ore exports in 2020, the government extended the ban to bauxite in mid-2023. The plan is to extend the policy to other strategic minerals, including copper and tin.
This resource nationalism strategy is politically popular, with all three presidential candidates agreeing to continue this policy. Presidential candidate Anies Baswedan promised to ‘recalibrate’ the scheme if elected. But Indonesia needs a more innovative and flexible plan to promote its industrial competitiveness beyond just banning exports. The government must consider moving away from a blunt nickel export ban to a more flexible scheme, like the domestic market obligation applied to coal and palm oil. The country should also anticipate technological shifts that may affect its comparative advantage in minerals like nickel and bauxite.
It is critical to continue reforming state institutions — especially those which form the legal and judiciary systems — to improve their capacity, governance and independence from political interference. Fiscal reform is necessary to improve Indonesia’s budgetary ability to tackle global financial pressures, higher inflation and the economic impacts of climate change. In the lead-up to the 2024 general election, the government must maintain security and political stability, which is critical for maintaining a stable macroeconomic foundation for Indonesia’s growth.
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.
This article is part of an EAF special feature series on 2023 in review and the year ahead.
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