OECD Economic Outlook – June 2022: Indonesia

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Indonesia GDP growth is projected to strengthen to 4.7% in 2022 and 2023, as the improving health situation underpins the rebound of domestic demand, exports of raw materials increase and tourism slowly restarts. The rise in inflation, however, is already damping consumers’ purchasing power and demand for durable goods. The output gap will remain considerable, limiting at least initially the pass-through of higher global commodity prices to consumer prices. However, the current account deficit will rise.

The government plans to reduce the budget deficit progressively in order to comply with the 3% of GDP constitutional ceiling by 2024. The normalisation of monetary policy will be gradual and geared towards currency stability. Following the enactment of major investment and tax administration reforms, it is important to complete the process with coherent implementation measures. Geopolitical tensions highlight the urgency of improving energy security through investment in renewables and higher energy efficiency.

The recovery is taking hold Mobility restrictions introduced to contain successive waves of COVID-19 infections have been largely lifted, although a shortage of vaccines, logistical challenges and vaccine hesitancy are still impeding quasi-universal coverage. Real GDP grew by 3.7% in 2021 and accelerated to 5% (year-on-year) in the first quarter of 2022: nonetheless output remains well below the path expected before the pandemic.

Household consumption, corporate investment, and net exports each accounted for a third of 2021 growth.

Sentiment indicators, such as the Mandiri Spending Index and the manufacturing PMI, suggest the rebound is taking hold, and the April stock market debut for Indonesia’s biggest start-up bucked a global decline in technology stocks. The pass-through of higher global prices into consumer prices was initially limited, although headline inflation has accelerated this year and core inflation has reached a level last seen at end-2017. Transport services and food and beverages are the fastest-growing CPI items. The unemployment rate declined in 2021, but almost half of household primary breadwinners report earning less than before COVID-19. Sales of consumer durables such as scooters have slowed in the first quarter of 2022.

Indonesia 1 Domestic demand is recovering

Commodity prices are rising Composite price indicator¹ Index Jan 2021 = 100 260

Index 2015 = 100 140

130

220

120

180

110

140

100

100

90

2015

2017

2019

2021

2023

0

0 Jan 21

Apr 21

Jul 21

Oct 21

Jan 22

Apr 22

60

1. The price indices for individual commodities (palm oil, coal, iron ore and gold) are aggregated by using weights based on the share of each commodity in the total 2020 exports of these commodities.

Source: OECD Economic Outlook 111 database; Ministry of Energy and Mineral Resources; and World Bank Commodity Markets Outlook.

StatLink 2 https://stat.link/ioz8n1 OECD ECONOMIC OUTLOOK, VOLUME 2022 ISSUE 1: PRELIMINARY VERSION © OECD 2022

150 

Indonesia: Demand, output and prices 2018

2019

GDP at market prices Private consumption Government consumption Gross fixed capital formation

2021

2022

2023

Percentage changes, volume (2010 prices)

Current prices IDR trillion

Indonesia

2020

14 838.8 8 455.1 1 338.6 4 791.2

5.0 5.2 3.3 4.5

-2.1 -2.7 2.0 -5.0

3.7 2.0 4.2 3.8

4.7 5.3 -6.3 3.8

4.7 4.4 1.4 4.9

Final domestic demand Stockbuilding¹

14 585.0 412.4

4.8 -1.0

-3.1 -0.5

2.8 0.1

3.8 0.2

4.3 0.0

Total domestic demand Exports of goods and services Imports of goods and services Net exports¹

14 997.4 3 116.5 3 275.1 - 158.6

3.6 -0.5 -7.1 1.4

-3.6 -8.1 -16.7 1.4

2.8 24.0 23.3 1.0

3.9 13.1 11.0 1.0

4.3 9.5 8.7 0.6

_ _ _ _ _

1.6 3.0 3.2 -1.7

-0.4 1.9 1.9 -5.4

6.0 1.6 1.7 -5.8

6.1 3.8 4.2 -4.4

3.1 3.8 4.5 -3.4

-2.7

-0.4

0.3

-0.6

-0.9

Memorandum items GDP deflator Consumer price index Private consumption deflator General government financial balance (% of GDP) Current account balance (% of GDP) 1. Contributions to changes in real GDP, actual amount in the first column.

Source: OECD Economic Outlook 111 database.

StatLink 2 https://stat.link/fd3qln

Indonesia imports a considerable share of its energy needs and is also far from self-sufficient in selected food staples such as wheat (a quarter of domestic needs is sourced from Ukraine). This is making the country vulnerable to war-related supply disruptions and weighting on households’ purchasing power.

Russian visitors also accounted for a considerable share of foreign tourists. On the other hand, Indonesia is among the largest global suppliers of commodities such as palm oil, thermal coal, nickel, gold and ferroalloys that have recorded considerable global price surges since mid-February.

Indonesia 2 Tax revenues are growing IDR, trillions 2500

Headline inflation is rising again

General government tax revenues

Y-o-y % changes 7.5

2200

6.0

1900

4.5

1600

3.0

1300

1.5

1000

2015 2016 2017 2018 2019 2020 2021 2022 2023

0

0

2015

2017

2019

2021

0.0

Source: OECD Main Economic Indicators database; and IMF World Economic Outlook, April 2022.

StatLink 2 https://stat.link/s8euc4

OECD ECONOMIC OUTLOOK, VOLUME 2022 ISSUE 1: PRELIMINARY VERSION © OECD 2022

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Policy normalisation will reflect global developments Fiscal and monetary policies have supported activity through the COVID-19 crisis and are now set to normalise gradually in parallel with the recovery. Bank Indonesia is projected to bring the policy rate to 4½ per cent by late 2022, thus moving from an accommodative towards a neutral stance before accelerating inflation expectations take root. The financial system is in better shape than during previous episodes of global turbulence and uncertainty: sovereign and corporate exposure to external financing is now relatively small, the current account deficit is low and manageable, the rupiah’s fluctuation has been relatively mild and international reserves are ample. Indonesia has resorted to export bans on commodities for which it ranks among the world’s largest producers, palm oil in particular. This approach should be very limited in time and coverage, as the potential short-term benefits (securing supply in the domestic market and limiting price increases) are likely to be offset by the proven medium-term costs of distortions. These include lower hard currency earnings, currency depreciation and therefore higher import costs, damage to reputation in global markets, and disincentives to farmers.

The 2021 fiscal performance was driven by improved tax revenue collection, supported by high commodity prices and tax reforms. In this context, there is space to protect the purchasing power of the most vulnerable groups through direct income support without jeopardising fiscal consolidation plans. Spending performance also improved, focusing mainly on healthcare and social programmes. The carbon tax, initially planned for April 2022 and postponed to July, includes a floor rate of IDR 30 000 (EUR 1.9) per tonne that will initially apply to coal power plants. This would be an important step to containing greenhouse gas emissions, which are currently the highest relative to GDP among G20 countries after accounting for land use.

Growth is set to return to its medium-term trend Real GDP growth for 2022 and 2023 is projected to be 4.7%. Forces driving the return to the growth pattern that prevailed before the pandemic include a release of pent-up demand for consumer goods and personal services, a cash transfer programme for cooking oil, job creation, new investments made possible by recent reforms and trade agreements, the return of foreign tourism and strong, albeit decelerating, world demand for Indonesian raw materials. Annual headline inflation will be close to the 4% ceiling during 2022 and 2023. The current account is projected to record a modest deficit.

The forecast is subject to both idiosyncratic risks weighing on investors’ confidence, such as continuing uncertainty surrounding the date of the next presidential elections, and a broad-based deterioration of financial conditions in emerging markets. Enduring increases in global energy and food prices would pose additional risks, including for public finances due to the large size of subsidies, as well as to food security and livelihoods. On the upside, the benefits of the 2020-21 reforms of labour markets and tax administration will be felt through a better business and investment climate, increased employment, and improved private physical and human capital.

OECD ECONOMIC OUTLOOK, VOLUME 2022 ISSUE 1: PRELIMINARY VERSION © OECD 2022

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Structural reforms can steer Indonesia towards energy security Through Vision 2045, the government has set the goal of making Indonesia one of the world’s five largest economies by the time of the 100th anniversary of independence. Achieving this ambition must be consistent with the target of reducing emissions by 29% with its own efforts, and 41% with international support, by 2030. The 2014 National Energy Plan targeted a 2025 energy mix where oil and coal account for 55% (against 72% in 2019), gas for 22% (19%), and new and renewable energy for 23% (9%). The government is working to cut subsidies that encourage the use of coal. Indonesia has an abundance of renewable energy resources, but complex procurement and project implementation inhibit greater uptake.

To attract the necessary investment, the reliability of official energy data should be enhanced, the regulatory review process strengthened to ensure regulatory consistency, and policies that have made fossil fuels more financially attractive than less emission-intensive energy sources withdrawn. Fiscal and non-fiscal incentives should be considered to accelerate the shift to electric vehicles and the necessary infrastructure should be expanded.

OECD ECONOMIC OUTLOOK, VOLUME 2022 ISSUE 1: PRELIMINARY VERSION © OECD 2022