Weak economy casts shadow over Indonesia’s election season: World Bank

[JAKARTA] Indonesia’s economy is expected to grow by 4.9 per cent in 2024, a decrease from this year’s 5 per cent, due to a slowdown in trade and lower commodity prices, said the World Bank.

This tougher macroeconomic environment could be an important factor for voters heading to the polls as Indonesia holds its general election on Feb 14 next year.

In its latest Indonesia Economic Prospects report published on Wednesday (Dec 13), the World Bank warned of downside risks that could impede the momentum of growth for South-east Asia’s largest economy.

Global factors, especially concerns about high benchmark interest rates in the United States and the Middle East geopolitical crisis, are the main factors behind the economic volatility in Indonesia next year. “Private consumption will be the primary driver of growth, supported in 2024 by election-cycle spending,” said the report.

Indonesia has seen the value of its exports decline, with its current account deficit totalling US$900 million or 0.6 per cent of the country’s gross domestic product (GDP) in November.

The bank said that this was mainly due to the decline in commodity prices amid a slowing global economy. Indonesia is the world’s largest palm oil exporter and a major exporter of processed nickel, which is used to make electric vehicles.

Meanwhile, inflation is expected to decrease, with headline inflation projected to average 3.7 per cent in 2023 and 3.2 per cent in 2024, as commodity and gas prices moderate. The World Bank also noted that foreign direct investment has been a steady source of external financing over the past three years.

The investment opportunity in mature sectors such as basic infrastructure and real estate, however, may be past its prime, according to World Bank senior economist for Indonesia and Timor Leste Habib Rab.

Indonesia is actively seeking a substantial amount of funding to facilitate the transition away from coal-based power plants in an effort to achieve a net-zero emissions target by 2060. This effort faces challenges as international coal demand and prices have risen since the start of the war in Ukraine, while tightening global monetary policy affects the cost of financing the low-carbon energy transition.

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The World Bank suggested that Indonesia build on its progress by addressing the challenges associated with climate changes with fiscal, financial and trade policies. Fiscal policies can help raise revenues and disincentivise fossil fuel use. “Financial instruments like green bonds can mobilise finance for climate mitigation and adaptation,” said Rab.