Eco Emerging

Indonesia : New President Prabowo inherits a strong economy

05/03/2024
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Subianto Prabowo will become the new President of Indonesia on 20 October. He will inherit a strong economy with robust and stable growth (5.1% on average over the last ten years, excluding the COVID-19 period), a low fiscal deficit, moderate public debt and sound external accounts. However, there are major challenges ahead for the new President. In the next decade, the country’s demographic dividend will begin to fade. He will need to adopt reforms more quickly in order to get significantly more young people and women into employment and attract more foreign direct investment. Without this, Indonesia will become an “old” country before it becomes a "high income" country.


A new President that follows the same path as the previous one

FORECASTS

Subianto Prabowo, who had already been a presidential candidate in 2014 and 2019, won the presidential elections in February in the first round.

The future government is expected to follow a similar foreign policy to Joko Widodo's government. However, future President Prabowo is seemingly more ambitious for his country, both economically and politically on the international stage. The former general, who made a point of putting “national security” at the forefront of his campaign, is expected to continue his defence spending commitments from his time as Minister of Defence. He is also possibly expected to be more receptive to the United States' security interests in the region, as the United States and Europe are its main arms suppliers.

At the same time, the future President is aspiring to make his country a key economic player in Asia. In order do this, he will look to attract investments from China (its biggest investor behind Singapore) and penetrate this market. However, this “multi-alignment” could be difficult to sustain should there be stand-offs in the South China Sea, as Indonesia's economic and nationalist objectives would then run counter to each other.

A strong economy

INDONESIA: REAL GDP GROWTH IS ROBUST EXCLUDING DURING THE COVID

The government, which will officially take office next autumn, will inherit a strong economy.

Since 2014, apart from the years of the COVID-19 pandemic, economic growth has remained robust and stable. It has reached 5.1% per year on average over the last ten years (excluding the pandemic period). In 2024, it is expected to remain dynamic, despite slowing down slightly to 4.9%, before rebounding to 5.1% in 2025, once the uncertainties surrounding the change of government have passed. In the short term, the main risks to the economy are linked to the international environment.

Inflationary pressures have accelerated slightly since the beginning of 2024. They stood at 3% year-on-year (y/y) in March 2024 compared to 2.6% in January, a rate which is still short of the new target set by the monetary authorities (2.5% +/- 1pp since 1 January 2024). This slight acceleration is mainly due to rising food prices, as well as a slight upturn in prices excluding energy and food (+1.8% y/y).

Even though the rising inflationary pressures are under control, the central bank (Bank Indonesia) raised its policy rates by 25bps to 6.25% at end-April to contain capital outflows. The of the Fed postponing its decision to cut its key rates (initially expected in June 2024) combined with an uncertain geopolitical environment have led to a 4.7% depreciation of the rupiah against the dollar since the start of the year. The yield spread between Indonesian and US government bonds narrowed over the first four months of the year.