Q2-2024

Key Figures
GDP Growth (Q4 ’23)
The Mirage of Steady Growth
5.04%
Highlights
Inflation (y.o.y, March ‘24)
3.05%
• GDP to grow 5.12%-5.17% in Q1-2024, 5.0%-5.1% for FY2024, supported by domestic
Credit Growth (y.o.y, Q4 ‘23) consumption and direct investment realization.
9.71% • Indonesia's GDP growth rebounded to 5.04% in Q4-2023, driving the overall 2023
growth rate to 5.05%.
BI Rate (April ‘24)
6.25%
• Key sectors like agriculture, manufacturing, and trade experienced a slowdown, while
smaller sectors such as transportation, mining, and electricity showed robust growth.
Current Account Balance (% GDP) • External risks stem from geopolitical tensions, China's economic slowdown, and
(Q4 ‘23) commodity price fluctuations, affecting Indonesia's trade surplus and foreign investment.
-0.38%
• Household consumption slowed to 4.83% in Q4-2023 due to increased costs from El
IDR/USD (April ’24) Niño impacts and rising interest rates, suggesting reduced purchasing power.
IDR16,249 • Investment in Q1-2024 showed strong growth, reaching IDR401.5 trillion, with foreign
To keep you updated direct investment (FDI) accounting for over half of the total.
with our free monthly • The Rupiah depreciated by 2.96% year-to-date by the end of March 2024, driven by
and quarterly reports, capital outflows and pressure from global financial uncertainties, impacting Indonesia's
please subscribe. Scan external stability.
the QR code below

Indonesia's economic growth rebounded to 5.04% (y.o.y) in the fourth quarter of

2023, following a slowdown to 4.94% (y.o.y) in the previous quarter. This rebound
brought the overall growth for 2023 to 5.05% (y.o.y), surpassing the 5% threshold.
However, there are concerning signs, as the three largest sectors, agriculture,
or go to
manufacturing, and trade, which cumulatively accounted for over 40% of the
http://bit.ly/LPEMCom economy, showed signs of deceleration in the fourth quarter of 2023. Smaller sectors
mentarySubscription like transportation, mining, and electricity grew substantially, offsetting some of the
decline from the major sectors. External factors, such as geopolitical tensions,
Macroeconomic, Finance
China's economic slowdown, and El Niño's impact on agricultural productivity
and Political Economy
played a role in the challenges faced by Indonesia's economy. Additionally, domestic
Research Group
issues like structural productivity declines in agriculture, weakening purchasing
Jahen F. Rezki, Ph.D. power in the wholesale and retail trade sector, and the continued sluggishness of
[email protected] manufacturing raised concerns. Despite these challenges, the rebound indicates
resilience, but it also serves as a call to action for Indonesia to accelerate structural
Teuku Riefky
[email protected] transformation and improve overall productivity.

Faradina Alifia Maizar

[email protected] External conditions impacting Indonesia's economy in early 2024 show a mix of
positive trends and emerging challenges. Despite robust investment in the first
Tarisha Yuliana
quarter, with total investment reaching IDR401.5 trillion, a 22.1% (y.o.y) increase, the
[email protected]
country's trade balance has been declining. The trade surplus fell to USD7.34 billion
Muhammad Adriansyah
in Q1-2024, a 39.40% (y.o.y) contraction, primarily due to a more significant drop in
[email protected]
exports compared to imports. The slowdown in exports can be attributed to factors,
such as China's economic deceleration and lower commodity prices. Simultaneously,

Indonesia Economic Outlook Q2-2024 1

 Q2-2024

there has been an outflow of capital from Indonesia's bond market, with USD1.89
billion leaving during the first quarter, likely due to shifting expectations about the
US Federal Reserve's interest rate policies and global geopolitical uncertainties.
These capital outflows, along with a depreciating Rupiah, which fell 2.96% (y.t.d) by
the end of March 2024, suggest ongoing pressures on Indonesia's external stability.
The decreasing foreign exchange reserves, which fell by almost USD6 billion since
December 2023, underscore the challenges in stabilizing the currency. Looking
ahead, Indonesia faces the challenge managing risks from a volatile global market,
highlighting the need for careful economic and monetary policy management to
navigate these external pressures.

Table 1: Growth Forecast (y.o.y)

Q1-2024 FY2024
5.12% - 5.17% 5.0% - 5.1%

Regardless, domestic economic conditions has been quite eventful during the first
quarter of 2024. General election, alongside with the occurrence of several long
holiday periods had the potential to boost consumption and other related spending.
In addition, the seasonal event of Ramadan could provide additional growth support
for the economy. Furthermore, substantially higher-than-target investment
realization reflects investors’ confidence toward Indonesian economic prospect.
Therefore, we see GDP to grow by 5.15% (y.o.y) in Q1-2024 (estimate range from
5.12% to 5.17%), and 5.1% (y.o.y) for FY2024 (estimate range from 5.0% to 5.1%).

Indonesia Economic Outlook Q2-2024 2

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Escaping the Productivity Quicksand

Tracing the Roots of Economic Growth: A Solow-Swan Analysis

1956 was a notable year in the field of macroeconomic literature. In February 1956, American
Economist Robert (Bob) Solow published an article titled “A Contribution to the Theory of
Economic Growth” in Quarterly Journal of Economics. Later that year (November 1956), an
Australian Economist named Trevor Swan published “Economic Growth and Capital
Accumulation” in a much lesser-known journal, Economic Record. Being unaware of each other’s
publication, these independent articles presented roughly the same model at almost the same
time. These seminal papers were ground-breaking as it shaped the way economists approach,
not only economic growth, but also the entire field of macroeconomics. Solow-Swan model
became the standard for neoclassical growth model, explaining three factors, namely labour,
capital, and overall productivity (or technological progress) as the sources of economic growth.

In this analysis, Solow-Swan model is utilized to shed lights on the source of Indonesian economic
growth. Using modified Cobb-Douglas production function by Ikhsan et. al. (2021), Indonesian
economic growth is decomposed into three components, namely capital accumulation (capital
stock), increase in quantity of labour and quality of human capital (labour), and increase in overall
productive efficiency (total factor productivity/TFP).1 In the past two decades, Indonesian
economy were on an upward trajectory until around 2010 where it hit plateau and has been on a
decreasing trend since (Figure A). Within those periods, capital stock accumulation became the
primary source of growth, and its contribution has been steadily increasing. On the other hand,
contributions of labour and TFP towards overall growth has been fluctuating and has been
roughly decreasing over the last 20 years. On its peak, out of 6.3% GDP growth in 2007, 2.8%
was contributed to labour. Furthermore, Indonesian economy grew by 6.2% in 2011 and growth
from TFP alone was 2.9%. In 2019, labour only produced 1.5% while TFP contributed only 0.4%
of economic growth, resulting in substantially lower GDP growth of 5.0%. Substantial decrease in
productivity of labour and overall efficiency (TFP) is rather worrying as it contributed significantly
to Indonesian GDP growth deceleration in the last few years.

Figure A: Decomposition of Output Growth*

7%
5.42% 5.60%
6% 4.92%
4.48%
5%

4%

3%

2%

1%

0%
2000-2004 2005-2009 2010-2014 2015-2019
Capital Stock Lab or Tota l Factor Productivity Tota l
Source: Penn World Table (PWT) 10.0; LPEM FEB UI staff calculations
*The latest available data from PWT 10.0 is 2019

1
Production function is formulated as follows:
𝑌 = 𝐴𝐾 ! (𝐿𝐻)"
Where Y is output, A is TFP, K is capital, L is labour, H is human capital, a is capital share of income, and b is labour share of
income.

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Indonesia's Economic Shift and Labour Market Trends

Based on economic structure, Indonesian economy illustrate several phenomenon that indicates
the gradual structural shift. First, the economy is shifting away from agriculture. In 2011, share of
agriculture in overall GDP was 13.9%, steadily decreasing to 11.8% in 2023 (Figure B). Second,
there is an emerging sign of premature deindustrialization. Manufacturing sector share, being the
biggest sector in Indonesian economy (based on 17 sector classification), has also been declining
from 22.1% in 2011 to 20.4% in 2023. Third, based on broad classification of economic activity,
Indonesian economy has steadily been dominated by low value-added services activity.2 During
2011-2023, GDP share of low value-added services has been steady around 25.5%. Fourth, there
has been a considerable increase in the contribution of high value-added services activity from
15.7% in 2011 to 19.8% in 2023.

At a glance, Indonesian’s structural transformation seems to be heading towards the right

direction, as it shifts away from agriculture and there has been an increased share of high value-
added services. However, assessment of structural transformation needs further scrutiny. To gain
a more complete picture of the economic transformation, output distribution should be
considered within the context of labour distribution to understand the change in sectoral
productivity. Specifically, sectoral productivity could be roughly measured by ratio of output to
labour.

Figure B: GDP Share by Sector Figure C: Labour Share by Sector

100% 100%

90% 90%

80% 80%

70% 70%

60% 60%

50% 50%

40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Agriculture Manufacturin g Agriculture Manufacturing
Other (Minin g, Construction Utilities) Low Value-Added Services Other (Mining, Construction Utilities) Low Value-Added Services
High Value -Added Services High Value-Added Services

Source: CEIC Source: CEIC

The shifts in labour share have been more drastic compared to shifts in output share (Figure C).
The share of labour in agriculture has decreased more than its output share, from 36.39% in 2011
to 28.21% in 2023, suggesting an increase in its productivity. On the other hand, labour
productivity of manufacturing sector has declined. While output share of manufacturing has
decreased, its share of labour has increased from 13.8% in 2011 to 13.9% in 2023, validating
further the signs of premature deindustrialization in Indonesia. Furthermore, there has been a
substantial increase in the share of labour in low value-added services activity, from 35.2% in 2011
to 41.3% in 2023, which also suggests a declining productivity. This phenomenon indicates that
over the last decade, most of the jobs created in Indonesia are on low value-added services.
Meanwhile, labour share increase in high value-added services has been fairly limited. The share
of labour in high value-added services has increased from 7.1% in 2011 to just 8.3% in 2023.

2
Based on 17 economic sector defined by Statistics Indonesia (BPS), economic sectors in this report are classified as follows:
Agriculture, Manufacturing, Other (mining and quarrying, construction, electricity and gas supply, and water supply, waste,
and recycling), Low Value-Added Services (wholesale and retail trade, accommodation, food and beverages activity, public
administration, education, health and social work, and other services), and High Value-Added Services (transportation and
storage, information and communication, financial and insurance activity, real estate, and business services).

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Although this sector has been more productive, high value-added services have been unable to
absorb a significant amount of labour in Indonesia.

While the economic structure of Indonesia has been shifting from agriculture toward more value-
added activities, the overall distribution of labour has shown a rather concerning trend. In 2023,
nearly 70% of the labour force worked in relatively unproductive sectors, such as agriculture and
low value-added services. This could have significant implications for welfare. As illustrated in
Figure D, sectors with high levels of labour productivity tend to offer higher wages, and vice
versa. Therefore, almost 70% of the labour force works in sectors with low wages, while fewer
than 10% are employed in productive and well-paid jobs (such as mining, quarrying, and high
value-added services). Despite its low productivity, labour tends to shift to low value-added
services, as these offer higher wages compared to agriculture. Beyond the issue of wages, the
high concentration of labour in low-productivity sectors raises concerns about the overall quality
of jobs, as these sectors tend to be more informal. High informality in these sectors means that
workers often lack job security and basic safety nets, placing the majority of the Indonesian labour
force in a vulnerable position.

Figure D: Labor Productivity and Sectoral Wages

6.0 Agriculture

Manufacturing

5.5 Other (Mining, Construction, Utilities)

Finance ICT
Low Value-Added Services

5.0
High Value-Added Services

Electricity
Average Wage (IDR million, 2023)

4.5

Public Admin Business Services Real Estate

4.0 Mining

Transport
Health and Social Work
3.5

Water Supply Manufacturing

3.0 Education

2.5 Accomodation, F&B

Construction

Trade
2.0

1.5
Other Services
Agriculture
1.0
-0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1 1.2
Log Sectoral Productivity as a Share of Total Productivity (2023)
Source: CEIC; LPEM FEB UI staff calculations

From labour supply perspective, there has been a promising sign in the past decade as labours
are more educated than before.3 During 2011-2023, share of working population with higher
secondary education and above has been increasing significantly (Figure E). In 2011, workers that
finished higher secondary education and tertiary education amounted to 31.7% of total workers,
while this share has risen to 45.4% in 2023. However, overall labour educational background
suggests that majority of labour (54.6%) in Indonesia had only completed junior high school (9
years of schooling) or below. This phenomenon might partially explain why most workers are
working on low productivity sectors. Aligned with the labour demand perspective (economic
sector aspects), labour concentration on relatively lower education attainment could have
significant consequences on general welfare. Based on Figure F, labour who finished education

3
Educational background of labour in this report are classified as follows: Does not complete primary education and no
schooling, primary education (elementary (SD) and its equivalent), lower secondary education (junior high school (SMP) and
its equivalent), higher secondary education (senior high school (SMA/SMK) and its equivalent), tertiary education (diploma
and university level education).

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 Q2-2024

beyond junior high school earns 30% to 116% higher than its counterpart who only finished junior
high school.

Figure E: Working Labor Force by Figure F: Average Wage by Education

Education Level Level (2023)
100%
8.0% 12.8% University 4.76
Te rtiary education
90%

80% 23.7% Diploma I/II/III Academy 4.12

70% 32.6% Higher secondary

educat ion Senior High School (Vo cational) 2.94
60% 18.9%
Senior High School (General) 2.87
50% Lower secondary
17.8% educat ion
40% Junior High School 2.20
28.8%
30% Pr imary education
24.6% Primary School 1.90
20%

Not/Not Yet Complete Primary School 1.54

10% 20.6%
12.2% Doe s not comple te
primary education
0% No Scho oling 1.32
and no schooling
2011 2023
Source: CEIC Source: CEIC

As previously shown, labour productivity and education level are crucial in determining wages.
However, the characteristics of sectoral labour share and educational background illustrates
serious challenges in current labour market conditions. On demand side, labours are most
absorbed by the least productive sectors. On the other hand, on the supply side, majority of
workers have at best a lower secondary education. Taken together, these trends indicate that
there are both demand and supply side constraints to improve overall quality of jobs. This could
have serious repercussion on aggregate economic development as the issues affect productivity,
welfare, and general quality of life.

Dynamics of Productivity

On aggregate level, source of changes in labour productivity can be classified into two
components. Following McMillan and Rodrik (2011)4, labour productivity growth can be
attributed to within-sector productivity changes and structural change. Within sector productivity
improvement occurs as workers and firms in a given sector become more efficient. In real world,
this could happen through capital deepening or upgrading (plant expansion), technological
improvement (machine upgrade), and/or increasing resource allocation efficiency (entrance of
more efficient firms or exit of less profitable firms in a given sector). On the other hand, structural
change occurs as labour (and other inputs of productions) move out from lower- into higher
productivity sectors in the economy. For instance, aggregate labour productivity increases as
labour shift from agriculture to manufacturing, generating more value-added per labour.

Over the last two decades, growth in labour productivity in Indonesia has been rather volatile.
The highest labour productivity growth occurred during 2011-2015, with the average growth of
4.30% annually. Since then, labour productivity growth has been on a downward pattern (even
separating the period of Covid-19 era) and only grew, on average, by 1.80% during 2022-2023.
Furthermore, growth of labour productivity has largely been influenced by within-sector-
improvement, rather than due to the mobility of labour across economic sectors (Figure G).
Between 2001-2023, structural changes only contributed to around 30% of improvement in
labour productivity. These developments suggest that growth in labour productivity has been
quite concentrated within specific sectors and labour has not been moving into more productive

4
Following McMillan and Rodrik (2011), growth in labour productivity can be mathematically expressed as follows:
∆𝑃!"# = $%𝑃!$ − 𝑃#$ '𝑆#$ + $%𝑆!$ − 𝑆#$ '𝑃!$
$ $
Where ∆𝑃!"# is the economy-wide labour productivity growth over period 0 until t, 𝑃!$ is labour productivity of sector i in time t, and 𝑆!$
is the share of labour of sector i in time t.

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sectors. Three sectors with the highest productivity growth, namely manufacturing, transport and
communication, and trade, hotel, and restaurants, has gained more than 90% (on average) of its
productivity improvements from within sector aspect as these sectors become more productive
over the last two decades without substantially absorbing higher share of labour in the economy
(Figure H). Equally staggering, total within-sector productivity improvement in these three sectors
accounted for more than half of aggregate rise of labour productivity in Indonesia since 2001.

Figure G: Productivity Growth Figure H: Labor Productivity Growth

Components Components by Sector (2001-2023)
5% 0.7%
4.30%
0.56% 0.55% 0.54%
3.80% 0.6%
4%
0.5%
2.80% 0.36%
0.4% 0.33%
3% 0.30%
2.13% 0.3% 0.23%
1.80%
2% 0.2%

0.1%
0.04%
1% -0.03%
0.0%
-0.05%
0% -0.1%

-0.2%
-1%
-0.3%

-0.4%
-2% Manufacturing Transport and Trade, Hotel Const ruct ion Financ ial and Public and Agriculture Ut ilities Mining and
Communic ation and Restaurant Bus ines s Social S ervices Quarrying
2001-2005 2006-2010 2011-2015 2016-2019 2020-2021* 2022-2023 Serv ic es

Within Sector Structural Change Total Within Sector Structural Change Total

Source: CEIC; LPEM FEB UI staff calculations Source: CEIC; LPEM FEB UI staff calculations
*Covid-19 period

Despite having the largest contribution to the overall labour productivity gains on the sectoral
level over the last 20 years, services activity has contributed larger than manufacturing activity
when considered from sectoral group perspective. Overall labour productivity grew by 2.89%
during the period of 2000-2023, of which 2.01% came from within-sector gain and the other
0.88% came from structural change aspect. Services activity contributed 1.06% of 2.01% within
sector gain and 0.67% of 0.88% structural improvement in labour productivity (Table 1).
Cumulatively, labour productivity improvement produced by services activity amounted to 1.73%
of 2.89% total productivity gains, or around 60% of total productivity improvement. However,
comparing to 2000-2011, almost all sectoral groups experienced a decline of productivity growth
during 2012-2023, both from within sector gain and structural change improvement. This
amplifies the concern over secular decline in labour contribution to growth and its general
productivity trend.

Table 1. Breakdown of Productivity Growth by Component and Sector Group

Period

2000-2023 2000-2011 2012-2023

Average Annual Labor Productivity Growth 2.89% 3.63% 2.22%
Within Sector 2.01% 2.15% 1.88%

Agriculture 0.54% 0.63% 0.47%

Manufacturing 0.54% 0.67% 0.42%

Services 1.06% 1.39% 0.75%

Other (Mining, Construction, and Utilities) -0.13% -0.53% 0.24%

Structural Change 0.88% 1.48% 0.33%

Agriculture -0.31% -0.32% -0.30%

Manufacturing 0.02% 0.07% -0.03%

Services 0.67% 0.68% 0.65%

Other (Mining, Construction, and Utilities) 0.50% 1.04% 0.01%

Source: CEIC; LPEM FEB UI staff calculations

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Since 2000, proportional to the size of labour market, agriculture has lost more than a third of its
workers as labour reallocated to other sectors, while other sectors virtually experienced an
increase in labour share. However, Figure I illustrate that while workers moved out from
agriculture, most of those have moved into sectors with low value-added, specifically low value-
added services activity (trade, hotel, restaurants, and public and social services activity). On the
other hand, information and communication sector, a high value-added service sector, has a
decrease in its labour share, suggesting high entry barrier towards such sector (aggregate
transport and communication labour share has been relatively unchanged due to the increase of
labour share in transport sector). Therefore, it might not be surprising that Indonesia has been
experiencing a persistent decline in labour productivity as labour from a low productivity sector
into other (slightly higher) low productivity sectors. This might also explain why the gain from
structural change towards labour productivity growth has been very limited.

Figure I: Labor Movement and Sectoral Productivity

100 %
Agriculture

Manufacturing
Mining and Quarrying
Log Sectoral Productivity as a Share of Total Productivity (2023)

80%
Other (Mining, Construction, Utilities)

Low Value-Added Services

60%
Utilities
High Value-Added Services
Financial and Business
Services
40% Transport and
Communication
Manufacturing
20%

Construction

0%
-20 % -15 % -10 % -5% 0% 5% 10%
Trade, Hotel and
Restaurant
-20 %
Public and Social
Agriculture Services
-40 %

-60 %
Change in Employment Share (2000-2023)

Source: Statistics Indonesia

To gain further perspective on the context of labour dynamics in Indonesia, it is useful to assess
the structural change in the context of relative change in labour share and relative productivity
between sectors that gain and lose labour share. Following a modification of McMillan and Rodrik
(2011) by Sander and Yoong (2020)5, the component of structural change in labour productivity
can be decomposed into two subcomponents, namely ‘between sector’ subcomponent and
‘productivity difference’ subcomponent. ‘Between sector’ captures the productivity gained in a
given sector by the changes in relative labour share, while ‘productivity difference’ captures the
productivity gained in a specific sector by the relative differences of productivity with another
sector. Between sector aspect enable the analysis to assess the relative contributions of direction
and magnitude of labour reallocation and productivity difference to assess the productivity gains
that occur when labours move across sectors. In the following analysis, agriculture is used as a
benchmark sector (i.e., productivity difference of sector A will be measured as sector A’s relative

5
This modification does not change the within-sector component from the original McMillan and Rodrik (2011).

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productivity to agriculture’s), given that structural transformation of an economy tends to involve

labour switches out of agriculture.

In-line with visual representation of labour reallocation in Figure G, Table 2 (column B) shows that
most labours that moved out from agriculture into trade, hotel, restaurant activities and public
and social services. These sectors are not much more productive relative to agriculture (column
C). By moving out from agriculture to these sectors, those labours only produce 1.4 to 1.7 more
output compared to those who stays in agriculture (Table 3). On the other hand, labour
reallocation from agriculture into most productive sectors, such as financial and business services
and mining and quarrying, have been very limited between 2000-2023. Relative to agriculture,
financial and business services is 7 times more productive, and mining and quarrying is 16.4 more
productive. However, the amount of labour entering most productive sectors were 75% less than
those entering low productivity sectors.

Table 2. Productivity Growth by Sector (relative to Agriculture)

Within Between Productivity Structural
Sector Sector Difference Change
(2000-2023) (A) (B) (C) (B+C)
Agriculture 0.54% -0.31% 0.00% -0.31%

Transport and Communication 0.57% 0.00% -0.02% -0.03%

Utilities 0.00% 0.00% 0.04% 0.05%

Manufacturing 0.54% 0.01% 0.01% 0.02%

Mining and Quarrying -0.30% 0.01% 0.25% 0.26%

Financial and Business Services -0.04% 0.04% 0.33% 0.37%

Construction 0.17% 0.05% 0.15% 0.20%

Public and Social Services 0.13% 0.10% 0.07% 0.16%

Trade, Hotel and Restaurant 0.39% 0.10% 0.06% 0.16%

Source: CEIC; LPEM FEB UI staff calculations

While conventional wisdom in the realm of economic development suggest that shifting away
from agriculture is a natural part of economic transformation into a more prosperous country, the
direction and magnitude of labour movement indicates that Indonesia has not been gaining
optimum growth potential from structural transformation. In addition, another worrying signal has
also emerged from the sectoral relative productivity. During period of 2000-2023, labour
productivity gaps across all sectors have almost uniformly declined in the past decade (Table 3).
Therefore, structural transformation in Indonesia needs to be shaped in such a way that focus on
enhancing growth.

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Table 3. Sectoral Relative Productivity to Agriculture

2000-2023 2000-2011 2012-2023

Agriculture 1.0 1.0 1.0

Mining and Quarrying 24.1 37.1 16.4

Manufacturing 4.2 5.1 3.7

Utilities 11.4 15.3 9.1

Construction 4.1 4.8 3.6

Trade, Hotel and Restaurant 1.9 2.2 1.7

Transport and Communication 4.0 2.8 4.7

Financial and Business Services 10.0 15.2 7.0

Public and Social Services 1.6 2.1 1.4

Source: CEIC; LPEM FEB UI staff calculations

A of decreasing relative sectoral productivity over time might also be driven by lower investment
efficiency. Incremental Capital to Output ratio (ICOR), a measurement for productivity in capital
investment, has shown a worsening productivity across sectors. As shown in Figure J, ICOR value
has been increasing across all sectors, suggesting lower productivity as it requires more
capital/investment to generate the same amount of output. While Figure A has shown that the
contribution of capital stock to overall growth is rather major, increasing ICOR value implies that
additional capital stock has been generating less additional output over time. The worsening
investment productivity across sectors, portrayed by ICOR, could also partially explain the
declining contribution of TFP in Indonesia’s overall economic growth (Figure A).

Figure J: Incremental Capital to Output Ratio (ICOR)6

Source: CEIC; LPEM FEB UI staff calculations

Labour Value-Added and Wages in Indonesian Companies

Analysing another measure of labour productivity, value-added per worker, by company

ownership7 using 2013 and 2021 data from the IBS Survey, a notable pattern emerges: companies
with a majority of foreign shareholders (foreign-owned companies) consistently show a higher

6
The data for gross fixed capital formation data per sector is only publicly available in 2010-2018.
7
A domestically owned company has no foreign shareholders. A minority foreign-owned company has less than 50% of its
shares owned by foreigners. A majority foreign-owned company has more than 50% of its shares owned by foreign
shareholders.

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median value-added per worker compared to domestically owned companies and those with
minority foreign ownership (Figure K). In 2013, companies with majority foreign ownership had a
median value-added per worker of IDR133.95 million, nearly three times higher than domestically
owned companies, which had a median value-added per worker of IDR49.75 million. However,
the data suggest that both domestically owned companies and those with minority foreign
shareholders made significant strides in catching up with foreign-owned companies by 2021.In
2021, the median value-added per worker for foreign-owned companies was IDR219.76 million.
In comparison, domestically owned companies and minority foreign-owned companies had
median value-added per worker of IDR124.53 million and IDR126.52 million, respectively. This
indicates that domestically owned companies and minority foreign-owned companies
experienced growth in median value-added per worker of 150.30% and 151.51% from 2013 to
2021, while foreign-owned companies grew by a comparatively lower rate of 64.08% during the
same period.

Given that foreign-owned companies have a higher median value-added per worker, it is not
surprising that the annual salary for workers in these companies is higher than in domestically-
owned and minority foreign-owned companies (Figure L). In 2013, the median annual salary per
worker in foreign-owned companies was IDR25.39 million, which is 1.35 times higher than the
median salary in domestically-owned companies, which was IDR18.75 million. Interestingly, the
median annual salary for each type of company ownership grew by approximately 60% by 2021.
In that year, the median annual salary for foreign-owned companies had risen to IDR41.47 million,
while it was IDR30.47 million for domestically-owned companies and minority foreign-owned
companies.

Figure K: Median Value-Added per Figure L: Median Annual Salary per

Worker by Company Ownership Worker by Company Ownership
(Million IDR) (Million IDR)

Source: IBS Survey Source: IBS Survey

Observed productivity and wage differentials favouring foreign-owned firms can be explained by
several factors. Foreign-owned companies, especially multinational corporations, are believed to
bring valuable, mostly intangible, assets that help them compete with the existing advantages of
local businesses. These assets may include advanced technology, established brand reputation,
and highly effective organizational skills (Girma et al., 2002). These productivity advantages often
translate into higher wage rates. Additionally, foreign companies usually follow global
compensation standards, which are generally higher than local standards, helping them attract
internationally competitive talent. As a result, foreign companies may offer more attractive
compensation packages, aligning with these global standards. Another possible explanation for
the wage differential is the provision of on-the-job training in foreign-owned companies, which
often leads to higher wage growth compared to training in domestically owned firms (Gorg et al.,
2007). This added training can improve worker skills and productivity, contributing to the overall
wage advantage seen in foreign-owned companies.

A similar trend emerges when analysing median value-added per worker and median annual
salary per worker by company activity. Companies that engage in either exports or the use of

Indonesia Economic Outlook Q2-2024 11

 Q2-2024

imported components tend to have a higher median value-added per worker compared to those
that do not (Figure M). In 2013, companies involved in either exports or imports had a median
value-added per worker of IDR101.49 million, while companies that did not participate in
international trade had a median value-added per worker of only IDR39.76 million. This
represents a significant difference of more than twofold, indicating that companies with
international trade connections tend to be more productive. By 2021, these figures had changed
considerably. Companies that engaged in exports or imports saw their median value-added per
worker increase to IDR208.49 million, representing a 105.43% increase from 2013. In contrast,
companies that did not engage in international trade saw their median value-added per worker
grow to IDR58.76 million, an increase of 47.80%.

Given that companies engaged in exports or imports are generally more productive, this higher
productivity translates into higher wages (Figure N). In 2013, the median annual salary per worker
for companies that engaged in exports or imports was IDR21.42 million, about 18% higher than
the median salary for companies that did not engage in international trade, which was IDR18.14
million. By 2021, the wage gap had widened, with salaries for companies involved in exports or
imports growing by 80.30% to IDR 38.62 million, while salaries for companies not engaged in
international trade grew by only 14.56% to IDR20.78 million.

These trends suggest that companies involved in international trade and those using imported
components tend to be more productive, leading to higher value-added per worker. This
productivity advantage might be due to factors, such as access to global markets, advanced
technology, and specialized components, which enhance their competitiveness and efficiency.
Additionally, these companies may benefit from larger economies of scale and more efficient
supply chains, contributing to their productivity edge. Moreover, companies engaged in
international trade tend to employ higher-skilled workers, which results in higher pay (Tanaka,
2018).

Figure M: Median Value-Added Per Figure N: Median Annual Salary Per

Worker by Involvement in International Worker by Involvement in International
Trade (Million IDR) Trade (Million IDR)

Source: IBS Survey Source: IBS Survey

By technology adoption8, in 2021, companies that used advanced technology, such as robotics,
artificial intelligence, and automation, had nearly double the median value-added per worker at
IDR114.94 million, while companies that did not adopt such technology had a median value-
added per worker of only IDR 61.61 million. This significant difference suggests that technology
adoption plays a key role in enhancing productivity. This productivity gap also translates into
higher wages for workers in companies that utilized technology. In 2021, the median annual salary
per worker in companies using advanced technology was IDR30.99 million, while those in
companies that did not employ technology earned a median annual salary of just IDR22.20

8
The data is only shown in 2021 as the questions related to technology adoption was not included in 2013 IBS Survey
questionnaire.

Indonesia Economic Outlook Q2-2024 12

 Q2-2024

million. This indicates a substantial salary differential, reflecting the increased productivity and
efficiency that technology adoption brings. The correlation between technology adoption and
productivity suggests that companies investing in advanced technology tend to be more efficient
and competitive, leading to higher value-added per worker. These companies are likely to require
more skilled labour to operate and maintain advanced systems, resulting in higher wages to
attract and retain talent.

Figure O: Median Value-Added Per Figure P: Median Annual Salary Per

Worker by Technology Adoption Worker by Technology Adoption
(Million IDR) (Million IDR)

Source: IBS Survey Source: IBS Survey

Strategies for Enhancing Productivity

Productivity is a vital element to enhance economic growth, increase general welfare, and
improve overall quality of life. However, improving productivity on a nationwide level is a highly
complex issue; necessitates properly identifying the issues to its roots and formulating a proper
solution to each issue. While there are various policy actions and steps that could be taken to
increase overall productivity, this study attempts to assess three potential aspects that could
improve productivity in details. These aspects are education improvement, digital infrastructure
and technological adoption, and opennes in trade and investment.

Improvement in Education

There is a positive trend in the past decade in which there has been an increasing portion of
worker that finished secondary and tertiary education (Figure E). A more educated workforce is
associated with better welfare as higher education tends to pay better wages (Figure F).
Furthermore, workers with greater skills carry out tasks more effectively, learn new processes
faster, and adapt to technological changes more readily. Li et al. (2019) highlights importance of
educational development as a key to harnessing the benefits of technology introduced by foreign
entities. Thus, better educated workforce adopts more technology, which consequently increase
the potential to create more value-added and gain higher salary (Figure N and O). Additionally,
human capital significantly influences an organization's or economy's capacity for innovation and
creativity. Through education and training, individuals enhance their ability to generate new
ideas, products, and services, which can significantly contribute to productivity growth.

Figure P offers a decade-long perspective on employment trends within the labour force,
segmented by educational attainment. There has been an encouraging development in which
unemployment level uniformly decreased across education level. This condition suggests that
GoI has been successfully created jobs that absorbs worker from all levels of educational
background. However, taking a closer look, Figure P also reveals a rather curious trend:
individuals with secondary and tertiary education backgrounds faced higher unemployment rates
than their peers with no, or only primary education. This is a deviation from the conventional
belief that higher education invariably leads to better job prospects. This situation could hamper
overall productivity growth as higher-secondary and tertiary educated worker tends to have

Indonesia Economic Outlook Q2-2024 13

 Q2-2024

higher skills and could create higher value-added. Relatively high unemployement rate among
higher-educated workers indicates the presence of skill mismatch and/or inadequate job
opportunity for higher-educated workers.

To increase productivity, GoI should attempt to improve education program by making it more
compatible with industry needs, especially for secondary and tertiary education level. In addition,
GoI should also put more focus in creating more high productivity jobs that could absorb
secondary and tertiary educated workers. On a broader level, as previously shown in Figure E,
most of Indonesian workers had only completed junior high school (9 years of schooling) or below.
Thus, more efforts need to be put in place to improve the education level of overall workforce.

Figure Q: Unemployment Rate by Education Level

12%

10.6%

10%

8.6%
8.4%
8% 7.7%

6%
5.1%
4.8%

4% 3.7%
3.4%
2.8%
2.1%
2%

0%
Does not complete Primary education Lower secondary Higher secondary Tertiary education
primary education and education education
no schooling

2011 2023

Source: CEIC; LPEM FEB UI staff calculations

Investment in Digital Infrastructure and Technological Adoption

A strategic investment in digital infrastructure is paramount. This investment should target not
only dedicated digital components such as broadband, 5G networks, and cloud computing
facilities but also hybrid models that integrate digital systems with traditional infrastructures like
smart meters, smart grids, and smart cities. This approach holds the promise of transforming the
economic landscape by ushering in a new era of efficiency and innovation.

Drawing from Zhang et al.'s (2022) case study in China, there is a substantial positive impact of
broadband infrastructure on firm productivity. The study delineates four key channels through
which this productivity gain materializes: fostering information development, improving
reallocation efficiency, promoting innovation, and reducing transaction costs. The broadband
infrastructure acts as a catalyst, spurring productivity by facilitating better information flow,
optimizing resource allocation, encouraging innovative endeavors, and streamlining transactions.

Tang and Zhao's analysis (2023), utilizing China’s panel data, further corroborates this viewpoint.
Their findings suggest that new digital infrastructure is instrumental in driving technological
innovation, enhancing factor allocation, and achieving economies of scale, all of which contribute
to TFP improvements. However, the impact is not uniform; it varies according to a region's
economic maturity, R&D vigor, and the presence of established traditional infrastructure. This
indicates that while digital infrastructure is universally beneficial, its effectiveness is amplified in
regions with certain advantageous characteristics.

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 Q2-2024

Borowiecki et all (2021) provide an additional dimension by highlighting the importance of

intangibles, such as digital skills intensity, in driving firm-level productivity growth, especially in
the service sector and among younger firms. Their research underscores the strong productivity
returns on software investments, particularly for firms that are currently less productive. This
implies that firms with lower initial productivity stand to benefit the most from investments in
digital capabilities.

Taken together, these studies present a compelling case for Indonesia to prioritize digital
infrastructure development. By doing so, Indonesia can expect not just incremental, but
potentially transformative gains in productivity, especially when such investments are tailored to
the nation's unique economic and infrastructural context. Furthermore, Figure P and O also
suggest that higher adoption of technology by firms is associated with higher wage for labour
and value-added creation. Thus, digital infrastructure development could accelerate the progress
of technological adoption, not only by firms, but also general population. Higher technological
adoption will multiply the productivity increase by development in digital infrastructure.

Higher Openness towards FDI and Foreign Trade

Firms that are able to export gains benefit as they have bigger market prospect than just domestic
market. Furthermore, exporting firms are exposed with international competition, forcing them
to increase their efficiency and overall competitiveness. On the other hand, firms that utilized
imported products for their inputs and capital gain benefit from broader options of goods,
potentially acquiring better quality and/or more affordable inputs. Overall, firms with higher
integration in global value chain creates more value-added and pay better wages (Figure M and
N). However, Indonesia is currently have a relatively low integration towards global market and
having a considerably low trade opennes compared to its peers (below Vietnam, Malaysia,
Thailand, Philippines, and Singapore). Thus, GoI should push for higher integration of domestic
firms in global value chain. This could be achieved by removing unnecessary trade barriers and
optimize the efficiency of trade instruments.

Figure R: FDI Regulatory Restrictiveness Index of Emerging Market Countries

0.4
0.37

0.35
0.35

0.3
0.27
0.26
0.25

0.21
0.21
0.2 0.19

0.15
0.13 0.13

0.1
0.08

0.06 0.06
0.05

0
South Turkey Brazil Vietnam Argentina Mexico India China Malaysia Thailand Indonesia Phillipines
Africa

Source: OECD

Further, FDI is a vital conduit through which advanced technology from developed markets is
transferred to emerging markets. Considering domestic firms situation, Figure K and L indicates
that higher FDI (reflected in higher foreign ownership of a firm) tends to create higher value-
added and could offer higher compensation for labour. The entry of foreign firms equipped with
superior technologies can catalyze a technological revolution in the local market. Domestic firms

Indonesia Economic Outlook Q2-2024 15

 Q2-2024

may assimilate these advanced technologies through various avenues: forming strategic
partnerships with foreign entities, engaging in dynamic supply chain relations, or simply through
the impetus of market competition. Van Nguyen (2019) provides insightful evidence into this
process. According to his research, technology transfer facilitated by FDI typically goes hand-in-
hand with the injection of financial resources into research and development (R&D) activities
within the host country. For R&D endeavors to bear fruit, they are often supported by a spillover
effect where foreign firms invest in training and skill development for the local workforce. This
not only uplifts the immediate technological standards but also broadens the skills base of the
labour force, enabling a more conducive environment for innovation and efficiency. However, as
suggested by Figure R, Indonesia have a very restrictive FDI regulations. Among EM countries,
Indonesia is the second most restrictive country for FDI. This serves as a major impediment for
overall productivity improvement agenda. From investment perspective, GoI could increase
productivity by aiming at reducing FDI restrictiveness. This includes reducing counterproductive
instruments (e.g., local content requirements), regulation and administrative complexity, and
potential rent-seeking activities, among others.

Economic Growth Rebounds Despite Sectoral Challenges

Indonesian economic growth rebounded to 5.04% (y.o.y) in Q4-2023 after a
decelerating and breaking 5% growth rate pattern as it only grew by 4.94% (y.o.y) in
Q3-2023. Thanks to the rebound, Indonesia managed to brought back overall
economic growth in 2023 to beyond 5%, with the growth rate of 5.05% (y.o.y). The
growth driver in the last quarter of 2023 suggested a rather worrying signal.
Specifically, three biggest sectors in Indonesian economy experienced a growth
slowdown in Q4-2023. With the accumulated share of more than 40% of Indonesian
economy, agriculture, manufacturing, and trade sector performed poorly at the end
of 2023. Instead, sectors with smaller share, including transportation, mining, and
“With the accumulated
electricity, grew substantially and managed to cushion the drag-down effect from
share of more than 40%
deceleration of “main” sectors. Objectively, 2023 was not an easy year for
of Indonesian
Indonesian economy, driven by several factors at play. First, intensifying geopolitical
economy, agriculture,
tensions has triggered the rise in protectionism and China’s economic slowdown has
manufacturing, and
undermined global trade volume. Second, the occurrence of El-Nino has a
trade sector performed
devastating impact on agricultural productivity and threaten food security. Third,
poorly at the end of
prolonged high-for-longer monetary regime has kept cost of funds high,
2023”
discouraging real-sector investment on a worldwide scale. Despite the bleak
influence of external aspects, domestic factors that also played a part in the main
sectors’ growth impotence are equally, if not more, alarming. While El-Nino
phenomenon contributed considerably in the growth slowdown of agriculture sector,
the growth decline of agriculture sector has been occuring for a quite extended
period of time, suggesting an ongoing structural productivity decline. Agriculture
sector only grew by 1.30% (y.o.y) in 2023 and recorded the lowest annual growth
since 1991 or hitting the new low in more than 30 years (excluding Asian Financial
Crisis and Covid-19 period). Furthermore, Indonesia has always boasted its vast
population and consumers market as one of the main engine of growth. However, a
substantial growth decrease of wholesale and retail sector might indicate decline in
purcashing power and could be an early sign of vanishing middle-class. In addition,
manufacturing industry prolonged its depressing trend of growing below GDP; thus,

Indonesia Economic Outlook Q2-2024 16

 Q2-2024

relatively shrinking in comparison to overall economic size. Despite painting a bleak

picture of current state of Indonesian economy, these domestic factors could also
serve as a wake-up call to accelerate structural transformation and overall
productivity improvement.

Figure 1: Growth of GDP and the Main Figure 2: Growth of Manufacturing

Industries, 2019-2023Q4 Sector and Its Subsectors, 2019-2023Q4
Weights in Weights
2023Q4
-16 -14 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 % in 2023Q4 -20 -15 -10 -5 0 5 10 15 20 25 30 %

100.0 Gross Domestic Product

5.05
100.0 Manufacturing Industry
4.64
20.4 Manufacturing Industry
4.64 33.9 Food & Beverages

2019 4.49
13.0 Wholesales and Retail Trade, Repairs
4.86
2020 9.4 Chemicals, Pharmaceutical & Tradit'l Medicine
2019
10.4 Agriculture, Forestry and Fisheries 0.13 2020
1.27 2021
9.2 2021
2022 Metal Prod, Comp, Elect, Optic & Electricity Equip
10.0 Construction
13.73 2022
4.90
2023
2023
7.7 Mining & Quarrying 8.8 Coal; Oil & Gas Refinery
6.09 4.25
6.6 Information & Communication
8.6 Transport Equipment
7.59
7.93
Transportation & Storage
4.6 14.07 6.1 Basic Metals
14.17
Financial & Insurance Activity
4.0 4.78
5.2 Textile & Wearing Apparel
Public Admin, Defense & Social Security -1.98
3.2 1.40

Source: CEIC Source: CEIC

“In Q4-2023, six out of Only grew by 4.07% (y.o.y) in Q4-2023, manufacturing sector growth rate dropped
16 subsectors within substantially from 5.19% (y.o.y) in Q3-2023. Furthermore, manufacturing sector
manufacturing industry growth rate in the last quarter was the lowest among other quarters in 2023,
posted a negative dragging down the overall annual growth rate of manufacturing sector to 4.64%. In
growth…” Q4-2023, six out of 16 subsectors within manufacturing industry posted a negative
growth, including textile and wearing apparel, coal, oil and gas refinery, rubber and
its products, and transport equipment. Influenced by a factor related to business
cycle, coal, oil and gas refinery sector grew by -0.16% (y.o.y) in Q4-2023, a significant
decline from 7.04% (y.o.y) in the previous quarter. The shrinkage in this subsector
was driven by the normalization of global energy prices. Despite the export value of
mineral fuels grew by 15.84% (y.o.y) in Q4-2023, the export volume actually
decreased by 21.32% (y.o.y) within the same period; suggesting the price effect in
play. On the other hand, the growth decline of textile, rubber, and transport
equipment products could have been driven by more structural factors, instead of
cyclical. Domestic rubber productions experienced shortage of input materials and
declined productivity of rubber farmer. On top of that, domestic rubber industry
were negatively impacted by the issuance of EU’s anti-deforestation law and reduced
Indonesia’s rubber products export to EU market. Consequently, export of rubber
products decreased by 16.64% (y.o.y) and shrunk the growth of its subsector by
4.49% (y.o.y) in the last quarter of 2023. Decreased by 3.42% (y.o.y) in Q4-2023,
growth stunt of textile and wearing apparel subsector were driven by different
structural factors. Despite performing well on the export front, as textile export grew
by 9.11% (y.o.y) in Q4-2023 and marking the first quarterly positive export growth in
the last six quarters, imports of textile products posed a risk. In Q4-2023, import
value of textile products grew by -9.70% (y.o.y) while its volume surprisingly grew by
3.38% (y.o.y). This contradiction suggests that although the monetary value of textile
imports declined, the physical quantity imported actually increased. The reasons for

Indonesia Economic Outlook Q2-2024 17

 Q2-2024

this divergence could be the rise in illegal textile imports and the lower
competitiveness of domestic textile products compared to imports. Then, transport
equipment subsector growth was recorded at -2.52% (y.o.y) in Q4-2023, dived from
7.31% (y.o.y) in the previous quarter. Dwindling domestic demand for motor vehicles
induced lower demand for transport equipment. Wholesale and retail vehicle sales
dropped by 13.73% (y.o.y) and 10.46% (y.o.y), respectively, in the last quarter of
2023, marking the worst sales growth since Q3-2015. On a positive note, metal-
related subsectors performed well in Q4-2023, thanks to the fruition of
downstreaming effort and increased global demand for metal products, partly driven
by China’s growth revival. Basic metal grew by 18.82% (y.o.y) and metal products
grew by 11.12% (y.o.y) in the last quarter of 2023. In addition, food and beverages
subsector growth increased by 4.71% (y.o.y) in Q4-2023 from 3.28% (y.o.y) in the
previous quarter due to increased consumption triggered by end-of-year holiday
period, upcoming election cycle, and disbursement of social assistance. Contributing
to almost half the size of manufacturing industry, encouraging growth figure of
metal-related subsectors and food and beverages subsector were able to buffer the
impact of negative growth from various subsectors.

Figure 3: Growth of Wholesale and Figure 4: Growth of Transport and Its

Retail Trade and Its Subsectors, Major Subsectors, 2019-2023Q4
2019-2023Q4
Weights in -16 -12 -8 -4 0 4 8 12 16 % Weight in
-60 -40 -20 0 20 40 60 80 100
2023Q4 %
2023Q4
Transportation & Storage
100
“… metal-related 14.07 2019
2019
100 Wholesale and Retail Trade, Repairs 2020
2020 Road
2021
subsectors performed 4.86
2021
2022
55.8
Storage & Support Activities for Transportation,
9.64
2022
2023
2023
well in Q4-2023, thanks
Postal & Courier
19.8 18.26

Air

to the fruition of 82.1 Non-Motor Vehicles and Motorcycle Trade

11.9 30.16
4.92

downstreaming effort
Sea
8.0 15.73

and increased global

Inland Water
3.6 15.47
17.9 Motor Vehicles and Motorcycle Trade and Repairs

demand for metal 4.62

0.9
Railways
25.97

products, partly driven

Source: CEIC Source: CEIC
by China’s growth
revival.”
Wholesale and retail trade sector growth was recorded at 4.10% (y.o.y) in Q4-2023,
considerably lower than 5.10% (y.o.y) in Q3-2023. A poor performance of wholesale
and retail trade sector could be mainly explained by a rather poor growth figure of
motor vehicles trade and repairs subsector at the end of last year. Accounted for
around 82% of the overall sector, motor vehicle trade and repair subsector grew by
-0.48% (y.o.y) in Q4-2023, nosedived from 5.37% (y.o.y) in the previous quarter and
marked its first negative growth rate since Q2-2015 (excluding Covid-19 period). As
previously mentioned, wholesale and retail motor vehicle sales recorded a double-
digit negative growth during the period. As the high-base effect following the Covid-
19 pent-up demand tapered off, the disappointing figure of motor vehicles trade
revealed a more serious underlying issue. The slump in motor vehicle sales around
September-October 2023 were corresponding with the Fed’s and BI’s latest rate
hike. Thus, a rise of cost of fund by banking sector to some extent play a role as
majority of car sales in Indonesia are purchased through credit financing scheme. On

Indonesia Economic Outlook Q2-2024 18

 Q2-2024

the other hand, non-motor vehicles trade continued its upward growth trend as it
grew by 5.15% (y.o.y) in Q4-2023 from 5.04% (y.o.y) in the previous quarter. The
growth of this subsector was caused by the occurrence of end-of-year holiday
season, upcoming election cycle, and disbursement of social assistance.The increase
in non-motor vehicle consumption was in-line with retail sales index figure. Average
monthly retail sales index in Q4-2023 was 211.19, increased from 202.82 in the
previous quarter. Regardless, due to its small share within overall sector, well-
performed non-motor vehicles trade subsector did not cushion the wholesale and
retail sector growth deceleration in a meaningful manner.

Moderating growth rate of transportation and storage sector was quite gradual as
the sector was still listed as the highest growing sector in Indonesia. Grew by 10.33%
(y.o.y) in Q4-2023, transportation and storage sector continued its double-digit
growth rate for eight consecutive quarters, despite decelerated from 14.74% (y.o.y)
growth rate in the preceding quarter. The growth pattern of overall sector was almost
uniformly mirrored by its subsectors. Other than railways transport subsector, all
“… accelerating the subsectors growth rate moderated. Growth rate deceleration within transport and
effort to complete storage subsectors suggested that the pent-up demand effect after Covid-19 has
various infrastructure been continuously diminishing. Bolstered by increasing demand for physical leisure
projects before the activities for end-of-year holidays and other travelling purposes, subsectors within
ending of the current transportation and storage activities were enjoying a growth rate well-beyond
administration, national average in Q4-2023. Considering from a broader perspective, the growth
construction sector and of transportation and storage sector roughly illustrated the symmetry of depression
electricity sector and recovery phase of Covid-19 crisis. During crisis phase in 2020, transportation
experienced a growth and storage was the most contracted sector with growth rate of -14.90% (y.o.y). Now
increase in Q4-2023.” recovering, this sector enjoyed its status as the most expansive sector in the
economy as it grew by 14.07% (y.o.y) in 2023.

Furthermore, accelerating the effort to complete various infrastructure projects

before the ending of the current administration, construction sector and electricity
sector experienced a growth increase in Q4-2023. Specifically, construction growth
rate increased to 7.68% (y.o.y) in Q4-2023 from 6.39% (y.o.y) in Q3-2023 while
electricity to 8.68% (y.o.y) from 5.06% (y.o.y) during the same period. A rather sizable
disbursment of social assistance program to cushion the impact of El-Nino on food
prices and following the trend of social assistance within political business cycle,
growth of public administration sector increased considerably by 1.60% (y.o.y) in Q4-
2023 from -6.25% (y.o.y) in the previous quarter.

A Mixed Picture of Growth and Challenges

Despite the festive period in Q4-2023, especially during Christmas and New Year,
which was expected to boost spending and mobility, household consumption
slowed to below 5%. Household consumption growth that contributes to more than
half of the Indonesian GDP slowed to 4.83% (y.o.y) in Q4-2023 from 5.06% in the
previous quarter. This slowdown was due to a general decline across all consumption

Indonesia Economic Outlook Q2-2024 19

 Q2-2024

groups, except for equipment, which makes up 13.8% of total household

consumption and saw its growth accelerate to 4.85% (y.o.y) in Q4-2023, up from
3.77% (y.o.y) in the previous quarter. The interest rate hike in October 2023 exerted
pressure on the economy's overall purchasing power. Furthermore, higher prices for
food commodities due to El Niño also contributed to this decline in spending power.
For example, the average retail price of rice increased by 18.71% (y.o.y) in Q4-2023,
continuing its upward trend from 15.93% (y.o.y) in Q3-2023. Further evidence of
muted spending came from a decrease in the number of domestic flight passengers
across five major airports, which recorded a negative growth of 74.76% (y.o.y) in Q4-
2023 compared to a growth of 20.50% (y.o.y) in Q3-2023.

Government consumption grew by 2.81% (y.o.y) in Q4-2023, an increase from -

“Government 3,83% in the previous quarter, driven by spending on goods and services, social
consumption grew by assistance, and an increase in the realization of official travel expenditures and non-
2.81% (y.o.y) in Q4- operational goods spending. As of December 30, 2023, government revenue
2023, an increase from reached IDR2,774.3 trillion, which is 105.2% of the revised government revenue
-3,83% in the previous target for 2023. Meanwhile, spending realization during the same period amounted
quarter, driven by to IDR3,121.9 trillion, or 100.2% of the revised target. This achievement in state
spending on goods and expenditure aligns with the mandate from President Joko Widodo, which stipulates
services, social that spending realization should be at least 95% of the target. With this realization,
assistance, and an the budget surplus of IDR67.7 trillion obtained in the Q3-2023 turned into a budget
increase in the deficit of IDR347.6 trillion, or 1.65% of GDP. This is due to expenditures growing by
realization of official 62% (q.o.q), indicating a seasonal pattern in the last quarter of the fiscal year when
travel expenditures and the GoI often increases budget disbursements. The realised deficit figure is lower
non-operational goods than the government’s target of 2.27% of GDP. Another positive performance in the
spending.” consumption group is highlighted by the high growth of 18.11% (y.o.y) in Q4-2023
compared to 6.18% (y.o.y) in the previous quarter for Nonprofit Institutions Serving
Households (NPISHs), driven by increased activities related to election preparation.

Figure 5: Growth of Household Figure 6: Growth rate of Investment and

Consumption and its Components, Its Main Components,
2019-2023Q4 2019-2023Q4
Weight in -10 -8 -6 -4 -2 0 2 4 6 8 10 % Weight in -15 -10 -5 0 5 10 15 20 25
2023Q4 2023Q4
Consumption: Household 2019
100 Gross Fixed Capital Formation
4.83 100 4.38 2020
36.2 F&B, Other than Restaurant 2021
3.50 71.8 Buildings & Structures
4.03
2022
25.2 Transportation & Communication 2023
7.55 12.8 Machine & Equipment
13.8 Equipments
3.32
3.79
5.8 Vehicles
9.5 Restaurant & Hotel 16.01
6.37
5.8 Cultivated Resources
7.2 Health & Education 2019 2.39
4.00
2020
4.5 Others 2021 2.4 Intellectual Property Products
2.89 2022 6.54

3.6 Apparel, Footwear & Maintenance 2023

4.49
1.5 Other Equipments

Source: CEIC Source: CEIC

Investment in Q4-2023 grew by 5.02% (y.o.y), down from the previous quarter's
growth of 5.77% (y.o.y). This growth in the last quarter of 2023 was driven by positive
performance in all investment groups except for cultivated biological resources,

Indonesia Economic Outlook Q2-2024 20

 Q2-2024

which contracted by 1.46% (y.o.y). Investment in buildings and structures, which

accounted for more than 70% of total investment, grew by 6.42% (y.o.y), slightly
higher than the 6.31% (y.o.y) growth in Q3-2023. This increase is likely due to
accelerated infrastructure development towards the end of President Joko Widodo's
administration. The slowdown in overall investment growth can be attributed to a
significant drop in the vehicles group to 3.20% (y.o.y) in Q4-2023, after a robust
21.27% (y.o.y) growth in the previous quarter. This decline is linked to reduced
domestic and international demand. Domestically, wholesale motor vehicle sales
data for Q4-2023, indicating sales to the industry, fell by 13.73% (y.o.y). This drop
likely resulted from the increase in Bank Indonesia's benchmark interest rate, leading
to higher financing costs, affecting vehicle sales where 80% are funded through
credit.

Bank Indonesia reported that banking credit growth throughout 2023 once again
reached double digits, at 10.38% (y.o.y), although this was a slowdown from 11.35%
(y.o.y) in 2022. This strong performance was driven by positive demand from both
corporate and household sectors, along with robust risk appetite and ample liquidity
“...banking credit on the supply side in the banking sector.Focusing on Q4-2023, working capital credit
growth throughout increased by 9.43% (y.o.y), growing faster than the previous quarter's 7.40% (y.o.y),
2023 once again largely due to expansion in the trade, hotels, and restaurants sector. Similarly,
reached double digits, consumer credit grew by 9.22% (y.o.y) toward the end of the year, outpacing the
at 10.38% (y.o.y), previous quarter's 9.05% (y.o.y). However, the only slowdown occurred in the
driven by positive investment credit component, where growth in this quarter was recorded at 10.68%
demand from both (y.o.y), down from 11.20% (y.o.y) in the previous quarter, marking the lowest growth
corporate and rate in a year. This deceleration might be attributed to a "wait-and-see" approach in
household sectors, anticipation of the 2024 elections, leading businesses to delay expansion plans and
along with robust risk decrease their demand for investment credit.
appetite and ample Figure 7: Shares of GDP Components, Figure 8: Credit Growth by Purposes,
liquidity on the supply 2018Q1-2023Q4 (%) 2017Q2-2023Q4 (y.o.y, %)
side in the banking 130 16

22
sector.”
110 21
22 21 22 21 20 21 20 18 19 20 21 22 23 23 23 24 25 25 24 22 23 25
12 10.68
90
35 34
33 32 33 33 32 33 32 31 32 33 33 31 32 33 32 30 31 32 31 30 32 32 9.71
70 9.43
6 7 8 11 6 8 7 10 6 8 8 11 6 8 8 11 5 7 8 10 5 7 7 10 8 9.22
50
30 55 54 54 55 55 54 54 55 55 54 53 54 54 53 52 53 54 53 52 53 53 53 52 53
4
10
-10 -21-20-21-22-19-18-18-19-17-15-14-16-18-19-18-21-20-20-22-21-20-18-19-20 0
-30
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-4
2018 2019 2020 2021 2022 2023
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4

Household Consumption Government Consumption

2017 2018 2019 2020 2021 2022 2023
Gross Fixed Capital Formation Export
Import Working Capital Investments Consumption Total

Source: CEIC Source: CEIC

In the fourth quarter of 2023, the growth rate of third-party funds accelerated to
2.43% (q.o.q), compared to 1.05% (q.o.q) in the previous quarter. This was the fastest
quarterly growth throughout 2023. The increase occurred across all types of
deposits—demand, savings, and time deposits. This growth may be attributed to
Bank Indonesia's interest rate hike of 25 basis points in October, which increased the
deposit rate and incentivized people to move their funds to banks.

Indonesia Economic Outlook Q2-2024 21

 Q2-2024

Despite a slowdown in the growth of third-party funds, the Indonesian banking

industry remained resilient as of December 2023, with a Return on Assets (RoA) of
2.74% and a Net Interest Margin (NIM) of 4.81%. The Capital Adequacy Ratio (CAR)
was also relatively high at 27.65%, providing ample capacity for banks to manage
risks amid global uncertainties. Liquidity ratios were equally favorable, with the
Liquid Assets/Non-Core Deposits (AL/NCD) ratio and the Liquid Assets/Third-Party
Funds (AL/DPK) ratio recorded at 120.07% and 28.73%, respectively. These figures
significantly exceeded the minimum thresholds of 50% and 10%.

Food Price Pressures Fuel Inflation in Indonesia

Headline inflation reached 3.05% (y.o.y) in March 2024, slightly up from 2.75% (y.o.y)
the previous month. Despite marking a seven-month high, headline inflation remains
within BI’s target range of 1.5% to 3.5%. The increase in headline inflation was driven
by higher prices of food commodities, resulting from the delayed harvest season due
to El-Nino's impact and heightened demand during the Ramadan period. This
indicates a dual pressure on food prices, stemming from both supply-side constraints
“… increase in headline and seasonal demand fluctuations, underscoring the vulnerability of food prices to
inflation was driven by climatic disruptions and religious events. Across all components, inflation was
higher prices of food evident in the third month of 2024. The primary driver of headline inflation was the
commodities, resulting volatile goods component, which experienced a 10.33% (y.o.y) increase,
from the delayed contributing 1.64% to March 2024's inflation. Food price surges, resulting from
harvest season due to limited supply and increased Ramadan demand, led to a surge in volatile goods
El-Nino's impact and inflation from 8.47% (y.o.y) in February 2024. Core inflation rose to 1.77% (y.o.y) in
heightened demand March 2024 from 1.68% in the previous month, propelled by heightened demand
during the Ramadan during Ramadan and ahead of Eid Al Fitr celebrations. Administered prices saw a
period.” 1.39% (y.o.y) increase in March 2024, lower than the 1.68% (y.o.y) recorded in
February 2024. In terms of expenditure groups, the rise in March 2024 inflation was
primarily driven by price increases in the food, beverage, and tobacco group, which
recorded a 7.43% (y.o.y) inflation rate, contributing 2.09% to the annual headline
inflation.

Figure 9: Inflation Rate (%, y.o.y) Figure 10: Inflation Rate (%, m.t.m)

Source: CEIC Source: CEIC

Indonesia Economic Outlook Q2-2024 22

 Q2-2024

On a monthly basis, inflation stood at 0.52% (m.t.m) in March 2024, representing an

increase from 0.37% (m.t.m) in February 2024. Similar to the annual inflation trend,
all components experienced a monthly price increase in March 2024. The most
significant monthly surge was observed in the volatile goods component, recording
a 2.16% (m.t.m) inflation rate in March 2024, up from 1.53% (m.t.m) in February 2024.
This increase was driven by rising prices of purebred chicken eggs, purebred chicken
meat, and rice. However, the upward trajectory of volatile goods was offset by
decreases in the prices of red chili pepper and tomatoes. Core inflation registered
at 0.15% (m.t.m) in March 2024, attributed to price hikes in gold jewelry, cooking oil,
and rice with side dishes, coinciding with increased demand due to the seasonal
effect of Ramadan. Administered prices experienced a 0.08% (m.t.m) inflation rate
in March 2024, down from 0.15% (m.t.m) the previous month. This decline in
administered price inflation was driven by lower airfare in March 2024, although it
was partially counteracted by price increases in machine-made kretek cigarettes.

Looking ahead, inflationary pressures are anticipated to originate from three sources.
Firstly, although harvest season happen in April 2024, volatile food prices are
expected to continue being a source of inflation due to increased demand during
Eid Al Fitr festivity. Secondly, should the Iran-Israel conflict prolong, there is an
expectation of an increase in oil prices, which in turn may exert pressure on other
“Looking ahead, global commodities. Thirdly, the weakening Rupiah may contribute to imported
inflationary pressures inflation, as a depreciating currency tends to make imported goods more expensive
are anticipated to domestically. These factors collectively highlight the multifaceted nature of
originate from three inflationary pressures, necessitating vigilant monitoring and appropriate policy
sources: food prices, oil responses. For example, collabouration between the Central and Regional Inflation
price increases, and Control Team (TPIP and TPID) and the National Food Inflation Control Movement
imported inflation.” (GNPIP) to anticipate the potential increase in food prices ahead of Eid Al-Fitr 2024.
Bank Indonesia is also expected to take steps to maintain Rupiah stability by
balancing supply and demand in the foreign exchange market through triple
interventions.

A Strong Start for Investment in Indonesia in 2024

Total investment realization in the first three months of 2024 reached IDR401.5
trillion, which is 24.3% of the 2024 investment target of IDR1,650 trillion. The latest
total investment realization rose by 22.1% (y.o.y) from the same period a year earlier
and was 9.76% higher compared to the previous quarter. This would suggest that
investment realization in Q1-2024 was not impacted by the election period when
investors usually adopt a “wait and see” approach. By source of investment, total
investment realization in Q1-2024 was slightly dominated by foreign direct
investment (FDI), totaling IDR204.4 trillion, contributing 50.9% to the total
investment realization. Domestic direct investment (DDI) totaled IDR197.1 trillion,
making up 49.1% of the total investment realization. Both FDI and DDI showed
growth in Q1-2024. FDI grew by 15.5% (y.o.y) and 10.8% (q.o.q), suggesting foreign
investors’ confidence in Indonesia as a favorable investment destination. DDI also
increased, with a 29.7% (y.o.y) rise or an 8.7% (q.o.q) increase compared to the

Indonesia Economic Outlook Q2-2024 23

 Q2-2024

previous quarter. This highlights a robust domestic economy where local businesses
and entrepreneurs are investing and expanding their operations.

The Ministry of Investment (BKPM) reported that downstream-related investment in

Q1-2024 totaled IDR75.8 trillion, constituting 18.9% of total investment realization
for the quarter. While this figure indicated a 30.71% (q.o.q) decrease from the last
quarter of 2023, it is still the major contributor to the overall investment. In terms of
industry, the basic metal industry, metal goods, non-machinery, and related
equipment continued to lead total investment realization, with a total of IDR50.48
trillion, contributing 12.22% of Q1-2024's investment. The transport, storage, and
communication sector followed as the second-largest investment sector, with
investments totaling IDR48.96 trillion, accounting for 11.85% of the total. Transport,
storage, and communication's strong performance helped push mining to the third
position. The mining sector received investments amounting to IDR43.5 trillion,
representing 10.53% of total investment for the January–March 2024 period.

“…Indonesia's Regarding investment locations, the total investment realization in Java reached
investment inflows are IDR206.31 trillion, accounting for 51.38% of the total investment realization. This
less diversified, which indicates that investment remains heavily concentrated in Java. Outside of Java,
could increase the risk Central Sulawesi experienced significant investment, with IDR28.51 trillion for the
of economic shocks if January–March 2024 period. This investment surge is largely driven by downstream
the Asian markets face activities, notably in smelter development.
downturns or Examining FDI by country, Asia continued to be the primary source in the first three
disruptions.” months of 2024, accounting for 77.94% of total FDI. Singapore led the list with
USD4.24 billion, followed by Hong Kong at USD1.90 billion, and China at USD1.87
billion. Although Asia's strong presence demonstrates robust regional economic
ties, this concentration might raise concerns. It suggests that Indonesia's investment
inflows are less diversified, which could increase the risk of economic shocks if the
Asian markets face downturns or disruptions.

Figure 11: FDI and DDI Figure 12: FDI Realization by Sectors
(Nominal) (Nominal)

Source: CEIC Source: CEIC

Indonesia Economic Outlook Q2-2024 24

 Q2-2024

Trade Surplus Falls, Rupiah Under Pressure

In the first quarter of 2024, Indonesia’s trade balance showed a surplus of USD7.34
billion. Despite this positive figure, the overall trend has been downward since the
third quarter of 2022. The trade surplus in Q1-2024 was USD7.31 billion,
representing a contraction of 39.40% (y.o.y) from the previous year. The primary
reason for this decline in the trade surplus is a more significant drop in exports. In
Q1-2024, exports decreased by 7.20% (y.o.y) to USD62.20 billion, while imports saw
a marginal contraction of just 0.10% (y.o.y) to USD54.90 billion. This discrepancy in
the rates of growth between exports and imports contributed to the reduction in the
overall trade surplus. Several factors are driving this downward trend. One is the
moderation in commodity prices, which affects Indonesia's export revenues due to
its reliance on commodities. Another contributing factor is China's economic
slowdown, as China is Indonesia's main trading partner. When the Chinese economy
slows down, demand for exports decreases. Indonesia's exports to China accounted
for more than 20% of its total exports, but in Q1-2024, these exports dropped by
16.24% (y.o.y) to USD13.36 billion.

Looking at exports, the decline in performance during Q1-2024 was driven by

contractions in both oil and gas exports and non-oil and gas exports. Oil and gas
exports dropped by 2.81% (y.o.y) in Q1-2024 to USD3.90 billion. In contrast, non-oil
and gas exports contracted by 7.47% (y.o.y) in the same period to USD58.34 billion.
By commodity, almost all major non-oil and gas commodities saw an annual
decrease in exports in Q1-2024, with two exceptions: exports of ores, slag, and ash,
which increased by 47.46% (y.o.y), and footwear, which increased by 0.94% (y.o.y).
Moving on to imports, the slight decline of 0.10% (y.o.y) to USD54.90 billion in Q1-
“Despite recording a
2024 was driven by a drop in non-oil and gas imports, which fell by 1.57% (y.o.y) to
trade surplus (in Q1-
USD45.89 billion. However, oil and gas imports saw an increase of 8.13% (y.o.y) to
2024), the overall trend
USD9.00 billion. By commodity, the top 10 commodities with the highest import
of the surplus has been
values recorded a 1.17% (y.o.y) increase, from USD28.54 billion in Q1-2023 to
downward since the
USD28.88 billion in Q1-2024.
third quarter of 2022”
Weak global demand from Indonesia's major trading partners is likely to drive the
country's trade surplus down. This trend is mainly due to economic slowdowns in
these regions, which affect demand for Indonesia's exports. However, a recent
increase in commodity prices, reflected in higher crude oil and rubber prices, could
help stabilize the trade surplus by offsetting some of the impact from reduced global
demand. This is because Indonesia's exports are primarily driven by raw materials
and commodities. Between January and February 2024, approximately 47% of
Indonesia's total exports were made up of mineral resources, vegetable and animal
fats, and pearls, diamonds, and precious metals. This heavy reliance on commodity
exports means that any fluctuations in global commodity prices have a direct impact
on Indonesia's trade balance. Meanwhile, around 90% of Indonesia's total imports
consist of raw materials and capital goods, indicating that a significant portion of
these imports supports manufacturing and production. An increase in the latest
Manufacturing Purchasing Managers' Index (PMI) suggests an uptick in

Indonesia Economic Outlook Q2-2024 25

 Q2-2024

manufacturing activity, pointing to a higher demand for raw materials and capital
goods, which would likely translate into an increase in imports.

The drop of trade surplus in the first quarter of 2024 has broken the increasing trend
of quarterly trade balance since Q3-2023. Previously, goods trade balance increased
by USD1.36 billion from Q3-2023 to Q4-2023, driven by higher export rise than the
import increase during that period. Despite the increasing surplus in goods trade,
current account has widened during that period. Current account deficit in the last
quarter of 2023 was recorded at USD1.29 billion (0.4% of GDP), widened by USD0.25
billion from the previous quarter’s deficit of USD1.04 billion (0.1% of GDP). Lowering
current account balance was attributable to the increasing deficit of service trade
balance increasing foreign tourist arrival to Indonesia during the end-of-year holiday
period and rising freight cost following the rise of import of goods, and widening
primary income deficit due to interest payment to foreign creditors. Current account
balance is expected to remain negative in the first quarter of 2024 due to narrowing
trade surplus in goods.
“The shifting sentiment
towards rate cuts delay Figure 13: Indonesia Exports Profile Figure 14: Indonesia Imports Profile
by the Fed has spurred (Q1-2024) (Q1-2024)
capital flows outside
emerging economies,
including Indonesia.”

Source: CEIC Source: CEIC

On the financial flow front, global market has been repeatedly ‘surprised’ by the
release of US inflation data during January-March 2024. In addition, US February
unemployment rate (which was published in March 2024) also increased to 3.9% in
February 2024 from 3.7% in the previous month. The surprising rise of inflation
triggered a sentiment that the Fed might have to wait longer than previously
expected to cut down policy rate from its current 23-year high. 2023 end-of-year
market consensus was leaning towards the Fed to cut its interest rate in June 2024.
However, rising inflation might suggest that the best time to cut rate is to be
postponed until September this year. The shifting sentiment towards rate cuts delay
by the Fed has spurred capital flows outside emerging economies, including
Indonesia. Consequently, Indonesia experienced a cumulative outflow of USD1.89
billion in bond market during the first three months of 2024. On the other hand,
there was an inflow of capital around USD1.56 billion towards domestic equity
market during the same period. As investors maintain a positive growth projection
towards Indonesia and reduced uncertainty after projected Presidential election
quick-count results, capital inflow to equity market has reduced the overall net

Indonesia Economic Outlook Q2-2024 26

 Q2-2024

capital outflow. Cumulatively, Indonesia ‘only’ experienced capital outflow of

USD0.3 billion in Q1-2024.

The narrowing trade surplus, along with net outflow from domestic financial market
during January-March this year, have depreciated Rupiah considerably. At the end
of March 2024, Rupiah depreciated 2.96% (y.t.d), performed worse that its peers’,
including Indian Rupee, Philippines Peso, and Chinese Yuan. A considerable
pressure on Rupiah has deteriorated foreign asset reserves, as it has been used in an
effort to stabilize Rupiah. Stood at USD140.4 billion in March 2024, foreign asset
reserves were down by almost USD6 billion since December 2023. Nonetheless,
Indonesia's foreign exchange reserves remain adequate as it is currently equivalent
to 6.4 months of imports or 6.2 months of imports and government external debt
payments, well above the international adequacy standard of 3 months of imports.

Figure 15: Monthly Trade Balance Figure 16: Exchange Rate and
(Nominal) Accumulated Short-Term Capital Inflow
USD bn IDR Trillion
“… the weakening 10.0 150 16,500

Rupiah has forced BI to 8.0

100
16,000

hike its policy rate in 6.0

50
15,500
0
April 2024. 4.0
-50 15,000
Unfortunately, this
2.0
-100
0.0 14,500
effort taken by BI in an -2.0
-150

attempt to counter the -4.0

-200 14,000
22

23

24
22

23
2

4
2

3
2

3
2

3
-2

-2
-2

-2

-2
-2

-2
l-2

l-2
n-

n-

n-
p-

p-
ay

ay
ov

ov
ar

ar

ar
Mar-20 Sep-20 Mar-21 Sep-21 Mar-22 Sep-22 Mar-23 Sep-23 Mar-24
Ju

Ju
pressure on exchange
Ja

Ja

Ja
Se

Se
M

M
M

M
N

N
TB: Oil and Gas TB: Non-Oil and Gas Trade Balance (TB) Total Portfolio (LHS) Bonds Stocks IDR/USD (RHS)

rate is of no Source: CEIC Source: CEIC

significance (at least

until early May) as the Looking beyond the Q1-2024 domestic financial situation, Indonesia has been facing
external pressure has an enormous currency pressure and surge in capital outflow in April 2024. This has
been rather been triggered by yet another round of shifting expectations regarding the Fed’s
enormous.” timeline to cut its policy rate and escalating geopolitical tension in Middle East. As
a consequence, Rupiah was recorded at around 16,280/USD in Mid-April, reaching
its weakest point since April 2020 (early days of Covid-19 breakout). Depreciated by
5.55% (y.t.d), the weakening Rupiah has forced BI to hike its policy rate in April 2024.
Unfortunately, this effort taken by BI in an attempt to counter the pressure on
exchange rate is of no significance (at least until early May) as the external pressure
has been rather enormous. Going forward, the biggest challenge faced by BI will
likely come from exchange rate front. Though there are some remaining pressures
on domestic price level stemming from food prices, it is expected that inflationary
pressure will soften in the upcoming months as impact of El-Nino is gradually
decreasing and the seasonal holiday period has passed. However, global financial
market is prolongingly uncertain, driven by continuing ‘high-for-longer’ sentiment
and some potential of intensifying geopolitical tension. BI should be very vigilant in
navigating external pressure and managing Rupiah stability. This is imperative to
ensure domestic financial stability, growing real sector, and overall economic
confidence.

Indonesia Economic Outlook Q2-2024 27