Booming foreign trade drives the economy

Indonesia recorded real economic growth of 5.2 percent in the first half of 2022. The International Monetary Fund (IMF) is forecasting GDP growth of 5.3 percent for the year as a whole. This is a significant increase. A year earlier the IMF had assumed 4.5 percent for 2022. In return, it should only be 5 percent in 2023 instead of the previously expected 6 percent. This shows that forecasts are more difficult than ever in times of high commodity prices and inflation.  

In the fading corona crisis, there are only a few restrictions on public life in Indonesia. People are back in the office, in some places with an entitlement to home working days. In the meantime, industry is also producing at a normal level again. However, they are now the harbingers of a weakening of demand in the global economy. 

The clothing industry, which has so far been able to look back on an extremely strong export year, reports fewer orders from the main customer country, the USA, and from Europe, and is laying off tens of thousands of employees. The food and electronics industries are also reporting a drop in orders from abroad. 

However, Indonesia's export-oriented manufacturing industry is comparatively small. Although lost orders cost jobs and exacerbate social tensions, they alone do not trigger an economic crisis. The currently booming raw materials sector provides a balance. Coal, palm oil, nickel and rubber from Indonesia achieve record prices on the international markets. 

Infrastructure continues to be a priority for the government. The movement of goods should be facilitated and the mobility of people should be improved. The corona-crisis have led to a number of important projects delayed. In addition, the rising dollar makes it difficult to buy foreign technology and services. Nevertheless, the government is sticking to the prestigious construction of the new capital in the province of East Kalimantan. The first construction activities have started, tenders for the construction of the supply infrastructure are running. 

Investment: Liberalization is intended to attract foreign funds 

Indonesia wants to bring more labor-intensive manufacturing into the country. The investment environment has long been unfavorable for the sector. That has now changed. In spring 2021, investment law and labor law were liberalized. Hundreds of economic sectors have been opened to foreign ownership. Tax incentives are designed to direct funds into export production. Companies can now act more flexibly on the labor market because protection against dismissal and severance pay rules have been relaxed and minimum wages have been reined in. 

Specialist lawyers rate the reform as a big step, though it remains to be seen whether the reform will actually bear fruit. Foreign business people have only been able to travel to the country again since spring 2022. However, commercial law firms are reporting that foreign companies are showing increasing interest in Indonesia. Further hopes rest on the dissatisfaction of foreign companies in China, which the island state wants to offer a new home. 

Consumption: Consumers are cautious 

Private consumption plays a key role in economic development. Before the corona crisis, its contribution to the gross domestic product (GDP) was almost 60 percent and was therefore an indispensable pillar of the economy. Since then, its share has fallen continuously and was just over 50 percent in the third quarter of 2022. 

During the crisis, private consumer spending fell more sharply than overall economic output. Their recovery has also been more sluggish since then. In the first three quarters of 2022, the overall economy grew by 5.4 percent, but private consumption only by 5.1 percent. Inflation, now at 5.7 percent (October 2022), is causing problems for consumers. 

Foreign trade: surplus at record level 

Indonesia's foreign trade shrank by only 10 percent in the crisis year 2020. Record values in foreign trade were already recorded in 2021: imports and exports each increased by almost 40 percent. The reason for this was the high world market prices for raw materials. With the two main export goods, coal and palm oil, unprecedented revenues could be achieved. 

This trend will continue in 2022: By October, exports were up 31 percent year-on-year and imports 28 percent. This means that the values for the whole of 2021 have already been exceeded. The foreign trade surplus is a record $44.5 billion. 

This article is based on this GTAI report.