Macroeconomics Research

5 January 2023

Indonesia 2023 Economic Outlook

The return of emerging-market maverick

`
 While the global economy suffered from the impact of Covid-19 in 2022, Economic Research Team
Indonesia was a standout performer in Emerging Markets (EM) with annual GDP Satria Sambijantoro
growth (and its nominal GDP tally) quickly returning to pre-pandemic level. We E-mail: satria@bahana.co.id
Phone: +6221 2505081 ext. 3620
expect Indonesia’s GDP growth to average 4.5% in 2023, with hefty election
Raden Rami Ramdana
budget supporting household consumption. E-mail: raden.rami@bahana.co.id
Phone: +6221 2505081 ext. 3623

Drewya Cinantyan
 While global inflation surged last year, Indonesia’s inflation was contained due to E-mail: drewya.cinantyan@bahana.co.id
a low-base for most of 2022, before it jumped in September on fuel-price hikes. Phone: +6221 2505081 ext. 3613

Our y-y CPI assumption for 2023 is 5% due to the low-base effects last year,
along with the demand-led inflationary pressure from minimum wage hikes.

 Trade surplus of USD3-5bn a month may continue on the back of strong palm oil
and coal exports, helping the current-account to remain in surplus (our
assumption is 0.2% of GDP for 2023). However, the wide FX rate differentials
with offshore banks means the strong export earnings are not converted into
domestic dollar supply and boosting the FX reserves. We believe structural
reforms such as revision to the Foreign Exchange Law (UU Devisa), may be
necessary to turn the situation around.

 We also see carry-over risks to the IDR this year. Bank Indonesia was among the
last to initiate the rate-hike cycle, but also was the first to pivot to less aggressive
tightening (it only hiked rate by 25-bps in December, despite 50-bps rate hikes
by the Fed and ECB). This dovish gambit has reversed the strong performance of
the rupiah, which under our assumptions may average at 15,800 per dollar
throughout in 2023. Meanwhile, we reiterate our base case for the benchmark BI
rate to be lifted to 6.00% this year.

 Fiscal consolidation is likely to continue, as we expect the budget deficit to hit

2.5% of GDP for 2023. In anticipation of the 2024 elections, leadership
transition at local levels (governors, regents, mayors) may limit government
spending efficacy, especially in 4Q23.

Contents
GDP lift from elections may be significant 2

Will CPI surprise again on the downside? 3

IDR outlook: the surplus without the dollars 4

BI: the last to tighten, the first to pivot 6

Fiscal policy outperforms expectations 6

Exhibit 1. Indonesia economic forecasts

2022
2023F 2024F
realized
GDP growth (%y-y) 5.3 4.5 5.0
Inflation (%y-y) 6.1 5.0 3.5
USDIDR 15,600 15,800 15,000
BI rate (%) 5.5 6.0 5.5
Current Account Balance (% of GDP) 0.2 0.2 -0.5
Fiscal Balance (% of GDP) -2.0 -2.5 -2.5
FX reserves (USDbn) 134 145 155
INDO 10-year bond yield (%) 6.9 6.7 6.3
US Fed Funds Rate 4.5 5.0 4.0
Brent Oil (USD/bbl) 84 95 88
Source: Bahana forecasts

Disclosure: PT. Bahana Sekuritas does and seeks to do business with companies covered in its research reports. Investors should consider this report as only a single
factor in making their investment decision.
This report uses credit ratings assigned by Fitch, which is not registered with Japan’s Financial Services Agency pursuant to Article 66, Paragraph 27 of the Financial
Instruments and Exchange Act.
Please see the important disclaimer information on the back of this report
Indonesia 2023 Economic Outlook
5 January 2023

It has been an impressive year for Indonesia. If Exhibit 2. GDP growth forecasts (%y-y)
investors were told in early 2022 that the Fed would 8

hike rates by more than 400-bps and the Indonesian 6

rupiah would become EM’s best-performing currency, 4.7 5.1

most would have found it hardly believable. Yet that 4

4.1
4.4

miraculous thing happened last year. The economy 2

also posted a 5% y-y GDP growth, supported by
household consumption, despite not lifting the Covid- 0

19 restrictions completely. Meanwhile, annual inflation -2

peaked at only 5.95% in September, despite the
government hiking the fuel prices by around 40%. -4

-6
On top all of that, President Joko Widodo successfully

2012

2012

2013

2014

2015

2015

2016

2017

2018

2018

2019

2020

2021

2021

2022

2023
hosted the G20 Summit when the Russia-Ukraine war
Source: CEIC, Bahana
was still raging. The Indonesian government managed
to stay largely neutral, in adherence to its “free-and-
Exhibit 3. Retail mobility and manufacturing PMI
active” foreign policy, by extending invitation to both
Russia and Western leaders. The President’s charm 70.0 30.0
diplomatic offensive was in full force in Bali, where he 20.0
60.0
signed multi-billion investment deals, which should 13.93
10.0
bolster government’s long-term economic ambitions. 50.0
50.900.0
40.0

Repeating those economic feat in 2023 will not be 30.0

-10.0

easy. With the looming 2024 Legislative and -20.0

Presidential elections, politics may prevail over 20.0

-30.0

economics in the heads of Indonesian policymakers, 10.0 -40.0

and it is likely some economic reforms will be halted, 0.0 -50.0
temporarily, in favour of near-term populist policies. Sep-20
Mar-20

Mar-21

Sep-21

Mar-22

Sep-22
Jan-20

Jul-20

Jan-21

Jul-21

Jan-22

Jul-22
Nov-20

Nov-21

Nov-22
May-20

May-21

May-22
Given the political and regulatory uncertainty, private
companies will be in wait-and-see mode and dial down Manufacturing PMI (LHS) Retail mobility (RHS)

their capex spending, affecting investments and Source: CEIC, Bahana

eventually GDP growth outlook.
Politics will also likely affect the decision-making in
Bank Indonesia, which is poised to see leadership
transition in May 2023. Perry Warjiyo, the incumbent
Governor, is seeking reappointment and our investors
suspect he had been acting more dovish than he
should to secure that post for another five years. The
refusal to adhere to monetary policy orthodoxy – and
the wide rate differential between onshore and
offshore banks because of that – will be a risk for IDR
to be carried over to 2023, in our view.
GDP lift from elections may be significant
The resilience of domestic consumption of 150mn
middle-class means the Indonesian economy should
be able to decouple from global risks. The economy
has returned to 5% y-y GDP growth last year,
supported by economic reopening and pent-up
demand. We also believe the acceleration in domestic
CPI and the surge in interest rates may not curtail
purchasing power too much.
The resilience of domestic economy was also evident
after fuel prices were hiked by c. 40% in September,
yet high-frequency consumption and investment
indicators did not fall as much.
Nevertheless, there are early signs suggesting the
pent-up demand from economic reopening has
subsided, and the transmission from elevated
commodity prices to higher purchasing power may not
be that strong (hence our assumption of sub-5% GDP
growth for this year). Cumulative electricity sales
growth have decelerated from 8.64% y-y in April to
6.54% in November. In November and December, y-
y electricity sales rose by only 2.96% and 2.17%,
respectively, compared to 9.63% in August and 6.3%
in September. The weak electricity sales were felt
across industries, with the steepest decline seen in
industry and household segments (Exhibit 4).
Exhibit 4. Electricity sales in industry, household,
and commercial segments (%y-y, 3MA)
30.0%

25.0%

20.0%
Officially, the large-scale social restrictions (PPKM) 15.0%
remained in place until end-2022, yet in reality 10.0%
13.8%

economic activities returned to normal since 2Q22. In 5.0%

turn, Google retail mobility data in several Indonesian 0.0%

2.1%
0.3%

provinces had surged by more than 20% compared to -5.0%

pre-pandemic level (Exhibit 3). Most local banks -10.0%

-15.0%
targeted credit growth to surpass 10% y-y in 2022,
-20.0%
while manufacturing PMIs have consistently exceeded
Aug-21
Jun-17

Jun-22
Apr-18

Sep-18

Dec-19

Mar-21
Jan-17

Oct-20
Jul-19

Jan-22
Nov-17

Feb-19

Nov-22
May-20

the expansionary threshold of 50 for some time.

Households Business Industry

Source: State electricity company (PLN), Bahana

PT. Bahana Sekuritas – Economics Research 2

 Indonesia 2023 Economic Outlook
5 January 2023

The economy was nonetheless supported by resilient
job markets, particularly for professionals and formal
white-collar workers. While official unemployment
rate of 5.86% (8.43mn people unemployed) has not
returned to pre-pandemic level of 5.18% (7.05mn
people), it has actually dropped significantly from
pandemic trough of 7.07% (9.77mn) in 2020. The
recovery was driven by the formal sector, which
employs 40.5% of Indonesia’s total workforce of
143mn people. Our data also suggests major public
firms like Astra and Indofood have been on an
aggressive hiring spree over the past two years.
Overall, we are optimistic on the outlook of household
consumption (54% of Indonesia’s GDP), which we
expect to grow by 4.80-5.40% y-y in 2023. There
could be positive catalysts from the upcoming 2024
General & Presidential Elections: historically,
household consumption growth jumped higher than
normal around two quarters before Election Day (14
February 2024), on the back of aggressive campaign
spending by political parties and presidential
candidates.
For the upcoming elections, the Finance Ministry has
earmarked a budget of IDR76.6-110.4tn (USD5-7bn),
which is higher than the budgets for all four previous
elections from 2004-2019 combined. Previous election
uncertainty serving as drag to GDP growth. Exports
have grown more than 20% y-y in 2022, but this is
likely to moderate going forward, with our forecast at
10.6% growth in 2023. Despite various down-
streaming and value-adding efforts in the mining
sector, in the near-term Indonesia remains heavily
reliant on commodity exports, and we expect the
export growth to be affected by slowing external
demand and plateauing of commodity prices.
Will CPI surprise again on the downside?
When global inflation surged to double-digit rates last
year, Indonesia’s y-y CPI growth of between 2-4% in
1H22 seemed too good to be true. But those in the
markets were in for even bigger surprise when the CPI
undershot expectations again after the fuel price hike.
Inflation peaked at 5.95% y-y, below our target range
of 6-7%, even after the government hiked the prices
of subsidized fuel by around 40% in September.
We assume y-y CPI to hit 5% for 2023 due to low base
effects last year, as well as the relatively steep hike in
minimum wages this year (7.3% y-y hike in minimum
wages for 2023 is the highest in three years).
Exhibit 6. Inflation forecast (% y-y)
9.00

cycles normally added 0.1-0.2% to headline full-year

8.00
GDP growth, and we expect this year’s election to add
0.25-0.30% to the economy, mostly through domestic 7.00

consumption. 6.00

Exhibit 5. Election budget (IDRtn) 5.00

100
4.00
86.00 4.34
90
3.00
80

2.00
70

60 1.00
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
50
Source: CEIC, Bahana
40

30 25.60
However, we do think there is fair chance for actual
20
8.50
15.60
data to undershoot our expectations again.
10 4.50

0
2004 2009 2014 2019 2024
Steep hike in minimum wages this year is indeed a
risk to inflation and our data show some positive
Source: Finance Ministry, Bahana
relationship to core CPI. But the impact should not be
overstated since 60% of Indonesian workforce are
Nevertheless, it is the investment side that we are
employed in the informal sector where labour market
most concerned. Investors’ appetite always fell before
remains generally loose – in other words, unaffected
elections, and there is still uncertainty from the
directly by the policy. There is also little evidence BI’s
legality of Omnibus Law, which was initially designed
debt-monetization program has drastically increased
to attract investments and boost jobs. Note that
core inflation. All in, wage and services inflation in
leadership transition will also occur at regional levels
Indonesia may accelerate but won’t be as bad as in
(elections for governors, regents and mayors due on
the US, in our view.
27 November 2024, or nine months after Presidential
and Legislative Elections). This means further
If the wage-led inflationary pressure is as high as
investment overhang, with investors facing regulatory
expected, there is possibility that y-y CPI in Indonesia
and leadership uncertainty from both central and
could fall to 4.3% after September 2023, when the
regional governments.
high-base effects on a y-y basis finally subside, or well
below our 5.0% assumption for 2023.
The y-y growth of investments (32% of Indonesia’s
GDP) fell from 9.13% in 2012 to 5.01% in 2013, or
one year prior to the leadership transition from Susilo
Bambang Yudhoyono to Joko Widodo. We assume only
3.75% y-y growth in investments for 2023, down from
estimated 4.30% last year, with election-related

PT. Bahana Sekuritas – Economics Research 3

 Indonesia 2023 Economic Outlook
5 January 2023

Exhibit 7. Core inflation and minimum wage growth balance (c. -USD30bn per annum), 2) transportation-
25.0 services (c. -USD 8bn), and 3) investment repatriation
in primary-income balance (c. -USD30bn per annum).
20.0
Minimum wage growth (y-y)

Some factors could narrow this services-balance

15.0 deficit this year. Recent pullback in global freight costs
would narrow the deficit in transportation sector by
10.0
some USD1-2bn per annum. Support could also come
from recovery in tourism FX earnings, which is
5.0
projected to top USD7bn (gross) in 2022, higher than
USD521mn in 2021 but still significantly lower than
0.0
0 2 4 6 8 10 12
USD17bn recorded prior to pandemic.
Core inflation (y-y)

Source: CEIC, Bahana

Exhibit 8. Balance of payments (USDbn)
20.0
Besides, we think it is unlikely the government will
pursue unpopular, inflationary policies this year. 15.0

Ahead of the 2024 Elections, the government appears 10.0

keen to maintain stable food prices and purchasing 5.0

power. To control inflation, supply-side efforts such as 4.38

opening the rein of imports, or improving food supply 0.0

-1.30

at regional governments level (a task normally carried -5.0

-6.07
out by Bank Indonesia’s regional inflation taskforce, -10.0
or TPID) can actually be more effective than hiking the
BI rate. Thus, when observing monetary policy setting -15.0

1Q21
1Q12

4Q12

3Q13

2Q14

1Q15

4Q15

3Q16

2Q17

1Q18

4Q18

3Q19

2Q20

4Q21

3Q22
and central bank credibility in Indonesia, inflation may
play second fiddle to exchange-rate stability. Current account Financial account Capital account BoP

Source: Bank Indonesia, CEIC, Bahana

Indonesia’s inflation is unique in a sense that it is
driven mostly by supply-side rather than demand-led. Exhibit 9. Current-account service balance (USDbn)
Past events also showed that any disruption in supply 3.00

for certain food commodities would initially increase 2.00

prices, but Indonesians are quick to search for other 1.00

edible alternatives, thus normalizing the inflationary 0.00 0.17

spiral in the long-term. -1.00 -2.18

-2.00
Food accounts for c. 20% weighting in CPI and most
-3.00
of the commodities are also domestically produced,
-3.26
thus insulating Indonesia from global inflation -4.00

predicament. The local production of rice has been in -5.00

-5.27

surplus and the government is closely monitoring the -6.00

1Q12 4Q12 3Q13 2Q14 1Q15 4Q15 3Q16 2Q17 1Q18 4Q18 3Q19 2Q20 1Q21 4Q21 3Q22
sufficiency of supply for chili, shallot, egg, among Transportation Travel Other services Services (net)
other commodities.
Source: Bank Indonesia, CEIC, Bahana

IDR outlook: the surplus without the dollars

We think Indonesia will still be exposed to the
fluctuation in commodity prices, though down-
Should commodity prices see modest pullback this
streaming initiatives in the mineral sector might
year (our assumption: 10-15% decline in average
reduce the volatility of its export value. The ban on
prices compared to 2022) Indonesia could still report
nickel ore exports have swelled the export value of
trade and current-account surplus for this year, in our
Indonesia’s iron and stainless steel to around
view. With that assumption, we are expecting
USD2.5bn a month last year, compared to only
Indonesia to record current-account surplus of USD3-
USD80mn in 2017. After all, despite its
4.5bn (c. 0.2% of GDP) for 2023, which will be slightly
“manufacturing” classification, the export value of pig
lower than estimated 0.7% of GDP last year.
iron or stainless steel will still depend on the price of
the commodity itself (nickel).
When commodities like palm oil, coal, and nickel
account for 30% of a country’ total exports, it’s no
Recent move to ban bauxite ore exports, if executed
surprise the windfall to external balance of Indonesia
successfully, is a logical step to enlarge the export
has been this massive during the current “commodity
value and strengthen Indonesia’s external balance
boom” era. Indonesia’s cumulative trade surplus
outlook in the long-run. The story is similar to nickel
topped USD50.6bn throughout last year, higher than
five years ago: monthly bauxite exports averaged at
USD35.4bn in 2021 and USD21.6bn in 2020, following
around USD700mn last year, but every month
two consecutive years of deficit (-USD3.5bn in 2019
Indonesia only exported less than USD80mn of
and USD-8.7bn in 2018).
aluminium, the higher-grade form of bauxite.
Nevertheless, structural challenges remain. Within the
current-account, deficit remained wide for 1) oil-trade
PT. Bahana Sekuritas – Economics Research 4
 Indonesia 2023 Economic Outlook
5 January 2023

We think that Indonesia could become one of the pressure on overall balance-of-payments (USD1.7bn
biggest beneficiaries of China’s reopening, which deficit in BoP in 3Q22). We expect the USD:IDR to
should increase exports and safeguard the trade average at 15,800 this year, on the assumption of still
surplus amid weakening external demand. China is persistent shortfall in BoP, particularly on the capital
the main destination of Indonesia’s exports (Exhibit and financial account side.
10), accounting for 23% of total value of goods
shipped overseas, mostly commodities such as palm Uncertainty over domestic politics and external
oil, coal, and nickel. Indonesian exports to China are geopolitics in 2023 means challenging outlook for FDI
significantly bigger than other trading partners such and portfolio flows, in our view. Our base case
as the US (10%), Japan (8%), India (8%), Malaysia scenario for the global economy is for the dollar index
(5%), and Singapore (5%). to stay elevated at least until 1H23 as the Fed, widely
expected to pivot by the markets, instead keeps rate
Exhibit 10. China's share in country exports (2021) at high levels and delivers no policy easing this year.
Russia 15.5%
Exhibit 11. Accumulated trade balance and FX
Thailand 19.9%
reserves (USDbn)
South Africa 20.0% 120
107.6
Vietnam 22.8%
100
Philippines 23.0%

80
Malaysia 23.6%

Indonesia 23.9% 60

South Korea 29.3%

40
Brazil 34.4%

Peru 20
36.5%

0% 5% 10% 15% 20% 25% 30% 35% 40% 0

Sep-20

Sep-21

Mar-22

Sep-22
Jan-20

Mar-20

Mar-21
Jul-20

Jul-21

Jul-22
Nov-20

Jan-21

Nov-21

Jan-22

Nov-22
May-20

May-21

May-22
Source: Bloomberg, Bahana

For Indonesia, however, the multi-billion-dollar Cumulative trade balance FX reserves

question for 2023 is whether all the trade and current- Source: Bloomberg, Bahana
account surpluses would boost domestic FX supply. So
far, they have not. Exhibit 12. One-month deposit rates in Singapore
and Indonesia
Since 2020, Indonesia has accumulated close to 9.0

USD100bn of trade surplus, yet there was no 8.0

significant boost for Bank Indonesia’s FX reserves that 7.0

instead stagnated at USD130bn in the past three 6.0

years (Exhibit 11). In fact, the reserves-to-import 5.0 4.08

coverage ratio actually declined to only 6 months, as 4.0 3.84

global inflation of manufacturing goods have pushed 3.0

3.64

up Indonesia’s monthly import value to 30-40% 2.0

2.01

higher compared to pre-pandemic level. Among 1.0

commercial banks, FX deposit growth has also 0.0
consistently trailed behind FX loan growth. 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Singapore UOB deposit USD rate Indonesia USD deposit rate

While the reluctance among exporters to convert their Singapore SGD deposit rate Indonesia IDR deposit rate

FX proceeds into local currency is indeed a global Source: Bloomberg, Bahana

trend (in China last year, only 36% of its goods trade
surplus was converted back into CNY), we think the Exhibit 13. Movement of EM currencies vs dollar
wide interest-rate differentials between Indonesia and since 2020 (%)
10.00

other regional peers also played a role. Latest data

show Indonesia’s average one-month FX deposit rates
5.00

SGD 0.98

currently stand at 2%, compared to around 3.8% 0.00

THB -2.11
MYR -5.56

offered by Singapore’s UOB (Exhibit 12). To bolster -5.00

AUD -5.41
EUR -6.79
KRW -6.72

domestic FX liquidity, the Indonesian Deposit -10.00

CNY -8.36
IDR -9.37

Corporation (LPS) has raised the maximum rates for -15.00

PHP -9.72
TWD -11.19

FX deposits that it guarantees to 1.75%, from

INR -11.58
GBP -12.25
-20.00

previously 0.75%.
JPY -13.08

-25.00

With global markets’ attention fixated on the Fed’s -30.00

hawkish stance, we think interest-rate differential -35.00

Jan-22 Jan-22 Mar-22 Apr-22 May-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 Oct-22 Nov-22 Dec-22

(capital-account) will have a stronger sway on CNY INR PHP THB IDR EUR JPY GBP AUD MYR SGD TWD KRW

Source: Bloomberg, Bahana

currency in 2023 than FX earnings from exports of
goods and services (current-account).

This means that, despite the surplus in the current-

account, there could still be near-term pressure to IDR
due to shortfall in capital-account, thus exerting

PT. Bahana Sekuritas – Economics Research 5

 Indonesia 2023 Economic Outlook
5 January 2023

BI: the last to tighten, the first to pivot position. The term of Perry Warjiyo will end in May
2023 and if the incumbent is not re-appointed, there
BI lifted the key interest-rate by cumulative 200-bps is uncertainty over interest-rate outlook for 2H23 if
last year, a move that could be interpreted as dovish the new BI governor has a different perspective,
when the Fed had lifted rates by more than 400-bps. should s/he see the need to restore monetary policy
BI was also late to join the tightening camp: it was not credibility or narrow the rate differential with other
until August 2022 that BI finally decided to hike rates central banks.
for the first time since 2020 – other EM peers from
Brazil, India, and South Korea had started the Fiscal policy outperforms expectations
tightening cycle way earlier. In the last monetary
meeting in December, BI hiked rates by only 25-bps We think the recent developments in fiscal policy
to 5.50% (following three consecutive months of 50- deserves acclaim. Indonesia relaxed its maximum 3%
bps hike) and delivered a message: policy tightening budget deficit cap during the Covid-19 pandemic, with
could be less aggressive, going forward. the fiscal shortfall hitting as much as 6.5% of GDP in
2020. The Finance Ministry had vowed to push the
Exhibit 14. BI 7-day RRR and FFR deficit back to below 3% by 2023 – a pledge that was
7.00
initially doubted by market observers – and fulfilled
6.00 5.50 one year ahead of expectations.
5.00 4.50
Last year, Indonesia posted a fiscal deficit of
4.00
IDR564.3tn (USD36bn) or equal to 2.38% of GDP,
3.00 significantly lower than initial target of IDR868tn
2.00 shortfall or 4.85% of GDP set in the 2022 State
1.00
Budget. The lower-than-expected fiscal deficit means
the government’s excess cash from financing (Silpa)
0.00
may hit around IDR230tn by the end of last year, with
Apr-21

Apr-22
Apr-16

Apr-17

Apr-18

Apr-19

Apr-20
Oct-16

Oct-17

Oct-18

Oct-19

Oct-20

Jul-21
Oct-21
Jan-22

Jul-22
Oct-22
Jul-16

Jan-17

Jul-17

Jan-18

Jul-18

Jan-19

Jul-19

Jan-20

Jul-20

Jan-21

total accumulated cash surplus (SAL) close to

BI7DRR FFR IDR400tn (USD25.6bn) – all ready to be deployed for
additional spending needs this year.
Source: Bloomberg, Bahana

Exhibit 15. Fiscal deficit (IDRtn)

It was a dovish tilt that surprised us. This “Bank
3,000 0.0%
Indonesia’s pivot” effectively preceded the Fed, which
still hiked by 50-bps last month, and we believe it was 2,000 -1.0%

not a wise move to adopt when the IDR had already 1,000 -2.0%
weakened by 2.5% against USD to become Asia’s -2.38%

worst-performing currency in 4Q22 despite general - -3.0%

dollar weakness in that period (the KRW and THB (1,000) -4.0%

strengthened by 13.7% and 9.5%, respectively). Not (2,000) -5.0%

when financial conditions are not sufficiently tightened
because local Indonesian banks were (and are still) (3,000) -6.0%

slow to pass through BI’s bout of rate hikes. Not when (4,000) -7.0%

core inflation may stay elevated after provincial 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

minimum wages had just been increased by 7.4% for Revenue Expenditure Fiscal deficit (% of GDP)

2023, the highest magnitude in three years. And Source: CEIC, Bahana
especially not when Bank of Japan just last month
tweaked its yield-curve control and signalled that, The lower budget deficit in 2022 was caused by the
after the Fed’s aggressive rate hikes last year, it could combination of strong windfall from commodity-
be their time to tighten policy this year. related tax revenues, and unexpected weakness in
government spending. Total state revenues grew
The negative impact to the IDR could be felt with a 30.6% y-y, while state spending rose only 10.9%.
lag, in our view. The reluctance to adopt monetary
policy orthodoxy in 3Q-4Q22 (as well as the wide rate- In 2022, tax revenues were 114% of the
differential between policy rates here and offshore) government’s early-year target, while non-tax
means the underperformance of the IDR against EM revenues (including cigarette excise taxes and royalty
currencies is likely to continue in 1Q-2Q23. With FDI payments from oil-and-gas sector) were 122% of
flows likely affected by election-related uncertainty, target, Finance Ministry data show. The revenue boost
there could still be external funding challenges for the from commodity-based sector means Indonesia’s tax-
deficit in Indonesia’s balance-of-payments if the USD to-GDP ratio has surged to 10.4% now, compared to
rises again when the markets finally acknowledge the around 9% in pre-pandemic era.
Fed would not pivot very soon.
In the 2023 State Budget, the government has
Our assumption is for BI rate to be lifted from 5.50% targeted domestic tax revenues to grow 6.6%
last year to 6.00% this year, with two 25-bps hike compared to the early-2022 target. That could be
frontloaded 1Q23. But our interest-rate call is tilted on achieved even if tax revenues are flat this year, given
the upside, with a possibility that BI may need to carry the overshooting of revenue realization by end-2022.
out more tightening to strengthen Indonesia’s BoP

PT. Bahana Sekuritas – Economics Research 6

 Indonesia 2023 Economic Outlook
5 January 2023

However, this year there may be headwinds in Exhibit 16. “BBB” group macro metrics
government spending particularly at local levels. INDONESIA (BBB)
Domestic
Economy
Indonesia is scheduled to hold legislative and 0.87
Society and Government
presidential elections in February 2024, as well as Governance Finance

regional elections to vote for governors, regents, and 0.60

mayors in November 2024. We think the upcoming Income and

0.34
Money and
leadership transition may lead to a regulatory vacuum Demographics
0.34
0.48
Finance

creating uncertainty for realization of government

0.10

projects, as elections become imminent. 0.55

Exchange Rate Banking
and Trade 0.45 Sector
0.53
This was already evident in 4Q22, when realization of
External Assets Balance of
regional transfer funds to local governments were and Liabilities Payments

estimated to hit only IDR130-140tn, or down c. 50%

y-y from last year’s realization of IDR244tn. In 1Q21 3Q22

Indonesia, an economy whose fiscal setting is heavily

decentralized, regional spending could be more
ITALY (BBB- to BBB)
influential to boost GDP growth compared to central Domestic economy

government spending. Society and governance Government finance

0.77
0.41

We expect the fiscal prudence to continue this year,

even as the imminent elections could increase the Income and
demographics 0.53
0.13
0.64 Money and finance

political demand to boost spending and widen budget

deficit. 0.19
0.50
0.59
Exchange rate and
Banking sector
We also see reasons to believe that Indonesia (BBB) trade 0.47

deserves a rating upgrade this year – a feat already External assets and
Balance of payments
achieved by Italy (BBB), Croatia (BBB+) and Portugal liabilities

(BBB+). According to our model, almost all sovereign

3Q22 1Q21
rating metrics of Indonesia showed significant
improvement relative to median investment-grade CROATIA (BBB- to BBB+) Domestic economy
nations, especially for government finance categories
(Exhibit 16). Despite weakness in state revenues and Society and governance Government finance

high interest expenses, the Indonesian economy is

0.7
0.3
0.4

still relatively underleveraged with healthy primary

Income and
balance and domestic debt levels. demographics 0.7 0.6 Money and finance

0.6
Exchange rate and 0.7
Banking sector
trade
0.5

External assets and 0.8

Balance of payments
liabilities

3Q22 1Q21

PORTUGAL (BBB to BBB+) Domestic economy

0.94
Society and governance Government finance
0.43

0.43

Income and
0.64 Money and finance
demographics 0.59

0.48

0.16 0.45

Exchange rate and

Banking sector
trade

0.75
External assets and
Balance of payments
liabilities

3Q22 1Q21

Source: Fitch, Bahana

PT. Bahana Sekuritas – Economics Research 7

 Indonesia 2023 Economic Outlook
5 January 2023

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