Home

2025 Outlook: Sailing Between Two Reefs

Commentary by Wayne Forrest

Remarkably, Indonesia’s 2025 economic outlook is very similar to 2024’s: 5% growth and low inflation. As in 2025, the nation’s resilience will again be tested, mostly by external factors. However, as can already be demonstrated by the first 100 days of President Prabowo’s administration, international and domestic policy is shifting. Regarding relations with the US, unless the incoming administration of President Trump has plans for Indonesia and SEA that we don’t know about, the valence of Indonesia’s gaze will continue to shift from the US/EU towards China and East Asia, between two “reefs”. Indonesia, under Prabowo, will continue to build out its vision of self-sufficiency in food, minerals processing, and energy, straining to move to 8% GDP growth.

Economic Affairs:

Resilience/Strong Macroeconomic Management/Intrusive Micro Economic Management

  • Technocratic Competence: With the experienced and highly competent Bank Indonesia Governor Perry Warjiyo and Finance Minister Sri Indrawati Mulyani remaining in their positions, Indonesia’s economy maintain its resilience and grow close to 5% in 2025, although President Prabowo (like his predecessor Jokowi) aims for 7-8%. It has been pointed out by several generations of Indonesian economic ministers that natural population brings 2-3% growth and 7% is needed to formally employ the new entrants to the job market. By keeping inflation low, Indonesia’s consumers will maintain their stabilizing position. However, recent data indicating a shrinking middle class represents a troubling trend.
  • Prominence of Fiscal Policy: Indonesia may be expecting further US interest rate cuts, hoping this would stem an outflow of investor capital to “secure harbors”. However, if 2016 is the model, a Trump tax cut will be inflationary, and the Fed will be forced to maintain rates. Whatever easing Bank Indonesia may be considering, would then likely be postponed. If so, fiscal policy will be the primary tool of growth.
  • Graduation to Developed Nation Status: It’s been 20 years that Indonesia’s leaders have been talking about the gap that exists between “just getting by” and “cashing in on the demographic dividend” (50% of the population is 30 or younger). Indonesia’s goal of achieving developed nation status by 2045 is looking less likely, although circumstances could change. Indonesia seems stuck on 5% GDP growth, admirable in challenging global circumstances (stronger dollar, supply chain anomalies, and weakening Chinese economy). The result is that most 50-60% of Indonesians will continue to be employed in informal positions with non-taxable wages and many will require a social safety net of income stabilization and energy subsidies. The government aims to change this via policies to increase manufacturing which pre-2000 was a greater contributor to GDP than it is today.
  • What Economic Development Model: Indonesia subscribes to several economic development models simultaneously –with the goal of increasing industrialization and job creation– that often lead to policy contradiction and confusion, market distortions, and abrupt regulatory interventions. These will be maintained under President Prabowo and include: local content regulations, “soft” currency controls, policies to add value through export and import bans, openness to foreign investment, subsidized energy, attempts to deregulate, and a large state-owned sector.
  • Automation/AI: The forces of automation and artificial intelligence are beginning to severely effect formal manufacturing jobs that Indonesia desperately needs. 100’s of thousands of jobs have already been lost since the pandemic in the garment industry, a segment that grew significantly beginning in the 1980’s based on contracts for worldwide brands.
  • Trade Policy Jitters: If Indonesia is too often to trade manufacturing industries such as textile/garment suffer from cheaper imports. On the hand, if it’s too closed either needed components are too expensive and locally made products cannot compete internationally. 2025 will probably see a repeat cycle of interventions to curb job losses.
  • Widening Current Account Deficit: Indonesia traditionally maintains a surplus in its trade account and a deficit in services (much of it generated by outbound haj travel, shipping, and insurance). Foreign companies often repatriate profits from natural resource activities, local companies hedge the rupiah by parking assets overseas, and portfolio investors can withdraw assets or limit bond purchases for many reasons, primarily interest rates. Although analysts read the figures differently, the consensus is that Indonesia’s current account deficit will widen in 2025.
  • Pressure on Finance Ministry: Fiscal policy will continue to be smartly managed, but the Finance Ministry will be under pressure to provide more funds for the military, new food estates, a free school meal program, and the new capital Nusantara. With one of the lowest tax collection rates in the world relative to the size of its economy, Indonesia’s economic managers in 2025 may become more creative.
  • How Far Will BI Intervene: Bank Indonesia may buy government bonds, and the Finance Ministry may dip into its deficit financing surplus. These new off-budget revenue sources may spook foreign portfolio investors. With the fiscal year beginning in the middle of the year, the situation will be clearer when the next budget is submitted. Traditionally limited to <3% of GDP, Indonesia’s deficit could widen beyond that level.
  • Go East For Investment: Foreign investment is a key factor in Indonesia’s economy. The trend to find it primarily in China and the rest of East Asia rather than the EU or US will continue.

Foreign Affairs

  • Key Driver: Economics will continue to be the key driver of Indonesia’s foreign relations, under a “free and active” approach. Indonesia endeavors to avoid the great power rivalry and join most regional economic frameworks where it sees a benefit.
  • Join Everything: In 2024 it began the process to join the OECD, concluded economic partnerships with Australia and in 2025 it has just announced its membership in the BRICS grouping of nations. BRICS countries (including China and Russia) have a different economic model and are dedicated to moving away from the US dollar. Indonesia will need to articulate how a BRICS membership benefits them without taking away from its commitments to other economic agreements. The US should be tolerant of this move, although it won’t like it.
  • Prabowo at UNGA: President Prabowo has a natural affinity for world affairs and although he spent time in Europe and the US, he will likely follow the greater opportunities in SEA and East Asia. 2025 may see Indonesia’s president address for UN General Assembly for the first time in over 10 years.
  • Beyond ASEAN: In his first month Prabowo raised eyebrows by agreeing to a statement fashioned in China that gave the appearance of recognizing China’s claims in the South China Sea. As the only G20 nation in southeast Asia its somewhat of a question how central ASEAN is to Indonesia and Prabowo’s perception if its role in world affairs.
  • US trade policy needs to be rebalanced toward Indonesia and SEA but given the protectionist statements and tariff policies of incoming President Trump and anti-global sentiment within the US Congress, Indonesia will have little leverage. Both former President Jokowi and Prabowo are seeking a critical minerals agreement, which could also benefit the US, but if it didn’t happen under Biden, it most likely won’t under Trump. Similarly, the US could modify or eliminate import controls on Indonesia’s herbal products emanating from its rainforest cornucopia (such as kratom), many of which have exciting medicinal properties.
  • Climate Change: Indonesia will be encouraged by the incoming US administration on climate change issues. Notwithstanding the LA wildfires, President Trump may withdraw from global climate change compacts, increase on/offshore gas and oil drilling, lower environmental standards, and deemphasize climate change as a matter of foreign policy. This will provide cover for Prabowo’s visions of self-sufficiency in food and energy. He has already announced an expansion of palm oil cultivation and the creation of large food estates, something that had been curtailed in the recent past.

Politics

  • Move Away from Direct Elections: Although elements of Indonesia’s political establishment have historically been resistant to direct elections, President Prabowo and his Gerindra party have been particularly outspoken in their preference for a more “parliamentary” system where parties control the nomination process and choose who represents them in legislative bodies and the executive branch. “This system is too costly, don’t you think? Just look at the faces of the winners – they seem exhausted. And the losers? Even more so,” the Indonesian president said. “If we let local councils handle the election, it could be as efficient as in Malaysia or Singapore,” he said, suggesting that the local councils elect the governors, regents and mayors rather than citizens. To achieve this modification a new election law would have to be drafted and approved. Indonesia’s voters would resist this, as they did in August 2024, when large demonstrations pushed back and effort to amend the election law to lower the eligibility age for governors after the Constitutional Court had ruled that the government could not change it. The same Constitutional Court ruling also eliminated the 20% of seats in Parliament as the minimal threshold to nominate the President. By and large, the public has hailed the decision and smaller parties feel empowered. If the “Onward Indonesia” Coalition that elected Prabowo moves forward with the overhaul, it could ignite large scale civil society opposition and possibly fracture Prabowo’s carefully crafted coalition.
  • Passing the Baton: Political observers are looking beyond President Prabowo to the future of his young Vice President, Gibran Rakubuming. It is widely assumed that choosing the son of hugely popular President Jokowi brought Prabowo victory and that it was a preparation step in continuing Jokowi’s (only 63) political dynasty. Would the 73 year old step aside in 5 years for his 37 year old Vice President? Will Prabowo prepare Gibran and continue to be influenced by Jokowi and his circle, or, will he begin distancing himself. Some signs will no doubt appear in 2025 that will help answer this question

Education

Looking East
In 2025 Indonesia will create more programs focused on East Asia, reflecting both the economic and political reality of global affairs.
A good early example is the new East Asian studies program announced by new Prasetya Mulya University rector, Hassan Wirajuda, a former Foreign Minister. (See story on page 3)

(These views are the author’s and may not reflect those of AICC or its members.)