Jakarta, LPEM FEB UI | The political climate and global monetary conditions will be the two main themes that will influence Indonesia's economic conditions in 2024. The upcoming General Election period will have an impact on growth and various other macroeconomic indicators next year. On the one hand, Indonesia will hold simultaneous elections for the first time from the national to district/city level; thereby encouraging the injection of large amounts of liquidity into the economy due to campaign spending and public spending. The large multiplier impact on the economy will trigger domestic consumption during 2024 considering that elections at the provincial and district/city levels are expected to occur towards the end of the year. However, on the other hand, the long transition period of power until the new government takes office will prolong the period of 'wait-and-see' sentiment by the private sector and have the potential to hamper the rate of economic growth and investment.
The tight labor market and still high inflation in several developed countries have encouraged various central banks to maintain a 'higher-for-longer' interest rate regime. Tight conditions of global monetary policy are eroding capital outflows from developing countries, including Indonesia, and triggering depreciation of these countries' currencies. As a result, BI was 'forced' to actively intervene in the foreign exchange market and even raised the benchmark interest rate to reduce exchange rate fluctuations. In 2024, we are of the view that the room for BI to ease monetary policy will be greatly influenced by the position taken by the Fed. If the Fed continues to hold its benchmark interest rate high, BI may also have to take similar steps to maintain the benchmark interest rate spread. In this scenario, high credit interest rates will put pressure on credit growth in 2024.
Furthermore, the contractionary monetary policies adopted by various world central banks triggered a slowdown in global demand and put pressure on commodity prices. This has the potential to have further implications for Indonesia in terms of trade due to the high dependence of exports on commodity prices. Then, continued depreciation also raises the risk of imported inflation. Considering that 90% of Indonesia's imports are raw materials and capital goods, depreciation will increase domestic production costs, endangering the performance of the manufacturing sector which will affect future investment growth. The combination of capital outflows and a decline in the trade balance next year also raises the risk of an increase in the current account deficit.
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