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SUMMARY

ECONOMICS (Radhika Rao)

Indonesia has set its sights higher. The country concluded a successful G20 presidency in 2022 and is due to assume the 2023 ASEAN Presidency. Authorities are keen to tap into global investment shifts and deepen presence in resource-based downstream industries.

Active on the international arena and pursuing green agenda

Marking the only Southeast Asian economy to have hosted the G20 Presidency to date, Indonesia utilised the platform to demonstrate its leadership, diplomatic, economic as well as green/sustainability capabilities. Set against a year where geopolitics grabbed most of the headlines, the international forum assumed more than its usual importance for global leaders to indulge in multilateral as well as bilateral discussions.

Indonesia Energy Transition Mechanism (ETM) platform was launched recently, facilitated by ADB, and intended to act as the central coordination mechanism to advance the retirement or repurposing of coal/ other fossil power plants and eventually replace these facilities with clean energy plants. Concurrently, under the umbrella of Indonesia’s Just Energy Transition Partnership (JETP), a coalition of countries including the US, Japan, Britain, Canada etc. will mobilise $20bn to help finance Indonesia’s efforts to shut coal plants and shorten the run-up to peak emissions to 2030, seven years ahead of schedule.

Separately, Indonesia assumed the ASEAN chairmanship for 2023, opting for ‘Asean Matters: Epicentrum of growth’ as the main theme. Deeper collaboration between the bloc members, especially to gain a bigger trade and investment footprint will be amongst the key focus areas, besides attending to thorny political & diplomatic aspects.

Strong investments push, especially downstream commodity industries

Beyond the pandemic, Indonesian authorities have long-held plans to transform the economy from one dominated by upstream commodity-driven to downstream processing and manufacturing/industrial sector-led. Besides making conditions conducive for domestic manufacturers, attracting foreign investments is a priority owing to attain a more balanced growth model and also tap into geopolitical supply chain dislocations (see our reports Indonesia: Strong FDI beat and Indonesia: Investments and foray into Electric Vehicles).

Macroeconomic outlook for 2023

The economy benefited from a confluence of catalysts, including service sector reopening, positive commodity terms of trade, external stability, and well-behaved inflation (barring supply-side rise on fuel price increases) in 2H22.

Growth

Household spending is likely to normalize in 2023 as few of the tailwinds dissipate next year, especially reopening dynamic and geopolitical premium that had lifted commodity prices sharply. Business sentiments are holding up, with PMIs in expansionary territory and recovery in capacity utilization rates. Normalisation in demand after this year’s spurt might, however, introduce some caution over aggressive capex spending plans, while foreign-focused firms eye slowing global growth. The government’s pro-investment bias is also expected to help, as a cut in fuel subsidies opens the room for more developmental spending (7% increase in 2023 on infra). In absence of a sharp rally in commodities, we expect net trade to be a smaller contributor to overall GDP in 2023 after accounting for a quarter of headline growth in 1Q-3Q22.

Inflation and policy direction

Jan-Oct22 inflation has averaged 4.0%yoy, higher than 2021’s 1.6%, on the higher end of the BI inflation target of 2-4%. A sharp increase in the subsidized fuel prices has driven headline inflation higher since Sep22 but is showing signs of a peak. Regardless, Indonesia is poised to end the year with the highest inflation rate in over eight years. BI joined the rate hike camp late in 2022 but has since undertaken bunched up hikes to take the benchmark rate from 3.5% to 5.25% in four months. Besides the need to contain inflationary expectations, policymakers were also keen to arrest depreciation pressures on the rupiah. We peg the terminal policy rate at 5.75% by early-2023 and pause thereafter.

Macro stability

Macro stability has been buttressed by the likely second consecutive year of current account surplus in 2022, lifted by a record high annual goods trade balance. We raise our current account surplus forecast to 0.7% of GDP vs 0.4% earlier, followed by a small slip to -0.5% deficit next year as export earnings moderate. Fiscal dynamics are favourable. After suspending its legally mandated deficit and debt thresholds through the pandemic, the ceilings will be reinstated in 2023. Apart from reopening boost to tax revenues, VAT increase, and tax amnesty scheme, commodity gains have pushed up resource-based receipts in 2021 (40% of non-tax collections).

Elections

Presidential and few regional elections are due to be held in February 2024, ahead of which the finalisation of number of seats as well as counties will be done in February 2023 and registration of the President and VP candidates will take place in Oct-Nov23.

Risks

Key risks for the economy in 2023 will be a combination of exogenous and domestic developments. Globally, a sharp downturn in global growth will hurt export earnings as well as weaken a repeat of this year’s strong FDI interests. A notable correction in commodity prices will be a risk, which accompanied by a jump in energy (Indonesia is a net importer) could complicate the external balance as well as inflation outlook. Political developments will be under watch.

FX STRATEGY (Philip Wee)

We expect USD/IDR to stabilize in a 15000-16000 range in 2023-2024. Externally, USD strength petered out in 4Q22 on expectations for smaller Fed hikes before US rates peak in 1Q23. In 2023, the central bank (BI) aims to lower CPI inflation to its 2-4% target and USD/IDR to around 15000.

RATES STRATEGY (Duncan Tan)

We carry a bullish stance on IndoGBs going into 2023. We like IndoGBs for Indonesia's faster fiscal consolidation, strong balance of payments and comfortable domestic liquidity (supports bond demand). As short US rates peak in 1Q and EM sentiments stabilize, foreign bond flows should also turn around and we expect USD3-7bn of net inflows in 2023.

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