October 30, 2024
JAKARTA – Indonesia could face an overheating economy if President Prabowo Subianto goes ahead with his plan to push the country’s gross domestic product growth to 8 percent per year, analysts have warned, suggesting that the archipelago does not have enough capacity to handle that surge in output, which would come with consequences.
An overheating economy, which means GDP is growing at an unsustainable rate, could lead to rising inflation and unemployment. The outcome could also include rising interest rates, as the central bank would need to stabilize a weaker exchange rate and push down inflation.
For now, many believe that Indonesia can only grow at around 5 percent annually, a figure that better reflects its current short-term domestic capacity.
Private lender BCA chief economist David Sumual said that pushing for 8 percent GDP growth “is like forcing a car to go 150 kilometers per hour when the car was only designed to reach 100 kph”, stressing that the vehicle will overheat and eventually break down.
David told The Jakarta Post on Tuesday that pursuing the target may involve providing a range of aggressive fiscal stimuli or issuing more debts, which could be unstainable in the long run.
One sustainable way to pursue high GDP growth is to reel in more foreign direct investment (FDI), he said.
To attain 8 percent GDP growth annually within the next five years, the government would need to ramp up FDI by fivefold from the current realization, he said, adding that without it, growth would stagnate at about 5 percent.
Last year, the country attracted Rp 744 trillion (US$47.19 billion) in FDI, an increase of 13.7 percent from the previous year, according to Investment Coordinating Board (BKPM) data.
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Coordinating Economic Minister Airlangga Hartarto acknowledged that Indonesia could not rely on domestic household consumption, which contributes to over 50 percent of GDP, to reach higher economic growth.
The government, he said, has to attract more FDI, increase exports and create more jobs, but he was unable to provide details on how the government plans to do this when asked by reporters on Oct. 22.
“The ministers will hold a coordination meeting [to decide] what will become the main pillars of the economy,” he said.
Growing by between 6 and 7 percent or more is deemed necessary to achieve the Golden Indonesia 2045 vision, and to pull the country out of the so-called middle-income trap.
The National Development Planning Agency (Bappenas) has projected that Indonesia’s economy will need to start growing by around 7 percent by Prabowo’s second or third year, while pursuing more expansion in the following year to achieve that target.
However, the International Monetary Fund’s World Economic Outlook publication released this October projected that Indonesia’s economy would grow 5.1 percent next year, as well as in 2029.
Similarly, Fitch Ratings also projected a growth of around 5 percent “in the next few years”, the rating agency’s head of Asia-Pacific Sovereign Ratings Thomas Rookmaaker told the Post on Monday.
“Pursuing ambitious development targets makes sense for any emerging market government, but the administration’s aim of 8 percent GDP growth and reaching developed nation status by 2045 seems challenging without major productivity-enhancing reforms or significantly higher government spending and a build-up of government debt,” said Rookmaaker.
He went on to highlight that the new government’s focus on human capital development “seems to make sense” as it would contribute to higher productivity and GDP growth “over the medium term”.
Prabowo has vowed to do this by promising free medical checkups and improved hospitals along with renovating schools and building new ones. This includes his prominent free nutritious meals program, which will feed 83 million people and cost $28 billion annually when running at full scale.
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BCA’s David said the free meals program will bring a multiplier effect, as people will have more room to spend in other areas, but he warned that it is estimated to only bring in 0.1 percent in extra GDP growth, as the program can only run if other expenses are cut.
Economist Intelligence Unit (EIU) analyst Wen Wei Tan told the Post on Monday that “the risk of overheating is low” because Indonesia will likely not be able to reach 8 percent GDP growth in Prabowo’s first term.
“A target of 8 percent requires major structural reforms — e.g. in equitable education, access to health care — infrastructure and productivity improvements. All these constraints or policies take time to address and implement, which we do not expect the new administration to fully tackle during its first [term],” said Wen Wei.
He added that should Indonesia choose to push aggressively for higher growth it has to ensure “the complementary conditions are there”, such as sufficient production capacity, infrastructure and skilled labor, all of which have been lackluster.
Wen Wei said Indonesia could have attracted more FDI given its abundance of natural resources and large domestic market, but structural issues “have reduced its attractiveness”, citing regulatory uncertainty and red tape, and reform is needed “rather quickly”.
Meanwhile, Prabowo’s brother and top adviser Hashim Djojohadikusumo claimed that the administration’s plan to build 3 million homes could boost economic growth by about 1 percent annually, which in turn could also help prop up the country’s GDP.
However, BCA’s David warned that providing housing would mean little if people do not have purchasing power to afford it.
Meanwhile, building up onshore industries will be necessary to fully utilize the program for economic growth, as only around 30 to 40 percent of housing components are made domestically.