"Global challenges marked by increasingly strong protectionist trends, especially in developed countries, coupled with various domestic variables that are also not easy, will make it difficult for Indonesia's economy to grow above 5% this year, according to the latest analysis from Bloomberg Economics released today."

Tamara Mast Henderson, Economist Bloomberg Economics, in her latest study, estimates that Indonesia's economic growth in 2025 will only be 4.9%, lower than the previous prediction of 5.1%.

Low growth at 4.9% is expected to continue in 2026, also down from the previous projection of 5.15%.

"The revision reflects a weaker investment outlook and increased trade risks from the threat of tariffs by U.S. President Donald Trump," said Henderson, as reported by Bloomberg.

"According to his analysis, the Indonesian economy has actually shown signs of sluggishness even when the threat of Trump's tariffs was not yet too heated. The wave of massive layoffs hitting labor-intensive industries such as textiles has hurt household consumption."

In addition, the uncertainty accompanying the leadership transition both in Indonesia and in the US has impacted credit demand. 

Here are some notes and highlights from Bloomberg Economics on Indonesia's economic outlook:

Vulnerability to US Tariff Impact

"Indonesia's risk from the US tariff policy appears to be more manageable compared to other countries in the Asian region. The export figures for goods and services from Indonesia to the US are relatively small compared to other countries, so if tariffs are imposed, the effects may also be smaller."

So far, the value of goods sold to the US is only 10% of Indonesia's total exports or still below 2% of GDP.

"Nevertheless, according to Tamara, Indonesia will not be able to escape the shocks affecting global trade, as Trump's tariff policy is likely to target agricultural goods, materials, metals, and manufacturing."

"The implementation of the increasing tariffs with a deadline of April 2, including reciprocal tariffs, is likely to impact all Indonesian exports to the US," said Henderson.

"The effect is not only on the volume and price of the products subject to tariffs, but substitute and complementary products will also be affected." 

Weakened global demand is also expected to put pressure on energy and commodity prices, threatening 25% of Indonesia's export revenue. 

The indirect impact will hit investors, entrepreneurs, and consumers in Indonesia. Investment, which contributes 30% of GDP, is expected to experience pressure from market volatility and global trade.

"Foreign direct investment [FDI] seems unlikely to come as Trump's tariffs will encourage re-shoring of US production. Likewise, labor recruitment and discretionary spending will weaken as entrepreneurs seek shelter from trade shocks," said Tamara.

However, the possibility of flooding imported goods from other markets will support household consumption.

Indonesia Strategy

The Indonesian government is striving to face the challenges of global trade by diversifying markets, attracting investments, and reducing import dependence. "However, we do not see any quick improvements, especially with the global economy struggling to cope with the excess supply that is emerging in the near future," said Henderson.

"The plan to limit wheat feed imports may help domestic corn farmers. Similarly, the B40 biodiesel mandate may reduce gasoline imports, and both will strengthen exports and GDP."

Household Consumption

"Indonesia needs to strengthen domestic consumption as the main driver of GDP so that the impact of the trade war can be balanced." 

The increase in government social spending on housing, education, and healthcare will help domestic consumption. 

Among them, the 3 Million Houses program, Free Nutritious Meals, and free health check-ups are expected to curb the decline in the middle class. On the other hand, the minimum wage increase of 6.5%, the elimination of bad debts for small businesses, and efforts to combat the influx of smuggled textiles are also part of the efforts to support consumption.

However, various policies have not been able to improve investor sentiment. The stock index, IHSG, has already declined by 12.9% year-to-date, the second worst in Asia after the Thai stock exchange.

Meanwhile, the rupiah weakened by 2.7%, making it one of the worst in emerging Asia and in contrast to the performance of the majority of currencies in the region that strengthened during the same period.

The risk premium of bonds has also surged where yield of 10Y SUN has increased by 40 basis points since mid-February. Compare this with the decline of US Treasury by 20 basis points during the same period.

Investor sentiment is negative, attributed to concerns about Indonesia's fiscal sustainability.

Concerns have resurfaced that President Prabowo will not maintain fiscal control as he accelerates social assistance spending and cancels the VAT increase, according to economists.

The rare budget deficit at the beginning of the year raises suspicions even though it seems to be only temporary. On the other hand, Henderson sees a greater risk occurring after 2026, when most of the global trade shocks have been addressed.

"Our basic assumption is that Minister Sri Mulyani will serve the first four budget periods of President Prabowo's five-year term, and fiscal discipline will be sufficient to maintain debt sustainability," he explained.

"He estimates that the state budget deficit will be maintained according to the rules, which is not to exceed 3%. 'Our main concern regarding fiscal matters is whether the parliament will materially lower the deficit limit. If the Minister of Finance and adequate budget rules are not implemented to limit government spending, the market will certainly protest,' said Henderson."

Bank Indonesia

The central bank of Indonesia appears to be under increasing pressure to help finance government spending. 

"BI's plan to purchase government bonds related to the 3 million houses program, as well as the willingness to lend Rp130 trillion for the housing program."

Economists also highlighted concerns that the independence of BI will be further restricted. The process of creating financial sector policies, which also regulates the central bank's mandate including the purchase of government bonds in the primary market, will be a concern for the market.

Danantara

The establishment of the Andantara Investment Management Agency, which is said to manage assets worth more than US$ 900 billion, is preceded by an initial capital injection from the government amounting to US$ 20 billion and state-owned assets of US$ 61 billion.

"Danantara can improve project coordination and ensure better capital utilization. However, the rapid consolidation of power raises concerns about governance. Additionally, there is a risk from potential off-balance-sheet borrowing."

"Transparency and clarity from regulators are important to balance those risks," said Henderson.

"The conclusion of economists is that the government under President Prabowo appears different from the previous regime, which was considered more business-friendly. Playbook is key to convincing investors in the era of President Joko Widodo, including during the implementation of burden sharing that is unusual."

"Now, the anxiety caused by Prabowo, precisely occurs when global trade flows are disrupted, which could complicate the increase in investment needed to drive growth." 

Source : Bloomberg

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