Previous Quarterly Editions
Expropriation Risk: 58 59 59 60 ►Political Violence Risk:51 51 51 51 ►Terrorism Risk:56 54 57 57 ▼Exchange Transfer and Trade Sanction Risk: 35 35 44 44 ►Sovereign Default Risk:37 47 47 55 ▲
TREND ▲
Protest intensity in 2022 and Q1 2023* 2022 Q1 2023Cost of living : Medium LowAll protest: Low Low
Cost-of-living protest risk in 2023*Wage protest: LowFood/fuel policy protests: Medium
*Note: Protest intensity is calculated based on ACLED. Risk levels are calculated by WTW. Where data are missing no risk level will be displayed. For details of calculations, see the introductory essay.
Indonesia’s commodity-led surge in exports that characterised the country’s 2022 economic performance ended as a combination of rising global interest rates, declining overseas demand for coal and palm oil, and higher wheat and fertilizer prices, dampened export revenue and increased domestic inflation.
Exports are forecast to rise by 12.8% this year, less than half the rate of 29.8% increase recorded in 2022, when the country’s overall economic growth of 5.3% was the highest level for almost a decade. The impact
of Russia’s invasion of Ukraine in February 2022 and the U.S. Federal Reserve’s decision dramatically to increase interest rates has effectively negated much of the anticipated global post-COVID-19 economic ‘bounce’ for Indonesia.
Inflation is now running at around 5.5% – a seven-year high for Indonesia – leading the country's central bank to lift its key interest rate to 5.75% at the start of 2023, up from 3.5% in August 2022. Although inflation has fallen slightly from its peak, by March 2023 prices for such politically sensitive items as food (up 7.2% year-on-year), transport (up 13.6%) and utilities (up 3.4%) remain high. Further, subsidised fuel prices – a key source of popular concern – have climbed by 30% in the past few months.
With no indication that either interest rates or high food prices will decline soon, the country’s next general and presidential elections – which are due to be held in February 2024 – will be contested against a backdrop of likely still-high inflation and staple food prices. Current polling indicates no clear favourite among the three candidates expected to vie to succeed incumbent President Joko Widodo, and the election campaign can be expected to become increasingly intense over the coming ten or so months.
Further, unresolved questions remain over the present government’s efforts to encourage greater foreign investment through what unions consider efforts to restrict employees’ rights. We can expect these various sources of friction to manifest at political rallies and labour protests, all with the potential to become at least confrontational and possibly violent and destabilizing.
TREND ►
In January the government announced a ban on bauxite ore exports, reconfirming President Widodo’s earlier pledge to end the shipments from June 2023. The government is also expected to ban unprocessed copper exports around the same time. The World Trade Organization may challenge both decisions, which senior Indonesian officials appear to accept. Nevertheless, officials are justifying their decisions on the grounds national development goals outweigh the need to adhere with strictures of international agencies intended to manage the competing interests of trading nations. Banning exports of raw minerals in order to encourage domestic processing sectors is a signature policy of Widodo’s expected to extend beyond his tenure as President.
The past year has been generally quiet in terms of political and social unrest resulting in violence or volatility. However, politicians, organized labour unions, and workers’ rights activists warn they are preparing to stage nationwide protests and strikes to oppose a government regulation on job creation, referred to locally as Perppu, which was passed into law in March.
The President of the Labour Party will seek to mobilize five million workers from 100,000 factories, as well as port and transport personnel, for a national strike and rallies in central Jakarta and other cities between July and August. The January strike over working conditions at a nickel mine and processing site in Sulawesi resulting in the deaths of two employees and numerous injuries showed how labour protests can lead to violence, on this occasion between local Indonesian workers, locally based Chinese personnel, and the security forces.
A single terrorist attack occurred since the previous iteration of WTW’s Political Risk Index in the second half of 2022. In December 2022, a man recently released from prison after serving a sentence for his involvement in a terrorist plot in 2017 used homemade explosives to carry out a suicide attack at police station in Bandung, West Java. The attack killed one officer and wounded eight other individuals.
The security services continue to maintain an active counter-terrorism campaign, arresting scores of suspects linked to the Jamaah Ansharut Daulah and Jamaah Islamiyah groups that identify respectively with Islamic State (IS) and al-Qaeda.
Some Indonesian security officials warn IS-linked groups are working with former terrorism convicts to form a group to carry out attacks before, during, and possibly after the 2024 elections, by targeting polling stations, the police, and non-Muslims. The threat remains plausible given terrorist groups’ preference for long-lead-time attacks against iconic targets or events that enable them to assemble and deploy their often-limited resources and personnel.
The pre-election period is now well underway, meaning most government economic and related decisions will reflect policies, actions, and initiatives that favour the interests of the political candidates supported by present leadership and their more powerful allies. The willingness to challenge agencies as the World Trade Organization or key markets, including the European Union, can in part be attributed to the demands of the election campaign and the need to prioritise and protect Indonesian economic and social interests over those of foreign commercial or state entities.
The implications of the March decision by Indonesia to develop an indigenous payment platform as it moves away from Visa and Mastercard – primarily to protect the country against geopolitical and international events that could threaten country’s financial sector – are unclear at present. However, we can expect these to add another layer of complexity in conducting numerous monetary transactions over at least the immediate- to short-term if the platform is fully implemented.
The main driver affecting the rupiah remains U.S. interest rates, with any new rises negatively affecting the local unit. After rising sharply earlier this year to reach a high of IDR14,840 against the U.S. dollar in early February 2023, the local currency eased to around IDR15,166 by late March.
Total foreign debt as of January 2023 reached IDR7,754.98 trillion, a slight increase against December 2022’s IDR7,733.99 trillion. Meanwhile, with a GDP ratio of 38.56%, this is well within the legally mandated 60% ceiling.
Foreign exchange reserves stood at USD139.4 billion in January, up USD2.2 billion from the previous month, largely reflecting the government's global bond issuance and tax and services revenues. Overall, Indonesia recorded an IDR464.3 trillion fiscal deficit in 2022, or 2.38% of GDP, based on unaudited data and a much smaller amount than originally forecast.
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