Understanding the Risks of a 2025 Indonesian Economic Recession, as the Rupiah Approaches Rp 16,500/US$

In fact, as recently as mid-June 2024, the Rupiah was nearly touching Rp 16,500. The Rupiah did strengthen in mid- to late May 2024 due to Bank Indonesia's policy of raising the benchmark interest rate and the announcement of Indonesia's foreign exchange reserves. However, this was not enough to stem the Rupiah's decline due to several factors:

• Uncertainty about the direction of the Indonesian government's future fiscal policy.
• Weakness of the foreign exchange market
• High US$ interest rates
• Strong US$ outlook.
• The government's fiscal burden is increasingly heavy due to the ambitious IKN project and future government programs, including the free lunch program.
• Indonesian government revenue projections are projected to decline through the end of 2024 and 2025.

Morgan Stanley has downgraded Indonesia's stock market equity rating to "underweight" in its allocation of companies in Asian and emerging markets. An underweight rating is a "highlight" term in stock trading, meaning the stock is expected to be volatile and at risk of price declines compared to other stocks in the same sector. This "underweight" rating will indirectly reduce market confidence in the short term.

The rupiah is among the world's ten lowest-valued currencies, facing a problematic situation, particularly due to a US dollar supply deficit. In the short term, the government must prevent the US dollar supply deficit from worsening to prevent the rupiah from further depreciation. Preventing a US dollar supply deficit requires a multifaceted approach.

Some of the main strategic approaches to prevent the worsening of the US$ supply deficit include:

1. Increase the trade balance surplus
2. Improve the performance of foreign direct investment (FDI).
3. Increase the country's foreign exchange reserves
4. Increase international MICE and tourism promotion for foreign tourists.
5. Increase remittances through the Indonesian diaspora network abroad and Indonesian migrant workers.
6. Maintain macroprudential stability through pro-market fiscal and monetary policies.

The above are classic recommendations for maintaining monetary stability technically. From a political policy perspective, the economic policy choice of implementing structural reforms is actually very appropriate.

The problem is that effective and impactful structural reforms have not been implemented, amidst legal reforms and a political situation that is not going well.

Looking at the Condition of the 2024 and 2025 State Budgets

The total 2025 State Budget (APBN) is IDR 3,500 trillion, with a deficit of IDR 600 trillion, or between 2.45% and 2.82% of gross domestic product (GDP). In 2024, the budget deficit is set at just 2.29% of GDP, and in 2023, it will reach 1.82% of GDP.

The Republic of Indonesia's foreign exchange reserves at the end of May 2024 were recorded at US$139 billion, equivalent to Rp 2.085 trillion (exchange rate of US$1 = Rp 15,000), or equivalent to Rp 2,293.5 trillion (exchange rate of US$1 = Rp 16,500).

Will the government be able to increase foreign exchange reserves and maintain the country's financial health amidst global uncertainty?

Debt Due

Based on debt maturity profile data from the Directorate General of Financing and Risk Management (DJPPR) of the Ministry of Finance, the Indonesian government's debt maturing in 2024 is IDR 434.29 trillion, consisting of obligations in the form of Government Securities (SBN) of IDR 371.8 trillion, and other loans of IDR 62.49 trillion.

The Infobank Research Bureau (birI) recorded Indonesia's total debt as of 2024 at Rp8,338 trillion. In 2024, the state budget burden for debt interest payments alone was Rp434.29 trillion, while debt maturing in 2025 reached Rp800.33 trillion, nearly doubling to Rp434.29 trillion.

Bank Indonesia must immediately inject foreign exchange into the market, which, whether we like it or not, must be taken from the Indonesian government's foreign exchange reserves. We're also waiting for Bank Indonesia's intervention, for example, to release gold reserves to the market as a hedge against the US dollar. We can influence domestic factors more easily than external or global factors, of course.

The Threat of Economic Recession in 2025

We define economic recession simply as a condition where a country's economy is deteriorating, as seen from a negative Gross Domestic Product (GDP), increasing unemployment, or negative real economic growth for two consecutive quarters.

Considering the global and national economic conditions, as well as existing political and economic trends, the threat of a real economic recession is very possible.

Indonesia's economic growth appears positive, but this is because it is supported by large government spending, for example in the government administration, defense, and mandatory social security sectors.

The projection of the economic situation in 2025 will depend heavily on the ability of Jokowi's economic team to overcome the potential monetary crisis in 2024. The threat of a recession in 2025 should be viewed seriously as a form of "early warning."

Source: Kompasiana

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