Volatile Market, RI in Shadow of 5 Percent Growth Stagnation

JAKARTA, KOMPAS – The market assessed that the direction of the government's economic policy was not very clear and that policies between sectors were not synchronized during the first quarter of 2025. As a result, market confidence was eroded along with the uncertainty of the government's policy.

The plunge in the Composite Stock Price Index (IHSG) to the point of causing a delay in trading at the opening of the first session, Tuesday (18/3/2025), is one reflection. At the same time, various indicators are signaling a weakening economy that risks stagnating economic growth in the range of 5 percent.

At the market close, the JCI was at 6,223.39 or down 3.84 percent compared to the previous day's close. This also recorded the worst performance since 2021. In fact, the JCI had plunged to 6,011.84 at the close of the first trading session.

Associate Director for Research of the Institute for Economic and Social Research (LPEM) Faculty of Economics and Business, University of Indonesia (FEB UI) Jahen Fachrul Rezki said that various macro indicators do show pressure on the domestic economy. The pressure mainly comes from the domestic side.

"This requires special attention from policymakers. Our economy is actually not fundamentally heading towards a crisis, but many government policies and communications have made investor expectations of the economy quite negative. This is reflected in the slowdown in several macro indicators," he said when contacted from Jakarta.

Previously, LPEM FEB UI has conducted a survey related to economic and social conditions, current policy developments compared to the previous period, and future policy evaluations.

The online survey conducted on February 14–24, 2025, gathered opinions from 42 economists with various backgrounds representing a variety of perspectives from both domestic and international perspectives.

The results of the LPEM Economic Experts Survey Semester I-2025 found that the majority of experts or 55 percent of respondents agreed that the current economic conditions were worse compared to three months ago. With an average confidence interval of 7.71 points, the survey results also showed a pessimistic view of Indonesia's economic conditions.

Therefore, Jahen added, the government needs to revise the policies taken, such as budget efficiency, free nutritious meals (MBG), the Red and White Cooperative program, the formation of Danantara, and so on. The delivery of information to the public must also be clearer regarding the policies to be taken.

In terms of economic fundamentals, policy packages are also needed that can increase investment and create jobs. This can be done amid limited room for interest rate cuts, given that there is still pressure from the external side.

"So, it is quite risky to lower interest rates. However, BI (Bank Indonesia) needs to try to increase liquidity in an economy that is not yet too big. This is also what causes low consumption, because of the liquidity issue," said Jahen.

Kompas in the last few days met with a number of company leaders from a number of sectors. Their opinions are consistent, namely that the direction of government policy is unclear and policies between sectors are not synchronized. This raises economic problems.

The uncertainty of the government's policy direction was responded to by market players, causing a number of economic indicators to worsen. In addition to being reflected in the IHSG, the rupiah exchange rate also depreciated to Rp16,500 per US dollar on February 28, the deepest since 2020.

Today, right, only IHSG is bad in the Asian region. While the others are fine. There must be a problem in this country.

The prolonged situation is complicated by the weakening of people's purchasing power and a number of less than encouraging economic indicators. This can be seen, among other things, from the deflation that occurred for two consecutive months in January-February 2025, respectively 0.76 percent and 0.48 percent.

Furthermore, the realization of tax revenue in the State Budget (2025) until February 2025 only reached IDR 187.8 trillion or 8.6 percent of the target. This achievement dropped 30.19 percent compared to last year's tax revenue.

As a result, the APBN recorded a deficit of IDR 31.2 trillion or 0.13 percent of gross domestic product (GDP) with an estimated widening at the end of the year.

On the other hand, the current account balance also recorded a deficit of US$8.85 billion or equivalent to 0.6 percent of GDP. This figure has increased fourfold compared to the 2023 period, which recorded a deficit of US$2.04 billion or 0.1 percent of GDP.

Senior Researcher of the Department of Economics of the Center for Strategic and International Studies (CSIS) Deni Friawan opined that external conditions due to global economic uncertainty do affect the domestic economy. The situation is further complicated by the uncertainty of the direction of government policy.

"The government may actually want to address the risk of economic weakness by presenting programs such as three million houses, MBG, Danantara, and so on. However, these policies are not the priorities needed to improve the economy today," he said.

The uncertainty from the domestic side was exacerbated by the emergence of a number of controversies, ranging from the corruption case that dragged PT Pertamina (Persero) to the revision of the TNI Law. Public trust in the government was eroded.

According to Deni, a series of less than encouraging economic indicators in early 2025 are a consequence of the uncertainty of the government's policy direction. This was then responded to by market players, the peak of which was reflected in the collapse of the capital market on Tuesday morning.

Therefore, the government should prioritize transparency and good governance in every policy-making process. Instead of carrying out structural reforms, providing clear information to the public and investors needs to be a priority in order to increase market confidence.

"If the cause is external (factors), today, right, only the IHSG is bad in the Asian region. While the others are fine. There must be a problem in this country. That is what must be responded to, by providing certainty, clarity, and measurable policies," he said.

Indonesia must grow at least an average of 6 percent per year to escape the middle-income country trap.

If this situation is allowed to continue without any effort to convince the market, Indonesia's economic growth in the future has the potential to stagnate in the range of 5 percent. In fact, Deni estimates that the economy in 2025 will grow below the 4.9 percent level.

In the last ten years, Indonesia's economic growth has stagnated at an average of 5 percent, except for Covid-19. This realization is far below the target of the National Medium-Term Development Plan (RPJMN), which is 7 percent per year during 2015-2019 and 5.7-6.0 percent per year during 2020-2024.

The National Development Planning Agency (Bappenas) scenario states that Indonesia must grow by at least an average of 6 percent per year to escape the middle-income country trap.

The average growth scenario of 6 percent per year will bring Indonesia up a class in 2041. Meanwhile, the average growth scenario of 7 percent per year will bring Indonesia up a class in 2038.

In order to accommodate President Prabowo's ambitious target for Indonesia to grow by 8 percent, Bappenas created a third scenario.

The contents, Indonesia's economic growth is successively 5.70 percent in 2025, 6.40 percent in 2026, 7 percent in 2027, 7.5 percent in 2028, and 8 percent in 2029.

But the ambition and scenario face major challenges. Economic performance in the first quarter of 2025 is not yet linear with the scenario. The uncertain global context is a challenge.

Several international institutions predict that the Indonesian economy is still running in place. The World Bank estimates that the Indonesian economy will grow an average of 5.1 percent during 2024-2026.

Meanwhile, the International Monetary Fund (IMF) projects Indonesia's economic growth throughout 2024-2029 to stagnate at around 5 percent per year. The projections are respectively 5.0 percent in 2024, and 5.1 percent in 2025 and 2029.

The IMF in the same period projected that Indonesia's current account deficit would widen. In 2023, the current account deficit was 0.3 percent of GDP. The IMF projected that the deficit would widen to 1 percent in 2024, 2 percent in 2025, and 1.4 percent in 2029.

Senior economist at Paramadina University Wijayanto Samirin said that the problematic domestic economic conditions could cause Indonesia's economy to grow low. In fact, the OECD projects that Indonesia's economic growth in 2025 will only be 4.9 percent.

In this landscape, BI is expected to maintain its benchmark interest rate at 5.75 percent. Although the inflation rate is still maintained within the target, the US Central Bank, The Fed, is projected to still maintain its benchmark interest rate.

On the other hand, the government needs to curb programs with large spending allocations such as MBG, Danantara, Ibu Kota Nusantara (IKN) and the Red and White Cooperative. The existing funds can be allocated to programs that have a direct impact on increasing purchasing power, job creation, and economic growth.

"The business climate needs to be improved so that investment flows in with several important steps, including eliminating thuggery by mass organizations, eradicating smuggling, simplifying regulations and bureaucracy, and improving logistics efficiency," said Wijayanto.