Will Indonesia Fall Amidst the Global Economy Crisis?

Mohammad Nur Rianto Al Arif
Professor at UIN Syarif Hidayatullah Jakarta / Assistant to the President’s Special Envoy on Food Security / Secretary General of the Indonesian Lecturers Association (ADI)

The world is currently facing increasingly complex and multidimensional economic turbulence. Geopolitical tensions in various parts of the globe, extreme climate change, China’s economic slowdown, and persistently high interest rates in the United States have created tremendous pressure on the global economy. As part of the international economic ecosystem, Indonesia is not totally immune to these shocks.

Amid these challenges arises a fundamental question: Where is Indonesia’s economy heading on? Can Indonesia endure, grow, and even emerge as a new economic power in Asia, or will it be swept away by the currents of global uncertainty?

This article seeks to gauge the direction of Indonesia’s economy amid global turmoil by examining current macroeconomic data, assessing risks and opportunities, and offering strategic steps that the government and stakeholders can take.

Ongoing geopolitical conflicts in the Middle East (Iran-Israel), the ongoing Russia-Ukraine war, and Cold War-like tensions between the US and China have turned the world into a boxing arena of technology and trade. Energy commodity prices, especially oil and gas, have become highly volatile, causing inflationary pressures in many developing countries.

According to the IMF’s World Economic Outlook (April 2025 edition), global economic growth projections have been cut to 2.8% from 3.3%. This downgrade is driven by trade wars fueled by high tariffs imposed by the U.S. and its allies, as well as unpredictable public policies from world leaders.

The US Federal Reserve raised interest rates by 525 basis points from March 2022 to July 2023, maintaining them at 5.25–5.50% until August 2024. Rates began to drop in September 2024 and stood between 4.25 –4.50% by June 2025. As a result, global capital flowed back into the US, weakening emerging market currencies, including the rupiah, thereby increasing foreign debt burdens and import costs. This, in turn, has triggered imported inflation risks.

Domestically, Indonesia’s Central Statistics Agency (BPS) recorded economic growth of 4.87% in Q1 2025, reflecting national economic resilience. Service sectors such as transportation, logistics, and tourism are recovering, while mining—particularly coal and nickel—continues to support exports. However, this growth is not inclusive; sectoral and regional disparities remain high. The manufacturing industry has stagnated, signaling that structural transformation is still incomplete.

Indonesia’s vision for 2045 requires an economic growth rate of 7–8% for the country to achieve developed nation status. If this momentum is missed during President Prabowo Subianto’s tenure, the target will be increasingly difficult to reach.

Household consumption, which contributes about 54 percent to GDP, is currently weakening. The Rojali phenomenon (people who can afford less) reflects a decline of purchasing power, particularly among lower- and middle-income groups. High food prices, electricity tariffs, and urban living costs have caused consumers to prefer frugal living as a compensation of terrible economic situation nowadays. Social assistance provided by the government serves only as a short-term solution and fails to address root issues such as job creation and wage growth.

On the fiscal side, the government faces pressure on both revenue and expenditure. The 2025 state budget deficit is projected to widen from the initial target of IDR 616.2 trillion (2.53% of GDP) to IDR 662 trillion (2.78% of GDP). Public debt continues to rise, with new debt issuance reaching IDR 250 trillion between January and March 2025. External debt in Q1 2025 stood at USD 430.5 billion (approximately IDR 7,144.6 trillion), with a debt-to-GDP ratio of 30.6%—still within safe limits but leaving limited fiscal space.

Three structural risks loom over Indonesia’s economy:

1. Premature deindustrialization and dependence on raw commodity exports.
   The manufacturing sector contributes only 17.5% to GDP, far from the ideal 25–30 percent typical of industrialized nations. Without intervention, this could trigger mass layoffs and hinder Indonesia’s transition to a technology-based industrial economy.

2. Poor human capital quality and unemployment rate.
   The open unemployment rate is around 5.3%, yet many graduates remain jobless due to a mismatch with industry needs. Meanwhile, labor-intensive sectors lack skilled workers. Vocational education and job training remain suboptimal.

3. Vulnerable food and energy security.
   Heavy reliance on imports of strategic food items (sugar, wheat, soybeans, meat) leaves Indonesia exposed during global supply chain crises. The transition to renewable energy (EBT) has also been slow, lagging behind investments in non renewable energies like oil, gas, and coal.

Indonesia still does have the chances:

1. Demographic bonus and a large domestic market.
   With a population of 284 million, mostly at productive age, Indonesia has strong market potential. The government must maintain the buying power and create job market for these people.

2. Industrialization and the green economy.
   This should extend to agriculture and fisheries, not just nickel and bauxite which results on ecological catasthrophe in Papua. Indonesia has significant potential to become a leader in battery production, electric vehicles, and renewable energy.

3. Digital economy growth.
   The digital economy is projected to grow fourfold by 2030, reaching USD 210–360 billion. Digital payments alone are expected to rise 2.5 times to USD 760 billion.

4. Strengthening Islamic economy and finance.
   Indonesia ranks third in the State of the Global Islamic Economy (SGIE) 2024/2025. Developing the halal ecosystem, Islamic tourism, Islamic banking, and productive waqf is crucial. Strengthening the National Committee for Islamic Economy and Finance (KNEKS) will also drive end-to-end growth in this sector.

The thing is that Indonesia’s economy remains as a double-edged sword. If swung wisely, Indonesia could emerge as a regional economic powerhouse in South East Asia. On the other side, stagnation or even recession will end its economic stability if the 'blade alignment' goes south.

Five key strategies:

1. Comprehensive structural reforms in industry, education, taxation, and labor.

2. Economic transformation from upstream to downstream, including workforce training and the development of green industrial zones.

3. Strengthening food and energy security through strategic subsidies, regenerative agriculture incentives, and accelerated adoption of renewable energy.

4. Diversification of trade partners and economic diplomacy with nontraditional regions such as Africa, South Asia, and the Middle East.

5. Financial inclusion and economic equity through modern cooperatives, adaptive social protection, and optimization of Islamic social funds (zakat, infaq, waqf).

The world is currently changing. A resilient nation is the one that adapts to change and dares to make strategic decisions, while sustainably harnesses all its domestic potential. Indonesia has all the ingredients needed—natural resources, demographic advantages, geostrategic position, and a vast market. What are we waiting now is a clear direction and a bold commitment to move forward together as one.

(This article was published on kompas.id on Tuesday, July 29, 2025)