January 6, 2025
JAKARTA – When Donald Trump reclaimed the United States presidency in November, it sent ripples across the global stage. Trump is not merely a leader; he is a disruptor, someone who reshapes the rules of the game in trade, monetary policy and geopolitics. For Indonesia, his second term presents a dual challenge: mitigating risks while seizing opportunities. With a projected fiscal deficit of 2.9 percent of GDP (SSI Projection), a weakening rupiah and shifting global dynamics, the year ahead will test Indonesia’s resilience and strategic agility.
Indonesia’s 2024 economic performance was commendable in many respects. The economy is projected to grow by 5.02 percent year-on-year (yoy), supported by solid direct investments and resilient exports, particularly in commodities such as palm oil and nickel.
However, beneath these achievements lie structural challenges. Weak household consumption, a volatile rupiah trading between Rp 15,800 to 16,200 against the US dollar, and diminished investor confidence in local equities painted a mixed picture. Trump’s reelection and its impact on the US monetary policy add a layer of complexity to Indonesia’s fiscal and monetary landscape.
Trump’s fiscal expansion, characterized by tax cuts and aggressive spending, raises inflationary expectations in the US, prompting the Federal Reserve to maintain or slow its rate-cut trajectory. For Indonesia, this translates into sustained capital outflows, a weakening rupiah (forecasted to drop to Rp 16,500 per US dollar in 2025), and limited room for monetary easing. Bank Indonesia (BI) is likely to cut its policy rate modestly to 5.75 percent, but fiscal policy will need to play a bigger role in supporting economic growth.
The fiscal landscape for 2025 is one of heightened tension. Indonesia’s fiscal deficit, projected at 2.9 percent of GDP, is driven by a Rp 100 trillion revenue shortfall and an additional Rp 130 trillion in unplanned spending, which comes on top of an already ambitious budget. This expansion in government spending is necessary to fund critical infrastructure projects, green energy initiatives and social programs. However, it also adds significant pressure to fiscal management. The government’s reliance on increased bond issuance to finance this deficit introduces additional risks. Rising global bond yields, driven by US monetary policy, will narrow the yield spread between Indonesian and US government bonds, making local bonds less attractive to international investors. This could lead to higher borrowing costs for the government, potentially crowding out private investment and slowing economic momentum.
The weaker rupiah further complicates matters. A depreciating currency increases the cost of servicing foreign-denominated debt and raises the price tag for importing critical materials needed for infrastructure and energy projects. This adds additional strain to a fiscal position already under pressure from global volatility.
Revenue mobilization will be critical in addressing these fiscal challenges. The planned VAT increase to 12 percent in 2025 is a step in the right direction to bolster revenue, but it must be managed carefully to avoid suppressing household consumption. Expanding the tax base, improving compliance, and leveraging digital tools for more efficient tax collection will also be vital. Moreover, exploring alternative financing mechanisms, such as green bonds and sukuk (Sharia-compliant bonds), could attract specialized investors while aligning with global sustainability goals.
Despite these challenges, Trump’s second term also opens doors for Indonesia. His preference for bilateral trade agreements offers an opportunity to negotiate focused and mutually beneficial deals. By strengthening trade relations with the US, Indonesia can secure better market access for its key commodities and value-added products. Furthermore, Trump’s ongoing trade tensions with China create room for Indonesia to position itself as a strategic player in global supply chains. Accelerated regulatory reforms and infrastructure development will be key to attracting foreign direct investment, but competition from regional peers such as Vietnam and Thailand will remain fierce.
Indonesia’s commitment to renewable energy and digital transformation provides a strong foundation for future growth. The government’s plan to attract $30 billion in green investments and achieve 75 GW of renewable energy capacity by 2040 aligns with global trends and investor priorities. Meanwhile, the digital economy, projected to grow by 14 percent yoy, offers immense potential for innovation, inclusivity and productivity gains. These efforts underscore the importance of maintaining fiscal discipline to ensure that these transformative initiatives can be funded sustainably.
Domestically, Indonesia must address its structural challenges to remain competitive. Simplifying regulations, improving infrastructure and reducing logistical inefficiencies will be critical to maintaining investor confidence. Additionally, fostering innovation in green energy and digital technology will position Indonesia as a leader in Southeast Asia’s economic transformation. By leveraging its regional leadership within ASEAN, Indonesia can also build stronger partnerships to mitigate the risks of Trump’s protectionist policies.
As we move into 2025, Indonesia stands at the crossroads of uncertainty and opportunity. Trump’s second term is a reminder that global dynamics can shift rapidly, reshaping the rules of engagement in trade, finance and geopolitics. For Indonesia, the road ahead will not be without challenges; currency pressures, fiscal constraints, and the complexities of global protectionism will test our resilience. But history has shown that we are a nation that thrives on adaptability. From the shocks of 2016 to the pandemic recovery, Indonesia has repeatedly demonstrated its capacity to rise above adversity.
This year is our chance to chart a new course, one that balances ambition with pragmatism, risks with opportunities, and domestic priorities with global realities. The stakes are high, but so are the rewards. By embracing bold reforms, fostering innovation and strengthening partnerships, Indonesia can not only navigate this era of uncertainty but emerge stronger, more inclusive and globally competitive. This is not just a test of our economy, it is a testament to our vision and determination.
