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Trump’s second act and Indonesia's economic outlook in 2025
Trump’s reelection and its impact on US monetary policy add a layer of complexity to Indonesia’s fiscal and monetary landscape.
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A teller arranges stacks of United States dollar and rupiah bills on March 1, 2024, at a money changer in Jakarta. (Antara/Muhammad Adimaja)
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hen 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.
