Adam Tooze, a professor of history at Columbia University, has a relevant term to describe the challenges we face these days. He popularized the word “polycrisis”.

A normal crisis emerges from a problem that challenges our typical abilities and hence causes us to question our identity. On the other hand, in a polycrisis, we encounter shocks that look disparate but are, in fact, interlocking and interacting in such a way that the overall effect is overwhelming. In short, they happen all at once and they tend to reinforce each other.

Evidence of this state of polycrisis appeared during the 2023 World Economic Forum, where we heard that businesses were still under pressure from the aftereffects of COVID-19, accelerated inflation in the post-pandemic world and the Russia-Ukraine war.

The message from emerging markets does not sound cheerful either. The pandemic, rising commodity and food prices and a stronger dollar have placed developing countries under stress.

The recent Global Risk Report by the WEF highlighted that the top risk for the next two to three years will be the cost of living. This means that the most vulnerable groups of society and already fragile states will be most severely affected, which will exacerbate poverty, starvation, violent protests, political instability and possibly result in state collapse.

Meanwhile, the gains earned by middle-class households will also be undermined by economic pressures, resulting in global unhappiness, political division and requests for more social protections.

Another important risk highlighted in the report is geoeconomic confrontation. With increasing tensions and conflicts between major world powers and state intervention in the markets during the next two years, economic warfare is starting to become the norm.

We have seen how the economy can be weaponized through boycotts and economic sanctions. This is what the report called geoeconomic weaponization.

While geopolitical tensions related to the Russia-Ukraine war might be the first to come to mind, such tensions are also occurring between the United States and the European Union. Trade and industrial policy are a significant additional story.

Businesses in Europe are fascinated by the misleadingly named US Inflation Reduction Act, and many are considering moving operations there to take advantage of its potential and lower US energy prices. The US has the upper hand in the subsidy war, which is only getting started, despite Ursula von der Leyen, the head of the European Commission, offering potential countermeasures.

The inefficiency of these policies is almost certain, in my opinion. However, they ought to hurry up with the use of fresh climate technologies. The only remaining option may be economic nationalism. At a critical time, it is also dividing the West.

 

How about Indonesia

Indonesia showed remarkable resilience in 2022, paving a solid path forward for this year.

First, consumption, reflected in our Mandiri Spending Index (MSI), has been stable for the long period. Indeed, MSI readings in 2022 followed a remarkably similar pattern to the Retail Sales Indices of Bank Indonesia (BI) in 2019 and 2018. This suggests spending is back to the pre-pandemic situation, not only in terms of the level but also in terms of behavior.

Second, in 2022, investment realization reached Rp 1,207 trillion (US$80.46 billion), above the government target of Rp 1,200 trillion. Investment flows were dominated by investment in the mining, base metals and transportation sectors. Rising demand and commodity prices have also boosted the prospects for these sectors. It should be noted that infrastructure projects built by the government over the last seven to eight years have increased connectivity, which then increased investment in the transportation sector.

Another interesting aspect of Indonesia's investment performance is that the rapid growth of investment is largely attributable to foreign direct investment (FDI). In 2022, FDI contributed around 54.2 percent of total investment, while domestic investment contributed around 45.8 percent of total investment. In 2022, FDI was recorded at Rp 654.4 trillion, a significant increase of 44.2 percent (when compared to 10.0 percent in 2021), reaching the highest level since 2008.

This good news suggests that investment and consumption will be the engine of economic growth. However, they will also face big challenges, despite the opportunities. A global economic slowdown could have an impact on investment.

From a global perspective, risks of economic slowdowns or even recessions loom over the countries of origin for Indonesian FDI, such as China, Singapore and the US. Deteriorating economic conditions in these countries may negatively affect investment.

On the domestic side, the challenge is more with regard to political stability in the run-up the 2024 general election. It is very important to be able to maintain a stable political environment. On the other hand, the government’s commitment to maintaining growth through various policies should give opportunities to business.

Another aspect is strong institutions and policy coordination between fiscal, monetary and banking authorities. This has helped us to navigate the COVID-19 crisis and may help us escape aspects of the polycrisis world. In addition, efficient government policies in containing the COVID-19 pandemic should be applauded. Due to this factor, the government has been able to attract domestic investment in consumers sectors.

For instance, in 2022, domestic investment flew to the transportation, warehousing and communication sectors (13.6 percent); housing, industrial and office areas (12.0 percent); mining (11.3 percent); and the food industry (9.9 percent). The robust domestic investment flow has been supported by mobility and flexibility in transactions.

Thus, good policies in containing the spread of the virus and the end of social restrictions have played a significant role. We anticipate a similar trend in 2023.

Lastly, we anticipate that economic growth will slow down, as well as export performance, which will shrink compared to 2022.

However, various positive factors will support Indonesia's economy in 2023. Solid spending and the end of social restrictions will be major factors. Pro-growth policies remain at the center of government policies, strong social assistance programs will help mitigate economic shocks, and the benchmark interest rate policy is no longer aggressive.

All of these factors should fuel our optimism as we enter 2023.

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The writer is head of the Mandiri Institute.