External Environment Increasingly Challenging, But Indonesia Has Its Huge Domestic Market to Rely On
As if the external environment wasn’t already challenging enough, a new geopolitical crisis broke out when military organization Hamas attacked Israel in the morning of 7 October 2023 (from the Gaza Strip), killing over 1,400 Israelis while taking hostage more than 200 people.
In response to these attacks, Israel not only defended itself, but took it much further by bombing many targets in the Gaza Strip, killing thousands of Palestinians in the area in an act of revenge while also preparing for a ground invasion. Problematically, Hamas often uses Palestinians as a human shield, and so when Israel attacks Hamas it instantly results in the killing of innocent people, which is a terrible situation.
Indonesia's Ministry of Foreign Affairs was quickly to release a statement expressing – on behalf of the Indonesian government, and the Indonesian people – its concerns over the escalating conflict between the Palestinians and Israelis:
“Indonesia is deeply concerned with the escalation of conflict between Palestine and Israel. Indonesia urges the immediate end of violence to avoid further casualties. The root of the conflict, namely the occupation of the Palestinian territories by Israel, must be resolved, in accordance with the parameters agreed upon by the UN.”
Being the world’s biggest Muslim population, Indonesia is a supporter of Palestinian statehood based on a constitutional mandate to eradicate colonialism. The country has also been collecting aid through the Foreign Affairs Ministry which is planned to be sent to the Gaza Strip, although, for now, it remains too difficult and dangerous to access the area.
What is worse, the end of this conflict is nowhere in sight. On the contrary, it can in fact easily escalate into a regional conflict involving Iran, Hezbollah, Lebanon, Syria, Turkey and Egypt – in a region that is a key supplier of energy. This would then likely give rise to soaring international crude oil prices, and thus trigger an overall surge of inflation around the world, implying central banks (particularly the US Federal Reserve, which basically sets the tone) are unable to lower their interest rates. For Indonesia, it would mean more pressures on the rupiah rate, stocks and bonds, while Bank Indonesia’s higher interest rate environment would limit demand for credit, hence holding back economic activity.
While Indonesia is certainly affected by global conditions (such as weaker demand for Indonesian commodities, and higher global crude oil prices as Indonesia is a net oil importer), Indonesia can always rely on its massive domestic market (in the form of household consumption) for economic growth. With a population that numbers over 275 million people, it can enjoy a huge consumer force that drives the national economy. Only when household consumption breaks down at home (such as during the COVID-19 crisis or the Asian Financial Crisis in 1998) Indonesia encounters an economic recession. And so, Indonesia’s poor integration into the global supply and value chains can sometimes be a positive matter (in times of economic turmoil).
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