Indonesia’s economy is expected to steadily grow over the next two years on the back of domestic consumption and investment despite weak exports, a World Bank report said Monday.

Household spending, traditionally a strong contributor to Indonesia’s GDP, and election-related spending helped to expand Southeast Asia’s largest economy 5.11 percent in the first quarter of 2024.

And it is expected to expand five percent overall this year, followed by 5.1 percent in 2025 and 2026, according to the World Bank’s Indonesia Economic Prospects report.

The latest projection was an increase from the Bank’s previous estimates of 4.9 percent this year and next, followed by five percent in 2026.

“The economy is expected to benefit from a pick-up in public consumption and investment but will face headwinds, notably from worsening terms of trade,” the report said.

It noted several risks to the economy, including high interest rates and geopolitical shocks, which could further weigh on exports already impacted by lower prices.

“The outlook is stable, but risks are tilted to the downside,” World Bank senior economist Wael Mansour told a news conference.

“Our baseline (projection) assumes continuity in policy, especially those linked to boosting investment.”

The latest projection assumes a large contribution from public consumption — with government spending expected to increase — while foreign direct investment as a share of GDP is projected to return to pre-pandemic levels, Mansour said.

He added that Indonesia’s “credible” fiscal rule had helped attract investments and lower Indonesia’s risk premiums.

But president-elect Prabowo Subianto, who will take office in October, is reportedly looking to increase the country’s debt-to-GDP ratio to 50 percent — from less than 40 percent — to fund his campaign promises including free school meals.

A member of Prabowo’s campaign team has denied the plan.

The government’s 2025 budget, due by October, is expected to outline an implementation plan for the new administration’s economic goals, and signal its fiscal policy stance.

A surge in the inflow of remittances and export proceeds has led to an increase in dollar supply in commercial banks, resulting in the highest letter of credit (LC) openings in the last 23 months in May.

However, LC settlements during the same period experienced a slight decline compared to April.

Bangladesh Bank data shows in May, both the government and private commercial banks opened import LCs amounting to $6.83 billion.

The previous highest $7.02 billion worth of LCs were opened in June 2022. Since then, despite fluctuations, LC openings have generally followed a decreasing trend.

In April of the current year, LCs worth $5.68 billion were opened. LC openings in May increased by more than 20% compared to April. In comparison to the same period in 2023, LC openings in May increased by 19.5%.

According to several policy-setting officials from both government and private commercial banks, the inflow of dollars in May was higher compared to normal times. One significant reason cited was the receipt of remittances amounting to $2.25 billion in that month. The figure stands in contrast to an average monthly remittance inflow of less than $2 billion in the current fiscal year.

Besides, despite a decrease in overall exports in May, there was a slight increase in export LCs in banks compared to previous times. Payments for previously made exports started arriving. With the initiation of the crawling peg in the exchange rate on 8 May, exporters are obtaining more favourable rates for dollars, prompting them to bring these back into the country.

Syed Mahbubur Rahman, managing director and chief executive officer, Mutual Trust Bank, told the nes reporter, “Due to the recent activation of the interbank dollar market, which was previously inactive, banks are now able to collect dollars from there. As a result, even though some banks have experienced a decrease in remittances, they are gaining confidence in acquiring dollars from the interbank market. This assurance has enabled them to open more Import LCs.”

The banks in the country are benefiting from the introduction of the crawling peg in the exchange rate system, he said.

“The crawling peg system has reduced the gap between the market rate and the dollar rate, giving customers more confidence to open LCs.”

Mahbubur also said similar to industrial raw materials, the volume of LCs for intermediate goods imports also rose. He mentioned that this trend is positive for the economy.

The deputy managing director of a private commercial bank said due to a favourable inflow of dollars in May, commercial banks are increasing their LC openings.

He mentioned that there has always been demand for LC openings, but previously they used to be more cautious in approving import LCs. For example, if someone applied for 5 LCs earlier, they might have approved only 2. However, in May, due to the good dollar flow, they on average approved 4 out of 5 LC applications.

In May, there was a slight increase in opening LCs for government imports, including jute oil and fertilisers. An official from a state-owned bank said one of the main reasons for this increase is the greater availability of foreign exchange, which facilitated more LC openings in bank accounts.

Ali Reza Iftekhar, managing director and chief executive officer of Eastern Bank told the news reporter, “Our liquidity situation in dollars has improved compared to before. Remittance flows are now steady. Moreover, our bank’s export proceeds have also increased. Additionally, there are now dollar transactions happening in the interbank market, which has led to an increase in dollar inflows.”

Transactions in this market were almost closed for a long time, he said, adding, “As a result, we have been able to increase our LC openings for imports. This trend will gradually move towards further improvement.”

LC openings, however, may decrease slightly in June due to the banks’ accounts being closed for a few days during Eid, said a senior official of a leading private bank.

“Besides, RMG and production-related houses remained closed for several days during Eid. As a result, there is reduced demand for raw materials. These factors contribute to a trend of decreased LC openings for imports during the Eid months.”

In the first 11 months of the current fiscal year, a total of $63.02 billion worth of import LCs were opened — a slight year-on-year increase from $62.08 billion.

LC settlements in May decrease slightly

In May, banks settled import LC payments totalling $5.48 billion, which was 5% lower compared to April, central bank data shows.

A senior official of the central bank said currently, the pressure on deferred LC payments has reduced compared to before. “Banks have reduced opening deferred LCs to mitigate exchange rate risks. Consequently, the volume of payments has also decreased,” he said.

In the first 11 months of the current fiscal year, LC settlements for imports decreased by 12% to $60.79 billion compared to the same period of the previous fiscal year.

A managing director of a private bank said due to lower LC openings in the past two years, pressure on payments reduced. Currently, banks are selling dollars at rates between Tk118.40 and Tk118.70 for LC settlements. On the other hand, they are collecting dollars from remittances at rates ranging from Tk117.80 to Tk118.30.

The spot rate for shipping goods in containers to Europe from Asia rose for a ninth straight week, the longest stretch of rising prices since the pandemic disrupted global supply chains in 2021.

The rate for a 40-foot container to Genoa, Italy, from China hit $7,029 over the past week, the highest level since September 2022, according to the Drewry World Container Index released Thursday. The cost to Rotterdam increased to $6,867. Both rates have essentially doubled since April.

For the busy trade route from Shanghai to Los Angeles, the rate rose for a seventh straight week, to $6,441.

While not all freight is moving at such elevated prices, the spot market for containers reflects the supply of available space on ships and the demand from importers. That balance has tightened during the past six months as vessels avoid the Red Sea, where Houthi rebels have attacked commercial traffic, including a bulk commodity carrier that sunk earlier this week.

Most container lines are taking the longer route around southern Africa, creating disruptions similar to those two or three years ago. Ryan Petersen, founder and chief executive officer of Flexport Inc., said “we’re right back almost to where we were during the peak Covid situation.” He’s seeing spot rates even higher than the numbers Drewry just reported.

“Right now, if you want to ship a container from China to here in the UK it will cost you about $10,000 unless you have a contract,” Petersen said during a Bloomberg Television interview in London on Thursday. “And by the way, most of those contracts that were signed at lower prices are not being honoured and they’re adding surcharges to them.”

Petersen said it’s hard to predict how long shipping prices will keep climbing, noting that carriers spent some of their record-high profits made during the pandemic on new vessels that are entering service through 2026, which should help ease the latest capacity crunch.

But he also said uncertainty about delivery reliability later this year is worrying some companies and motivating them to order now rather than wait. Among the threats is a dockworker strike at ports along the US East and Gulf coasts, which Petersen said might send container rates above their pandemic highs if cargo bound for those gateways is significantly disrupted.