Indonesia Faces Political Uncertainty and Economic Hurdles as 2025 Begins

By Maria Rina Santoso, South East Asia Correspondent

Indonesia, Southeast Asia’s largest democracy, entered 2025 with a mix of optimism and apprehension. While 2024 ended on a note of relative stability following peaceful elections, fresh challenges—from a planned value-added tax (VAT) hike to escalating political rivalries—threaten to disrupt the nation’s economic ambitions and democratic progress. Protests in Jakarta against the government’s fiscal measures highlight growing public discontent, raising questions about President Prabowo Subianto’s ability to deliver on his promises amid global and domestic pressures.

The year 2024 demonstrated Indonesia’s maturing democracy, with the February presidential and legislative elections proceeding without major unrest despite initial fears of vote-rigging and interference. However, as the new administration grapples with internal divisions and external economic risks, the path ahead remains fraught. Analysts suggest that if unchecked, these tensions could hinder the country’s target of 8% economic growth, though such projections remain unconfirmed and depend on various factors including international trade dynamics.

A Year of Democratic Tests and Triumphs

Indonesia’s 2024 elections marked a pivotal moment in its democratic evolution. The February polls, which saw Prabowo Subianto elected as president, were characterised by intense debates over alleged government influence and resource deployment by the incumbent administration. Despite these controversies, the process concluded with both winners and losers agreeing to resolve disputes through legal channels, such as the Constitutional Court. This outcome could signal a strengthening of democratic institutions, as it avoided the violence that has marred elections in other regions.

The October regional elections further tested the system, with an opposition candidate securing victory in Jakarta. This result occurred shortly after Prabowo’s inauguration on 20 October 2024, where he outlined an ambitious agenda. Key pledges included achieving 8% economic growth, launching a nationwide free meals programme to combat malnutrition, and continuing policies from his predecessor, Joko Widodo, such as industrial downstreaming. Prabowo’s early international tour, visiting Beijing, Washington, DC, and attending summits with leaders like Russian President Vladimir Putin and Turkish President Recep Tayyip Erdogan, aimed to bolster Indonesia’s global standing.

Yet, these diplomatic efforts have not shielded the country from external uncertainties. The re-election of Donald Trump in the United States, with his pledges to impose tariffs on China, poses potential risks. If a US-China trade war intensifies, it could complicate Indonesia’s export-dependent economy, particularly in commodities like palm oil and nickel. Experts warn that such disruptions might undermine Prabowo’s growth targets, although no definitive evidence confirms the scale of impact at this stage.

Domestic Politics: Rising Tensions and Corruption Allegations

On the home front, political stability has begun to fray. The Corruption Eradication Commission (KPK) named Hasto Kristiyanto, secretary general of the Indonesian Democratic Party of Struggle (PDI-P), as a suspect in a bribery case on Christmas Eve 2024. This move is widely perceived as politically charged, potentially linked to former President Joko Widodo’s efforts to consolidate power. Jokowi, along with his son Vice President Gibran Rakabuming Raka and son-in-law Bobby Nasution, was expelled from the PDI-P just days before the announcement, fuelling suspicions of retribution.

Such developments underscore the fragility of Indonesia’s political landscape. The PDI-P, a major opposition force, has accused the KPK of bias, arguing that its leadership—appointed during Jokowi’s final days—may be serving his interests. If these allegations prove true, they could exacerbate divisions within the government coalition. Political analysts suggest that ongoing tit-for-tat manoeuvres might lead to increased polarisation in early 2025, potentially destabilising policy implementation. However, it is important to note that no concrete evidence has emerged to substantiate claims of direct interference, and such speculations should be treated with caution.

In this context, a truce between Jokowi and the PDI-P could be crucial for maintaining stability. While some observers hold out hope for reconciliation, the likelihood appears slim based on current rhetoric. The government’s response to these challenges will be critical, as unresolved conflicts could erode public trust and complicate efforts to address economic issues.

Economic Pressures: The VAT Hike and Its Implications

One of the most contentious policies is the planned increase in VAT from 11% to 12%, set to take effect in early 2025. This measure, intended to boost government revenue, has sparked widespread protests, as seen in Jakarta on 26 December 2024, where students clashed with riot police. Demonstrators argue that the hike will erode consumer purchasing power, particularly for low-income households, at a time when global inflation remains a concern.

Economists have estimated that the VAT increase could dampen growth by reducing domestic demand, with potential ripple effects on sectors like retail and manufacturing. For instance, if consumer spending declines as projected, it might hinder Prabowo’s 8% growth goal. Yet, these estimates are preliminary and unverified; factors such as compensatory fiscal measures or export booms could mitigate the impact. The government maintains that the revenue will fund essential programmes, including the free meals initiative, but critics counter that without targeted support for vulnerable groups, the policy risks widening inequality.

Indonesia’s economic strategy also hinges on navigating global uncertainties. The country’s reliance on trade with China and the US means that any escalation in tariffs could disrupt supply chains. Prabowo’s administration has emphasised diversification, but achieving this will require sustained investment in infrastructure and innovation. If successful, these efforts might position Indonesia as a regional economic leader; however, should international tensions persist, the outlook could dim.

Analysis: Balancing Ambition and Reality

As 2025 unfolds, Indonesia stands at a crossroads. Prabowo’s vision for rapid development is commendable, yet it must contend with the interplay of domestic politics and global economics. The VAT protests serve as a reminder that policy decisions affect real people, and mishandling could lead to broader unrest. From a geopolitical perspective, Indonesia’s non-aligned stance—evident in Prabowo’s summit engagements—offers opportunities for strategic partnerships, but it also exposes the nation to volatility.

It is worth considering that if political reconciliation occurs, it could foster a more cohesive approach to economic challenges. Conversely, persistent infighting might divert attention from critical issues like corruption reform and sustainable growth. While some commentators express optimism that the “worst is over,” this view is speculative and should be qualified: no evidence guarantees a smooth year ahead.

In summary, Indonesia’s journey in 2025 will test the resilience of its institutions and the adaptability of its leaders. With careful navigation, the country could emerge stronger, but the road will demand compromise and evidence-based decision-making.