Domestic Market Drives Growth as Manufacturing Confidence Index Climbs in November 2024

Jakarta, INTI - The Indonesian manufacturing sector continues to demonstrate resilience amid global economic uncertainties, driven by robust domestic demand. According to the latest report from the Ministry of Industry's Index of Industrial Confidence (IKI), the index for November 2024 reached 52.95 points, marking an increase of 0.20 points from October 2024 and a 0.52-point rise compared to November 2023. The consistent expansion in manufacturing performance suggests that domestic economic stability and consumer purchasing power play a critical role in shaping the sector's growth, as indicated by the IKI analysts.

Domestic Market Dominance

Approximately 75% of Indonesia's manufactured goods are consumed within the domestic market, with only 25% directed towards exports. This domestic orientation underscores the sector's reliance on local economic conditions. "The growth in the IKI for November is supported by the expansion of 21 subsectors, contributing significantly to the Non-Oil and Gas Manufacturing Gross Domestic Product (GDP) in the second quarter of 2024, which accounted for 99.3%," stated Febri Hendri Antoni Arif, the spokesperson for the Ministry of Industry, in a written statement on Thursday, November 28.

The positive trajectory of the IKI for November was fueled by an increase in the new orders index, which rose by 2.58 points to reach 54.2, signaling increased demand. Despite a slight decline of 1.18 points in the inventory index to 54.68, the overall outlook remained optimistic. However, the production index faced a contraction, dipping by 2.84 points to 49.72. This decline marked a reversal after two consecutive months of expansion. The primary driver behind this slowdown was the strengthening of the US dollar against the Indonesian rupiah, which led to higher import raw material costs, while manufacturers continued to sell their products in local currency.

Government Initiatives Boost Confidence

The growth in the IKI was also bolstered by the positive response from industries oriented towards the domestic market, which have benefited from programs spearheaded by President Prabowo Subianto and Vice President Gibran Rakabuming Raka. Key initiatives, such as industrial downstreaming and free nutritious meal programs, have strengthened confidence within these sectors. Meanwhile, industries focused on exports continue to grapple with a weakening global demand.

Breaking down the data further, three subsectors showed the highest gains in November: Electrical Equipment, Beverages, and Printing and Reproduction Media. The electrical equipment sector, in particular, saw growth due to the completion of projects by the state utility company, PLN, and increased procurement of battery charging equipment for Electric Vehicle Charging Stations (SPKLU). The beverage sector, on the other hand, was buoyed by preparations for the regional elections (Pilkada) across the country and the upcoming Christmas and New Year (Nataru) festivities. These factors contributed to heightened demand for beverages.

Challenges in Export-Oriented Subsector

Not all subsectors shared in the growth. Two subsectors experienced contractions: Other Manufacturing and Repair and Installation of Machinery and Equipment. The Other Manufacturing subsector, which includes products like false eyelashes, jewelry, toys, sporting goods, and musical instruments, faced a slowdown due to a decline in export demand, largely attributed to the economic slowdown in key export markets. Similarly, the Repair and Installation of Machinery and Equipment sector experienced a downturn, potentially due to reduced domestic demand following efficiency improvements amid global economic uncertainties.

Domestic vs. Export Market Performance

A closer look at the IKI data reveals a stronger performance among industries targeting the domestic market compared to those focused on exports. The IKI for export-oriented companies stood at 52.39, while the domestic market-oriented IKI was higher at 53.33. The expansion in the domestic market was supported by 20 subsectors showing growth, although a few subsectors, including Tobacco Processing, Other Manufacturing, and Repair and Installation of Machinery and Equipment, experienced contractions.

The contraction in the tobacco processing sector was linked to a rise in the use of illegal cigarettes, which has dampened demand in the domestic market. "The IKI for November 2024 rose due to substantial domestic demand, supported by government initiatives," Febri added. He noted that public confidence in the new administration was reflected in the overall business sentiment for November, with 30.8% of industries reporting improved conditions, compared to 22.2% that indicated a decline. Furthermore, business optimism for the next six months showed a slight increase of 0.1% over the previous month.

Economic Concerns and Global Influences

Despite the positive trends, Febri highlighted concerns noted by IKI analysts regarding domestic economic growth, which has been affected by increased geopolitical tensions and the ongoing US presidential election. These factors have contributed to a slowdown in production and a depreciation of the rupiah. Producers are also reportedly cautious and holding back on production, awaiting policy announcements from the newly elected US president.

Policy Recommendations and Future Outlook

With the domestic market playing a vital role in supporting the manufacturing sector, ongoing efforts and coordinated policies are necessary to maintain market share and strengthen the industry. "The Ministry of Industry believes that pro-industry policies enacted by other ministries and agencies will support industrial confidence and further enhance the IKI," said Febri. He emphasized the importance of policies that restrict imports of finished goods to protect the domestic market and safeguard local industries.

These protective measures are considered essential for maintaining a healthy competitive landscape and ensuring that domestic products continue to dominate the local market. The Ministry of Industry is advocating for sustained efforts in policy formulation that safeguard the interests of the local manufacturing sector, enabling it to thrive in the face of both domestic and international challenges.

The manufacturing sector's resilience, bolstered by strong domestic demand and government policies, has helped maintain positive growth despite external uncertainties. The continued expansion of the IKI, supported by strategic programs and an increase in domestic orders, signals a promising outlook for Indonesia's industrial landscape. However, challenges such as global economic tensions and currency fluctuations highlight the need for adaptive strategies to sustain growth and stability in the manufacturing sector.