Economic Update

Published 09 Jan 2020

Indonesia has sought to stimulate the economy in 2019, with President Joko Widodo, known as Jokowi, outlining significant growth plans after securing his second term in office.

President Widodo won the April 17 election, defeating opponent Prabowo Subianto with 55.5% of the vote.

The incumbent president’s campaign focused on human capital development and the country’s large-scale infrastructure rollout, as well as efforts to increase foreign investment and diversify the economy away from a reliance on natural resources.

President Widodo’s victory came amid a difficult economic environment globally, with the trade war between the US and China leading to a slowdown in commerce and demand across the region.

Indonesian exports were down 7.8% year-on-year between January and the end of October, according to figures from Statistics Indonesia, while the IMF predicted the year-end trade deficit would widen from 0.4% of GDP to 4.6%.

Concerns over trade have weighed slightly on GDP. In October the Ministry of Finance, together with Bank Indonesia (BI), the central bank, projected year-end growth of between 5% and 5.1%, down on government projections of 5.2% and on the lower end of BI’s 5-5.4% target range.

These figures broadly align with the forecasts of international institutions. The IMF and the World Bank both cut their 2019 growth forecasts from 5.2% to 5%, the lowest annual rate since 2016.

“Since 2018 BI has applied a policy mix which led to low inflation and a stable exchange rate in 2019, and allowed for continued economic growth. We will maintain these business-friendly policies in 2020,” Perry Warjiyo, governor of BI, told OBG.

See also: The Report – Indonesia 2019

Rate cuts and investment incentives

In light of the slightly muted outlook, the country has been proactive in trying to stimulate activity.

BI cut interest rates four times in four consecutive months between July and October, lowering the benchmark rate from 6% to 5% over the period in a bid to stimulate lending and improve liquidity.

The rate cuts dovetail with broader plans to boost growth and investment through the expansion of special economic zones (SEZs), a key priority for the administration.

In October officials unveiled plans to simplify tax holiday schemes relating to investments in SEZs. The government hopes to build on the 13 existing SEZs by inaugurating another seven in 2020, including a digital park on Batam Island, and an export-focused zone for electronics, automotive and chemical industries in Central Java.

The authorities hope to attract Rp726trn ($51.5bn) in investment in SEZs by 2030.

Additional reforms include a proposal to progressively reduce the corporate tax rate from 25% to 20%, starting in 2021, and President Widodo has also highlighted plans to relax the country’s negative investment list.

Expansion of digital economy

Another priority for the government has been the development of Indonesia’s digital economy, a sector with significant growth potential.

Central to this was the mid-October launch of the Palapa Ring broadband project, a $1.3bn, 35,000-km, fibre-optic network designed to provide 4G services to the entire archipelago.

In addition to infrastructure upgrades, a number of companies have invested in the domestic ICT sector.

In July it was announced that Japanese investment giant SoftBank – through Singaporean firm Grab – would invest $2bn in Indonesia over the next five years to upgrade digital infrastructure.

The funds will go towards creating a new, environmentally friendly urban transport network based on electric vehicles and geo-mapping, as well as expanding electronic health care services.

Meanwhile, in September Japanese telecoms operator NTT unveiled plans to invest $500m in a new data centre, the company’s third in the country.

Advancements in digital technology are expected to have a widespread effect on the entire economy, benefitting sectors such as agriculture, health care and industry – the latter being a primary focus of the government’s Making Indonesia 4.0 strategy.

“For Indonesia to continue its role as a major player in Asia’s tech industries, we need to pay attention to two things. First, we must have the infrastructure to support the digital ecosystem, and second, we must empower our ICT talent to play a major role in the industry,” Muhamad Fajrin, co-founder of local e-commerce company Bukalapak, told OBG.

New capital announcement

In 2019 the government announced plans to relocate its capital city from Jakarta to East Kalimantan, located on the island of Borneo.

The new capital will be located between Samarinda City and the port city of Balikpapan, in what is considered a strategic location in the centre of the Indonesian archipelago.

The government said the relocation would cost an estimated $33bn, to be funded by a mix of state and private investment, and public-private partnerships. Construction could start as early as 2020, with the relocation of civil servants slated to begin in 2024.

While the move will help stimulate economic activity on sparsely populated Borneo, it will also ease pressure on the existing capital, Jakarta. With a population of around 10m, many parts of the city suffer from overcrowding and congestion, and it is also susceptible to floods and sinking due to the overuse of groundwater.