As South-east Asia’s largest economy and the world’s fourth-most-populated country, Indonesia is an important trade partner within ASEAN, as well as for Japan, China and the US. The country has averaged more than 5% annual GDP growth over the past decade through sound macroeconomic policies, rising domestic demand driven by a burgeoning middle class and high commodity prices. However, a gradual slowdown brought on by a collapse in commodity prices in 2011 and 2012 has weighed on the economy, highlighting the country’s commodity export dependency and pushing trade and investment to the top of the growth agenda.

Boosting Investment 

Indonesia faces a host of significant challenges as it seeks to further boost trade and investment, including a long history of protectionist policies, which have lingered under the new administration of President Joko Widodo; a severe infrastructure gap, which has driven up the cost of transport; and labour rigidity, which has held back the expansion of the labour-intensive manufacturing sector. External factors have also slowed growth.

The economic slowdown in China, depressed commodity prices and the rupiah’s rapid depreciation between 2013 and 2015 have further impacted trade in recent years, with export revenues dropping as manufacturers struggle to cope with rising overheads. Despite dampened investor sentiment, the outlook for trade growth remains positive.

The government moved to implement a host of pro-business reforms through a wave of stimulus packages rolled out in late 2015 and early 2016. These have bolstered growth of foreign direct investment (FDI), and the country is negotiating a handful of important free trade agreements (FTAs), including the Regional Comprehensive Economic Partnership (RCEP). An EU-Indonesia Comprehensive Economic Partnership Agreement (CEPA) is also in the pipeline. The country has also expressed interest in joining the Trans-Pacific Partnership (TTP). The steady progress being made with reforms and new trade deals, coupled with efforts to boost value-added production in key export sectors – such as palm oil and metals – suggests a bright future for trade and investment in Indonesia, which should help the country navigate challenging waters in the near term.

Trade Oversight

The Indonesia Investment Coordinating Board (BKPM) – restored to ministerial status in 2009 – reports directly to the president, who has tasked BKPM with three priorities as part of Indonesia’s Vision 2015-19 strategic plan: improving the business licensing process, improving investment realisation and developing the investment climate. In addition to seeking investments that reduce inequality and boost employment, BKPM also works as an advocate for the private sector and offers matchmaking services for investors. Under its strategic roadmap, the agency’s short-term focus is on the so-called low-hanging fruits of investment in Indonesia, namely exports of commodities and natural resources – Indonesia is the world’s top producer of palm oil, the fourth-largest producer of coal and exports considerable quantities of oil and gas.

According to the Ministry of Trade (MoT), Indonesia’s top exports in 2015 were fixed vegetable fats and oils, at $18.7bn, coal ($14.7bn) and natural gas ($10.3bn), followed by electrical equipment ($8.6bn), and petroleum oil ($6.5bn). Its top imports in the same year were machinery ($22bn), electrical equipment ($15.5bn) crude and refined petroleum and oils from bitumin ($12.9bn), plastic ($6.9bn), iron and steel ($6.3bn) and organic chemicals ($5.7bn).

BKPM’s own strategic investment roadmap also aims to channel investment towards infrastructure, including roads, airports, ports and utilities, as well as health services and education. To this end, BKPM’s negative investment list (DNI) – which outlines the sectors in which foreign investment is prohibited or restricted – was revised in 2016 to include opening up toll road businesses and nine health care segments to 100% foreign investment. The roadmap’s third pillar focuses on industrialisation and calls for investment in education to develop a highly skilled workforce, the elimination of policy uncertainties and the provision of fiscal and non-fiscal incentives for industry. The fourth pillar emphasises the development of a knowledge-based economy with further investment in education. The MoT, meanwhile, is responsible for setting trade policy and overseeing the sector through nine separate directorates and agencies. A cabinet shuffle in August 2015 saw Thomas Lembong, a Harvard-educated banker, named minister of trade, a move which many viewed as a sign that the government is intent on embracing more market-friendly trade policies. Lembong has since been made chairman of the BKPM, while Enggartiasto Lukita was chosen to replace him as minister of trade in July 2016

Open To Investment

Foreign investment in Indonesia has been more limited historically compared to some of its ASEAN neighbours, due in part to the aforementioned DNI. In July 2014 Indonesia marked a historic first when it elected Widodo – a former businessman from outside the political establishment – as its new president. Widodo rode to power on the promise of cracking down on corruption and rolling out widespread economic reforms aimed at boosting growth. Early in his presidency he announced a target of reaching 7% annual GDP growth, as well as moves to eliminate costly fuel subsidies, which were estimated to have cost the country around $18bn per year in late 2014 and early 2015.

The Widodo administration has formulated a comprehensive national development strategy called Nawa Cita, which comprises nine strategic pillars: protecting citizens; developing clean, effective and democratic governance; rural development; law enforcement reforms; improving quality of life; promoting economic independence through domestic development; overhauling the character of the nation; strengthening social reforms; and increasing productivity and competitiveness.

Priority Sectors 

The BKPM’s Investment Strategic Plan 2015-19 identifies a number of priority sectors for new investment: power generation; labour-intensive industry, including textiles, food and beverages, furniture and toys; import substitution industries, including chemical and pharmaceutical products, iron and steel; export-oriented industries, such as electronics, machinery, rubber products, automotive, seafood and paper products; downstream production of cacao, sugar and metals; and the maritime and tourism sectors. In order to develop these sectors, the government has announced plans for loosened investment restrictions, while the Ministry of Finance has stressed a need to transform Indonesia from a consumption-driven economy to one propelled by investment. To achieve these goals, the government unveiled 12 new economic stimulus packages between September 2015 and March 2016, many of which included reforms aimed at improving the business environment, providing new fiscal incentives to potential investors and, most significantly, amending the DNI to open up a number of high-priority sectors to foreign investment.

Doing Business 

The business environment is already improving as a result of these packages. Indonesia moved up 11 places in the World Bank “Doing Business 2016” report, from 120th to 109th. The survey, which monitors regulations that enhance the ease of doing business, found that Indonesia has made significant progress in the following areas: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency. Indonesia recorded the strongest gains in the category concerning tax payments, where it rose 12 spots to 114th, as well as in the index for dealing with construction permits, where it improved from 110th to 107th place.

In its “2015 Doing Business in Indonesia” report, the US Commercial Service highlighted that multiple sectors are attracting foreign investors to the market, with consumer-related opportunities being generated in retail, health, education, telecoms and financial services. The agency reported that Indonesian consumers are ranked as the most confident globally, while there is also considerable potential in sectors including aviation – which is expanding at 20% annually – banking, IT, public infrastructure, utilities, defence, communications and agri-business.

Export Markets 

According to data from Statistics Indonesia (BPS), ASEAN is Indonesia’s largest export market, with the value of exports to ASEAN members rising from $33.35bn in 2010 to hit $42.1bn in 2011 before plateauing somewhat at $41.83bn in 2012, $40.63bn in 2013, $39.67bn in 2014 and $33.6bn in 2015. Within ASEAN, Singapore is Indonesia’s largest export market, however, exports have fallen from $18.4bn in 2011 to $12.6bn in 2015, a 31.5% decrease. Declining exports have become an unfortunate trend for the country as of late.

Japan is the biggest single export market for Indonesia, however, and BPS reports that exports to Japan, while lower than their 2011 peak of $33.71bn, remain strong, standing at $23.1bn in 2014 and $18bn in 2015. Japan is followed by the US, with $16.2bn of exports in 2015; China with $15bn; and the EU, with $14.8bn. Outside of ASEAN, export growth was strongest in the US and China between 2010 and 2014, with US-bound export revenues rising by 10.7% to $16.5bn in 2014, while exports to China rose by 12.2% to $17.6bn in 2014 over the same period.

Balancing Act 

Although the country had enjoyed decades of trade surpluses on the back of high commodity prices in the years to 2011, the end of the commodities supercycle saw Indonesia record its first annual trade deficit in 2012, with exports dropping by 6.61% year-on-year (y-o-y) and imports simultaneously rising by 8.02%, resulting in a $1.63bn deficit. The situation worsened somewhat in the following years, with the deficit growing to $4.06bn in 2013, largely due to a rising fuel bill.

In 2014 BPS projected that Indonesia’s trade deficit would hover at around $4bn as a result of a ban on the exportation of unprocessed minerals, which comprised 10% of total exports, or roughly $2bn per month. However, in 2014 global crude prices fell from $115 per barrel in the middle of the year to less than $60 by the end of the year. This new situation proved extremely advantageous for the newly elected administration, which moved to cut an expensive, long-standing fuel subsidy programme, freeing up an estimated $18bn in fiscal space, much of which was channelled into infrastructure. As a result the country went on to post a $1.88bn trade deficit in 2014 and its first trade surplus in nearly three years ($7.6bn) in 2015, according to MoT data.

Surplus Worries 

Although Indonesia has maintained its trade surplus into 2016, total trade has been in decline as a result of depressed energy and commodity prices. This is a concern for stakeholders, as weak trade growth is expected to weigh on both the inflow of FDI and broader economic growth.

In August 2016 BPS announced that Indonesia’s July trade surplus narrowed to $598m from $879.2m a month prior. The decline in imports was attributed to fewer working days in July as a result of religious holidays. Although a trade surplus is generally viewed as positive, stakeholders remain concerned about falling trade volumes. Indonesia’s y-o-y export growth figures have continually declined in recent months – by 9.75% in May, by 4.42% in June and by 17% in July 2016 . According to BPS data, annual export revenues have also been decreasing since hitting a five-year peak of $203.5bn in 2011, dropping to $190bn in 2012, $182.6bn in 2013 and $175.98bn in 2014, their lowest levels since 2010. Export revenues decreased a further 14.6% in 2015 to $150.25bn.

Exporters have been hit hard by the dual challenges of rupiah depreciation – many manufacturers import raw materials for production – and rising wages, which have had a significant impact on competitiveness. The rupiah slid to a 17-year low in July 2015, and although the central bank’s move to tighten lending enabled a recovery in late 2015 and early 2016 (see Economy chapter), it has since adopted a growth-oriented monetary policy. In addition, China’s recent moves to devalue its own currency have put further pressure on Indonesian exports.

Higher salaries have also been a major challenge for labour-intensive industries, particularly textiles, where Indonesia finds itself competing to an ever-greater extent with regional neighbour Vietnam. While Indonesia fell from the 11th-largest garment exporter in 2000 to 14th in 2015, with its share of the $490bn global industry falling from 2.4% to 1.6%, Vietnam rose from 30th to seventh over the same period, according to an April 2015 Reuters report.

Rising wages have been largely blamed by observers for this decline, with the previous system for implementing minimum wage increases being based on a subjective cost of living index that saw wages double in East Java between 2012 and 2015, and jump by 40% across many parts of the country in 2013 alone (see Industry & Retail chapter).

Falling Imports 

Imports also fell for the 22nd consecutive month in July 2016, with BPS statistics showing a 11.6% y-o-y decline. The bureau attributes this continuing trend to reduced economic activity, which saw GDP growth in the country fall to a six-year low of 4.79% in 2015. A slowdown in domestic consumption, which accounts for roughly 57% of GDP, is also considered a contributing factor; however, while the 4.94% y-o-y GDP growth figure posted in the first quarter of 2016 failed to meet analysts’ projections, it was higher than the 4.73% that was posted a year earlier for the same period.

The rupiah’s steady depreciation against the US dollar from 2011 to a 17-year low of Rp14,773:$1 in October 2015 has also had a considerable impact on growth. Weaker foreign exchange earnings have curbed the country’s purchasing power, which, when combined with regional uncertainty driven by the ongoing economic slowdown in China, has impacted investor sentiment. However, there is cause for optimism. The export and import figures in June 2016 were the highest all year, and is evidence that the foreign demand for Indonesian products has grown as has domestic demand for foreign products. This could also imply that the country’s purchasing power has improved in 2016. Furthermore, the country’s attractiveness as an investment destination saw both FDI and domestic direct investment (DDI) post a positive performance in 2015.

FDI Highs 

In January 2016 BKPM announced that in rupiah terms, FDI into Indonesia rose by 19.2% y-o-y in 2015 to hit Rp365.9trn ($26.7bn), following a particularly strong fourth quarter, in which FDI was up 26% y-o-y after the unveiling of a host of economic stimulus packages, most significantly those aimed at reducing red tape and the time it takes to establish a new business.

In US dollar terms, the increase in FDI was more muted, with BKPM reporting that FDI into Indonesia rose by 2.6% to $29.27bn in 2015, up from $28.53bn the year before. It is important to note, however, that BKPM’s calculations were based on the rupiah exchange rate set in the 2015 state budget (Rp12,500:$1), much stronger than the rupiah’s spot rate at the end of 2015, which hovered around Rp18,800:$1.

Total direct investment, including FDI and DDI, rose by 17.8% to Rp545.4trn ($40bn) in 2015, well above BKPM’s annual target of Rp519.5trn ($38bn), with this figure excluding investment in banking and oil and gas. Franky Sibarani, then-chairman of BKPM, noted that investment in manufacturing was particularly strong, rising 43.3% y-o-y, in keeping with the government’s goal to reduce dependency on raw commodity exports and bolster industrialisation and value-added production. The government is also seeking to better distribute new investment across the country’s 17,000 islands, though Java, the most populous island, was the destination for 54% of total investment – Rp296.7trn ($21.7bn) – in 2015. This was down slightly from 57% the year before, and BKPM aims to further reduce this figure to 51% in 2016.

Investors & Beneficiaries 

Singapore was Indonesia’s leading investor in 2015, with $5.9bn in investments, followed by Malaysia ($3.1bn), Japan ($2.9bn), the Netherlands ($1.3bn) and South Korea ($1.2bn), according to BKPM data. The board also reported that the mining, transportation, telecommunications and mineral processing segments were the biggest beneficiaries of FDI in 2015, with Chinese investment in smelters and mineral processing plants surging as a result of a new ban on exports of raw mineral resources. The agency noted that with many major Chinese companies investing substantial amounts through various subsidiaries in Singapore, it is likely that China is actually one of the largest investors in Indonesia (see analysis).

BKPM’s 2016 investment target is an ambitious Rp594.8trn ($43.4bn), with the hope of creating 2m jobs through new FDI and DDI (see Economy chapter). Achieving these benchmarks might be a challenge for Indonesia, with unemployment on the rise in the struggling agricultural and manufacturing sectors; however, recent economic reforms and stimulus packages, such as the revision of the DNI in 2016, should help put the country well on its way to meeting its long-term economic goals.

Coal & Palm Oil 

These reforms will be particularly critical given depressed global commodity prices, which have had a sizeable impact on two of Indonesia’s primary exports: coal and palm oil. In October 2015 Reuters reported that coal shipments from Indonesia are forecast to fall by as much as 17% in 2016, with the majority of mining operations set to lose money and significantly reduce output.

Recent projections see production falling to 300m tonnes in 2016, compared to an estimated 330m-360m tonnes in 2015, after benchmark prices for thermal coal dropped by 16% in 2015 to hit a nine-year low of $51.84 per tonne. Palm oil is also forecast to take a hit in 2016, although the government’s strategy of boosting value-added downstream production of processed palm products is already paying dividends, supported by the country’s enormous domestic fuel demands and prudent government policies. Palm oil has long been a staple of Indonesia’s export base, with the Ministry of Agriculture reporting that it possesses 8m ha of oil palm plantations at present, more than twice as much as in 2000, with the figure expected to rise to 13m ha by 2020.

The industry is dominated by large private enterprises, including the Wilmar Group and Sinar Mas, which together account for roughly half of total palm oil production, followed by smallholder farmers, with a 35% share, and state-owned plantations.

Palm Oil Challenges 

The sector has suffered recently, as international palm oil prices started to fall in 2011. Although production has risen consistently, from 26.5m tonnes in 2012 to 32.5m tonnes in 2015, export revenue fell from $21.6bn to $18.6bn over the same period. In 2016 production and revenue are expected to hit 31m tonnes and $17bn, respectively, according to the Indonesian Palm Oil Producers Association. Factors including severe manmade fires, El Niño weather patterns and a proposed moratorium on new palm oil concessions in certain provinces announced in April 2016 are expected to weigh on production, hence lower production expectations. In June 2016 palm oil production rose by 7.7% to 2.7m tonnes. However, palm oil exports have fallen since April, when they reached 2.1m tonnes, which represented a 20% increase over the preceding month. In June 2016 palm exports stood at 1.8m tonnes, up slightly from May, when exports hit 1.76m. India, China and the EU represent the largest destination markets for Indonesian palm oil as of the same month.

Supportive Tax Policy

One solution to this challenge is to expand downstream palm production. As part of its agenda to bolster revenues and increase value-added production, the government is pushing investment into palm oil refining, moving to slash export taxes on refined palm oil products. In terms of crude palm oil levies, the government had in the past maintained an automatic mechanism by which the CPO export tax was cut to 0% when its price on international markets dropped below $750 per tonne. With CPO prices sinking below this threshold as of September 2014, the country effectively removed export levies in October of that same year. This proved problematic, with the government missing out on much-needed export tax revenues from the industry, and with tax collection consistently falling short of targets (see Economy chapter).

Consequently, the government moved to re-introduce export levies in mid-2015, imposing a $50-per-tonne levy on CPO exports, and a $30-per-tonne levy on processed palm oil products. In April 2016 the Indonesian Oil Palm Estate Fund announced that a total of Rp2.8trn ($204.4m) in export levies had been collected during the first quarter of the year, equal to roughly 30% of the government’s full-year target.

With this levy on CPO exports expected to be scrapped once the benchmark price of $750 per tonne was reached, news later in the month that a new tax on CPO exports would be rolled out in May 2016 came as a surprise, and the government’s reference CPO price was set at $754.10. Now, when the price of CPO exceeds $750 per tonne, a progressive rate of between $3 and $200 per tonne will kick in.

Downstream Investment 

Revenues from palm oil export levies are currently being channelled into an ambitious and modernising biodiesel development programme known as B20, which requires that biodiesel fuels sold in the country consist of an 80:20 blend of diesel and fatty acid methyl ester (FAME), respectively.

FAME is produced from palm oil, meaning that domestic palm oil demand should increase as a result of higher mandatory levels of the biodiesel component, with a 85:15 mix implemented in 2015 under the B15 programme. In February 2015 the government announced it would raise biofuel subsidies from Rp1500 ($0.11) per litre to Rp4000 ($0.29) per litre in an effort to further protect and nurture domestic biofuel producers. In April 2016 this subsidy was raised to Rp5000 ($0.37) per litre.

Positive Results 

Progressively higher mandatory FAME levels have been pursued y-o-y to support overall growth in global prices, as well as to boost domestic palm oil demand, and analysts have forecast that in the event of an oil price rebound, demand for biofuels will increase further, as it will represent a cheaper alternative to many consumers.

This push to develop the biofuel industry has had a positive impact, with palm oil prices rising from $450 per tonne in August 2015 to $700 per tonne as of March 2016, indicating a modest recovery and raising hopes for further downstream investment in the industry. Although palm oil exports in the first quarter of 2016 were weaker than usual, the export mix indicates that government efforts to improve value addition have been successful, and the Indonesian Oil Palm Estate Fund reported that total exports of CPO and palm products stood at 7.42m tonnes during the first quarter of 2016, of which 87.2% was processed palm product, with CPO accounting for the remainder. Domestic demand for biodiesel is forecast to rise significantly to 7.1m kilolitres (KL) in 2016, a 446% increase from 1.3m KL in 2015, further offsetting the negative impact of weaker palm oil shipments to larger markets like India and China.

New Trade Ties 

As part of its strategy to attract new investment and bolster trade growth, the government has increasingly sought to improve trade ties with its regional neighbours and push for the RCEP, a proposed FTA between ASEAN and the six states with which the bloc has existing FTAs. The formal integration of the ASEAN Economic Community (AEC), launched in 2015, presents perhaps both the most significant near-term challenge and opportunity for Indonesia, as it is expected to increase both investment and labour market pressures within the country, although the RCEP, the TPP and the CEPA will almost certainly have the most considerable impact on Indonesia’s long-term trade growth.


As chair of ASEAN in 2011, Indonesia was the first of the bloc’s members to propose consolidating the five FTAs between ASEAN and Australia, New Zealand, China, South Korea, Japan and India into one agreement comprising 16 member countries and spanning a market of 3.4bn people.

The potential advantages are significant, and according to a 2013 study conducted by Johns Hopkins University, SAIS-Bologna and the East-West Centre, Indonesia could realise $18bn in benefits from RCEP membership. In November 2011 ASEAN leaders agreed to the deal, which was then introduced to the community’s six FTA partners. One year later, the 16 countries agreed to launch RCEP negotiations, marking the first serious progress since China began urging ASEAN members to adopt an “ASEAN Plus Three” initiative comprising ASEAN, China, Japan and South Korea in 2006 and 2007.

Indonesia maintains a prominent role in RCEP negotiations, having been appointed ASEAN coordinator for the FTA negotiations, while ministers from 15 RCEP countries have also agreed to appoint Indonesia as chair of the RCEP negotiating committee, assisted by the ASEAN Secretariat. The RCEP Negotiations Committee was formally launched in 2013 and has held 11 meetings since, the last of which took place in Brunei Darussalam in February 2016. Negotiations were not concluded by the original 2015 deadline, however, due to the enormous complexities involved in such a far-reaching FTA. Other challenges include the underdeveloped trade relationships between some of the RCEP’s larger members, for example between India and China, which do not currently have an FTA or an economic partnership.


Although Indonesia is slated to benefit from the RCEP, membership to the US-led TPP could prove even more beneficial. Indeed, the same 2013 study published by Johns Hopkins University and others found that Indonesia stands to gain $62bn in economic benefits from TPP membership.

At present, the TPP comprises 12 Pacific Rim countries: Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US and Vietnam. Collectively, these countries represent 40% of the global economy, nearly $300bn in income and stand to reach $1.9bn in trade gains should the agreement be finalised.

In November 2015 the Widodo administration announced that Indonesia was also considering joining the agreement, with the nation expected to benefit from the elimination or reduction of nearly 18,000 trade barriers, including restriction on textiles and apparel, as well as new regulations on fair trade practices and small business support.

TPP members met in Auckland in 2016 to sign the agreement, although challenges in obtaining the domestic approval necessary to implement the agreement, particularly in the US, have left its future in doubt (see analysis).

Nonetheless, Widodo’s announcement came in the midst of warming trade relations with the US. The president made his first visit to the country in October 2015, where media reported he secured $20bn in FDI commitments from American investors, and made a second visit in February 2016 to attend the ASEAN summit in California. These developments are particularly salient given Obama’s long-standing push for a “pivot to Asia”, which calls for enhanced trade between the US and South-east Asian partners.


Negotiations for an EU-Indonesia FTA are also gathering pace, having stalled since 2012. In January 2016 Indonesian authorities announced plans to speed up CEPA negotiations, with the aim of concluding a trade deal within the next two years.

The key announcement came after a meeting between Lembong and EU trade ministers during the World Economic Forum in Davos, with Lembong stressing timely negotiations in light of Vietnam’s FTA with the EU, which came into effect in August 2015. CEPA aims to reduce trade barriers and liberalise government procurement. A 2015 study published by the Centre for Strategic and International Studies found that the agreement would help to enable a 5.4% increase in EU-bound exports, reaching a value of €802bn, 38% of which would be derived from traditional products, with the remainder from newly created trade in diversified products.

Indonesia currently benefits from the EU’s generalised scheme of preference (GSP), which allows preferential access to EU markets for less-developed countries, although its rapid economic growth will likely see it lose GSP status in the coming years, resulting in annual trade losses of €1.8bn, according to a May 2015 report by Advantage Austria.


Although Chinese and global demand, low commodity prices and rising wages will continue to challenge trade growth in 2016, Indonesia remains on a positive growth trajectory. Growing domestic demand, increasing liberalisation measures, improvements to the investment climate and a growing drive towards value-added production will bolster both exports and investment. At the same time, new trade agreements with the world’s largest economies look set to drive long-term trade growth.

Prudent government policy, an ambitious reform agenda and rising recognition of the important role of the private sector should help to keep investment and trade stable in 2016, and though exports and growth have dipped in recent years, the country is well positioned to make the crucial transformation from a consumption- to investment-based economy.