Indonesia, one of the richest countries in natural resources with extensive oil, gas and solid mineral deposits, is also one of the largest global economies. In 2017 the economy passed the $1trn mark, making it the 16th-largest in the world. Its growing middle class, emphasis on industrialisation and services, and drive to improve infrastructure are laying the foundations for continued economic growth. Indonesia is also now home to four unicorns – start-ups valued at $1bn or above – highlighting its potential for entrepreneurial and creative industries.

The country is also working to attract both foreign and domestic funding, opening up and incentivising investment in additional sectors, most notably the development of infrastructure. Efforts to improve the business environment have been paying off: in 2019 Indonesia ranked 73rd out of 190 in the ease of doing business index in the World Bank’s “Doing Business” report, up from 120th out of 190 in 2014.

Economic Growth

Indonesia’s economy grew by 5.2% in 2018, the fastest pace since 2013. The authorities expect continued growth, with the Ministry of Finance (MoF) budget committee setting a target of 5.3% for 2019. Inflation fell to 2.6% in February 2019, the lowest in almost a decade and within the central bank’s target range of between 2.5% and 4.5%. Indonesia’s debt-to-GDP ratio is 30%, which the central bank, Bank Indonesia (BI), considers structurally healthy as 86.8% of the total is in long-term bonds rather than short-term ones.

In the years since the 1997-98 Asian financial crisis, economic growth has been very steady, as the debt-to-GDP ratio declined and conservative fiscal policies and accumulation of reserves restored confidence in the macro-framework. Although the rupiah slumped to near-crisis levels in 2018, it experienced a recovery later that year, and the economy continued to grow into early 2019. Until 2011 the exchange rate averaged below Rp10,000:$1, and in October 2018 it fell to a 20-year low of Rp15,233:$1.

Indonesia is a twin-deficit country, in that it has both a budget and trade deficit, making currency management difficult. While interest rate decreases may stimulate economic activity, the options for BI were curtailed by the US Federal Reserve, which hiked rates throughout the year. If BI did not follow suit, pressure on the rupiah could have been increased as investors move to US investments. The rupiah depreciated 5.7% against the US dollar during 2018 but rebounded in the first months of 2019, gaining 3% between January 1 and mid-February.

Indonesia’s economy grew 5.2% in 2018, the fastest pace in half a decade. The authorities expect continued growth, with the Ministry of Finance budget committee setting a target of 5.3% for 2019 There are three key gaps that must be addressed to raise potential growth. First, there is a human capital gap. This is shown by Indonesia’s Programme for International Student Assessment scores – a global measure of literacy, numeracy and science ability – which are very low compared to its regional peers. Second, a huge infrastructure gap persists. Based on capital stock per capita, Indonesia lacks $1.5trn in capital stock. Lastly, Indonesia is still experiencing a productivity gap, with an underdeveloped financial services segment not allocating resources to productive economic entities.

Contributors to GDP

Over the years the economy has shifted from being largely agrarian to one dominated by services and industry. Services accounted for 40% of GDP in 2018, and industry – which includes natural resources – accounted for 46%. The transition from agriculture to industry has been a long-term process. Industry’s share of GDP rose from 13% in 1965 to 47% in 2010 as agriculture declined from 51% to 15% over the same period. The services sector’s share of the economy has been relatively stable, moving from 36% in 1965 to 37% in 2010. In recent years industrial growth has been driven more by natural resource extraction than manufacturing, with large multinationals seeking a manufacturing base in ASEAN typically ending up elsewhere in the region due to Indonesia’s logistics and supply-chain constraints.

Structure & Oversight

BI is responsible for monetary policy but since 2011 has shared its regulatory role over various financial sector licensees with the Financial Services Authority (OJK). The OJK was created to manage regulation and supervision. The OJK’s medium-term strategy, the Indonesian Financial Services Sector Master Plan, runs from 2015-19 and aims to strengthen the competitiveness of the national financial industry to maximise opportunities on a local, regional and global scale.

Another major player is the MoF, led by Sri Mulyani Indrawati, who has held this position since 2016 and also served as minister in 2005-10. She is credited with managing the economy through the 2008 financial crisis and consequently is seen as a reassuring presence for the business community. The National Development Planning Agency (BAPPENAS) formulates and carries out national development strategies, while the Indonesia Investment Coordinating Board (BKPM) is in charge of implementing policy and service coordination in investment, and is the primary interface between businesses and the government. In January 2015 the BKPM rolled out the one-stop service centre (PTSP) to centralise government services and licensing. However, there is still progress to be made to ensure the PTSP is implemented across the board. “The PTSP has been a sound initiative despite current operational challenges,” Neneng Goenadi, managing director of ride-hailing app Grab Indonesia, told OBG. “Implementation always depends on the cooperation of local authorities. In this regard, coordination can be improved among the Walikota (mayor), the kabupaten (municipalities) and the federal government.”


Policy is guided by several development plans, including the National Medium-Term Development Plan 2015-19 (RPJMN). The RPJMN targets improving business licensing processes, investment realisation and the country’s investment climate, and is part of the Master Plan for Acceleration and Expansion of Indonesia’s Economic Development (MP3EI), which runs from 2011 until 2025. The MP3EI aims to transform Indonesia into a developed country, reaching per capita income of between $14,250 and $15,500, and attaining GDP growth of between 6.4% and 7.5% by 2025. The plan is divided into fiveyear stages, with the current stage focusing on infrastructure development and the improvement of social services, and the next to be centred on human capital development Indonesia aims to maintain control of its natural resources and at times has brought sector assets into state hands. In September 2018 US mining company Freeport-McMoRan and UK-Australian Rio Tinto gave Indonesia a majority stake in their Grasberg copper mine, located in the province of Papua. The stake in Grasberg, the world’s second-largest copper mine, was transferred to the state-owned Indonesia Asahan Aluminium, also known as Inalum.

In the oil sector, in August 2018 Indonesia’s government announced state-owned oil company Pertamina would take over the Rokan oil block from Chevron when its contract expires in 2021. Rokan is the second-largest productive block in the country, and Pertamina is reportedly keen to acquire more mature assets from existing foreign owners. This announcement follows Pertamina’s takeover of Indonesia’s largest gas block, Mahakam, from France’s Total and Japan’s Inpex in early 2018 after the production-sharing agreement ended in 2017.

The government hopes the details of its handling of the Grasberg mine will serve as a positive signal to investors. The deal grants Freeport a special mining licence to continue operating until 2041. According to the minister of energy and mineral resources, Ignasius Jonan, this permit represents the “government’s commitment to maintaining a climate of certainty and security for foreign investors in Indonesia”. The agreement also obliges Freeport to build a copper smelter with a capacity of between 2m and 2.6m tonnes per annum within five years. Domestic refining of natural resources – such as smelting ore, refining oil or agri-businesses using crude palm oil – is a key part of the government’s objective to increase the economic value of natural resources and in turn create more jobs. In 2014 Indonesia banned the export of some raw metals, including nickel, to encourage value-added domestic industries. However, this restriction has since been relaxed to allow some exports.

Other key government targets include fostering the creation of 1000 local start-ups valued at a total of $10bn as part of broader efforts to cement the country as the regional centre for digital technology by 2020. However, some challenges remain in terms of government policy implementation. “Major bottlenecks for micro-, small and medium-sized enterprises that need to be considered include, not only obsolescent regulations and lack of coordination among government institutions, but also the tendency to use a single solution for all challenges faced by traditional and start-up companies,” Surachmat Sunjoto, president director of Lima Group, told OBG.

Supply Chain Focus

The government aims to further develop domestic supply chains through special economic zones (SEZs) and industrial estates. As of 2017 there were 87 industrial estates across 12 SEZs, covering over 36,300 ha of land. The zones and estates provide investors with centralised and efficient services to encourage the development of value-added production facilities. SEZs are open to foreign investment and give investors access to preferential regulatory and taxation incentives. The zones cover a range of industries such as palm oil, rubber, downstream services and hydrocarbons.

However, not all of the zones are dedicated to industry or creating supply chains based on raw resources. For example, the Batam Indonesia Free Zone, which is located just across the strait from Singapore, hopes to attract creative industries.

However, one of the major issues for this free zone is that all shipments are still required to go through Singapore due to the lower logistics costs. OBG understands from conversations with industry insiders that discussions have been held with Chinese investors regarding the construction of a port at Batam, with a view to addressing this issue, though no concrete plans have been announced.

Foreign Invesment

Indonesia has historically not been as open to foreign investment as many of its ASEAN peers and maintains a “negative investment list” of sectors and industries in which foreign ownership is restricted or prohibited. In 2016 the country updated the list to help increase its regional competitiveness and encourage foreign direct investment (FDI) while maintaining protections. In November 2018 the authorities announced plans to update the list further as part of an economic policy package including tax holidays and tax cuts, removing 54 industries from the list and allowing full foreign ownership in 25 segments.

Foreigners are currently allowed to own 100% of a business in segments such as e-commerce, cold storage, pharmaceuticals manufacturing and film. Where ownership thresholds apply, they range from minority stakes such as the 40% cap in banking and insurance, to 95% for activities including palm oil production. The cap is lower for those exporting the raw commodity before refining. In some cases, the caps can be flexible under specific circumstances. For example, in the financial services sector, regulators have balanced the desire for economic independence with the need for consolidation. Foreign companies looking to buy two or more small lenders or insurers are able to combine them into a single entity, making them more likely to be permitted to exceed the 40% ownership cap. Generally, caps are imposed according to the size of the investment.

Overall, FDI declined by 8.8% in 2018 to Rp392.7trn ($27.8bn) with BKPM attributing this to the transition to the Online Single Submission licensing system as well as a lack of policy implementation. “There are still challenges to attracting FDI,” David Wake, a partner in PwC Indonesia who leads its financial services practice, told OBG. “The government is making small steps in the right direction, but many say they have not seen real impact yet.”

The largest single sector for FDI was electricity, gas and water, followed by housing, offices and industrial estates. Singapore is the largest source of FDI, followed by Japan and China. Japanese investment is particularly prominent in the car manufacturing industry, while Chinese investors are especially involved in the building of smelters.

Domestic Investment

There was a significant increase in domestic direct investment, however, which rose to Rp328.6trn ($23.3bn) in 2018, up from Rp262.3trn ($18.6bn) in the previous year, representing an increase of 25.3%. Domestic investment was primarily directed towards food and beverages, telecommunications, construction, and plantations, while utilities saw large volumes of both domestic and foreign investment in 2018.


One of the most consistent policy priorities has been to upgrade transportation networks, utilities systems and other forms of infrastructure. However, land acquisition has traditionally been an obstacle for investors. Under current conditions, state-owned enterprises have more ability to use land-taking laws than private investors. The maximum waiting period of 583 working days from submission until registration for land-acquisition plans, which can be extended in the event residents contend the compensation process is unfair, can make potential investors pause for thought. Additionally, it typically takes a long period of time for an infrastructure development project to generate sufficient returns, which can also serve to deter investment.

Public-Private Partnerships

The authorities are looking to public-private partnerships (PPPs) as a way to help bridge the gap and encourage investment in infrastructure. The government has taken a series of steps to improve the regulatory framework around PPPs and boost Indonesia’s competitiveness for these agreements. PPP projects are offered to the private sector through the Coordinating Ministry of Economic Affairs and BAPPENAS, which was established in 2009 and oversees PPP planning and implementation. The authorities see these partnerships as a way to develop transportation, logistics and energy infrastructure. In October 2018 the government developed a plan to implement 19 PPP projects related to the country’s sustainable development goals. The partnerships cover a range of segments including green infrastructure, sustainable agriculture and extending energy access.

In 2015 Indonesia established a cross-sector regulatory framework for PPP implementation, which outlined clear and detailed stipulations about proposals, agreements and payments. PPPs are also central to the RPJMN and a key part of the country’s aim to develop rural areas and improve regional connectivity. According to research published by Singapore-based DBS bank in February 2019, “Infrastructure development outside of Java will not only improve regional inequality, but also provide connectivity and create new urban or industrial areas that could serve as new locus of growth.”

Fiscal Policy

Given Indonesia’s status as a twin-deficit country, the MoF has focused on boosting revenue and promoting efficient spending. The projected fiscal deficit for 2018 was 2.2% of GDP but came in at 1.7%, the smallest in six years, as it narrowed to Rp259.9trn ($18.4bn).

Tax revenue has been slipping in recent years as a percentage of GDP, however – the figure was 10.3% in 2015 and 10.1% in 2016, before sinking below the 10% threshold in 2017. The IMF estimates that it will stay below that level until 2021 if current policies continue. More aggressive economic reforms could boost tax revenue above 10% of GDP in the near term and to 12.2% of GDP by 2021.

The falling rates underscore the difficulty of capturing tax revenue. Of Indonesia’s population of roughly 165m adults, 35m are registered taxpayers. Estimates suggest 12m pay the mandated tax rates. The most recent large-scale attempt to widen the tax net was an amnesty programme in 2016-17 that offered Indonesians the chance to declare previously hidden assets without penalty. Almost 966,000 people took advantage of the programme and declared Rp4870trn ($345bn) in assets. However, the programme repatriated Rp147trn ($10.4bn), far short of the Rp1000trn ($70.9bn) goal. Redemption payments collected amounted to Rp114trn ($8.1bn), compared to the target of Rp165trn ($11.7bn). The MoF is working to increase transparency and communications between banks and the Directorate General of Taxation and is implementing programmes aimed at raising tax revenue. This is especially important as increased tax collections could help finance infrastructure projects. “Financing a large infrastructure push by raising higher tax revenues would maximise the growth impact while safeguarding macroeconomic stability,” the IMF noted in a study conducted in 2018.

2019 Budget

In 2019 the government approved a $161.7bn budget featuring deficit spending of 1.8% of GDP. Key budget assumptions include GDP growth of 5.3%, inflation of 3.5% and an exchange rate of Rp15,000:$1. The budget emphasises social spending, allocating 20% of total spending to education, as mandated by law, as well as increasing general social spending by 32.8% from the 2018 budget to Rp381trn ($27bn). Infrastructure is also a priority in the budget and received a 2.4% increase, to Rp420.5trn ($29.8bn), comprising approximately 17% of total government spending, down from 20% in 2017. The budget also seeks to clamp down on inflation by maintaining energy-related subsidies despite increases in oil prices in the world markets. The budget allocated Rp156.5trn ($11.1bn) to energy subsidies, a 65.6% increase from the year before.

Another highlight was a doubling of the budget for disaster relief to Rp15trn ($1.1bn) after the archipelago was hit by a series of major natural disasters including earthquakes, tsunamis and volcanic eruptions in 2018. Rehabilitation and reconstruction were allocated Rp5trn ($354.5m) and disaster response Rp10trn ($709.1m).

Foreign Trade

In 2018 Indonesia posted a larger-than-expected trade deficit of $10bn, which was also the widest on record, as exports slowed at a time when imports increased due to economic recovery. The deficit came after the authorities issued a series of import controls, including the wider use of biodiesel and elevated import taxes. In December 2018 exports fell 4.6% from 2017 to $14.2bn as imports rose 1.2% to $15.3bn. As of February 2019 the current account deficit was $31.1bn, or 3% of GDP, which BI considers within safe limits. Top exports, according to the Ministry of Trade, are fats, oils and waxes, followed by: mineral oils and fuels; electrical equipment; rubber; and vehicles other than trains. The country’s main trade partners are China, Japan, Singapore, the EU and the US.

Training Initiatives

One of the chief obstacles for foreign investors is often human resources. Investors find Indonesia’s massive customer base attractive but also struggle to find staff who can implement their vision. “One of the biggest and most consistent concerns for foreign investors is finding the specialist talent you need in the domestic market,” Wake told OBG. As a result, firms often need to operate with smaller workforces.

In the banking sector, for example, foreign banks are increasingly declining to build branch networks across the country to compete with the major domestic lenders. Instead they are relying on digital banking services and financial technology.


BI expects economic fundamentals to remain strong in 2019, with inflation at about 3.5%, credit growth at 10-12%, and the current account deficit down at around 2.5% of GDP. While Indonesia has traditionally implemented protectionist policies in many of its industries, the authorities are working to open up several sectors to foreign investment and work with private investors through PPPs. The investment climate in 2019 is also influenced by the question of whether BI will lower interest rates, which remained unanswered in early 2019. Nevertheless, buoyed by a growing middle class population, stronger infrastructure, an emphasis on value-added services and goods, and an improving business climate, Indonesia is well situated to maintain its position as an economy with a high growth potential. However, future policy direction is reliant on the outcome of the April 2019 general election.