Indonesia entered 2020 trying to navigate global economic headwinds, including the pressure of uncertainty surrounding the outcome of the Covid-19 outbreak; however, the second-term election victory of President Joko Widodo, better known as President Jokowi, in 2019 and his coalition’s control of the national legislature has put the government in a solid position to enact much-needed reforms.

With the country long dependent on natural resources, the administration seeks to streamline investment processes to attract foreign direct investment (FDI) in downstream processing, thereby raising the value of exports and providing a domestic alternative to imports (see analysis). “The focus of the current government is metal smelting and downstream energy,” Rinaldi Lukita Handaya, head of investment at Batavia Asset Management, told OBG. “If this can be achieved successfully, it will solve our structural problems.”

Meanwhile, Indonesia is also pursuing – and in some cases has already secured – a raft of bilateral and multi-stakeholder trade agreements. Local media has suggested that the government is concluding 11 deals and has plans for 14 more, as the Ministry of Trade targets a rise in non-oil-and-gas exports of up to 12.2% by 2024. The imminent ratification of the Regional Comprehensive Economic Partnership (RCEP), with or without India, is poised to improve overall market access for Indonesian exports to China and other key ASEAN dialogue partners in the Asia-Pacific region. It will also open the door for greater integration of the country into global supply chains (see analysis).


In 2019 Indonesia’s economy grew by 5.03%, down from 5.2% the previous year and lower than the government’s target of 5.3%, due to weaker-than-anticipated investment and exports. According to Statistics Indonesia, in the fourth quarter of 2019 GDP growth was 4.97% year-on-year (y-o-y), the weakest quarterly growth rate in three years, largely due to a roughly 2.6% contraction in exports on the preceding quarter. On the domestic front, the somewhat lacklustre economic performance can be attributed to political uncertainty and unrest during the period following the presidential election result until President Jokowi finalised his second-term Cabinet in October 2019.


An increasingly protectionist global trade environment, epitomised by the UK’s exit from the EU and ongoing tensions between the US and China, also hampered consumer and investor confidence. This led to depressed demand and prices for Indonesia’s key commodity exports of palm oil and coal, both of which have also been affected by environmental concerns; petroleum and gas; and copper ore, gold, tin and nickel (see Energy chapter). This, in turn, weighed on tax revenue and fed into a $25bn budget deficit in 2019.

Despite such challenges, in 2019 Indonesia’s fullyear balance of payments recorded a surplus of $4.7bn – a considerable improvement from the deficit of $7.1bn in 2018. The country secured a capital and financial account surplus of $36.3bn, driven by strong long-term capital inflows that reflect healthy investor confidence in its economic prospects.

In 2019 the trade deficit narrowed by one-third to $3.2bn, largely due to a reduction in the oil and gas trade deficit – almost 25% lower, at $9.3bn, than the 2016 figure of $12bn. This can be partly attributed to the impact of a government mandate to use biodiesel fuel with 20% palm oil for motor vehicles, implemented in September 2018. Meanwhile, non-oil and gas trade registered a $4bn surplus.

Imports fell by 9.5% y-o-y to $171bn in 2019, with raw materials down 12%, while capital goods decreased by 4.5% and consumer goods declined by 5.1%. The drop in raw materials sourced from overseas – which nonetheless accounted for almost three-quarters of the country’s total import bill – suggests that Indonesian businesses may not be receiving the inputs they need to sustain economic activity. Exports dropped by approximately 6.9% to $168bn, with the value of shipments lower across the board – the one exception being agricultural products, which were up 5.3%. Exports of manufacturing, mining, and oil and gas were down 2.7%, 15.0% and 27.0%, respectively.

Indonesia is the world’s leading crude palm oil producer. Exports of palm products, including biodiesel and oleochemicals, rose by 4.2% to a record 36.2m tonnes in 2019. Demand growth in China, the Middle East and Africa offset fewer orders from India, which switched its supply to Malaysia as a result of lower tariffs – a discrepancy that Indian membership in the RCEP would eliminate. India has been the most reluctant dialogue partner to sign the RCEP agreement, primarily because of concerns over Chinese exports flooding its vast domestic market. With increasing palm exports mooted as a trade priority and the government aiming to raise related revenue from $16.5bn per year in 2018 to $25bn, supply in Indonesia is tight, due in part to strong domestic demand. Demand is set to rise even further following the increase in mandatory biodiesel mix in diesel fuel from 20% to 30% blend – the highest mandatory mix in the world. The change was implemented in December 2019 – ahead of the planned January 2020 start date – with an eye to appeasing the politically important palm lobby and saving some Rp63trn ($4.4bn) in imported fuel costs.

Covid-19 Impact

As of May 2020 the full extent of the fallout from Covid-19 remained unclear, but the pandemic had a notable impact on the trade environment in the first months of the year. For example, In February Indonesia banned Chinese live animal imports. A number of export commodity prices also dropped as a result of lower demand from China, with rubber prices falling from Rp9200 ($0.65) per kg to Rp7200 ($0.51) per kg in South Sumatra the same month, while oil prices also declined precipitously due to weakened global demand.

The price of some import commodities, however, increased in early 2020. Prior to the pandemic, Indonesia sourced 95% of its garlic from China, and prices rose by 40% in February as a result of the virus. Indeed, the price of the commodity had caused concern even before Covid-19 came into play. In May 2019 Budi Waseso, head of the Indonesian Bureau of Logistics, raised concerns of cartel practices among Indonesian garlic importers, and Amran Sulaiman, minister of agriculture, threatened to blacklist any players who manipulate prices. Tackling this issue will require the government to simplify local government regulations for import, which currently act as an opaque barrier to competition.

In response to the disruption to global trade stemming from the Covid-19 outbreak, Indonesia’s second stimulus package, passed on March 13, 2020, contained a number of non-fiscal measures designed to ease the import and export of goods. The package included a simplified import procedure for raw materials; a streamlined process for the import and export of goods by reputable traders, a group that comprises 735 companies with a proven track record of complying with regulations; and a relaxation of trade restrictions and requirements applied to the import and export of certain products. Fiscal measures included a six-month deferral on import tax payments for businesses in 19 named manufacturing industries, such as pharmaceuticals, basic metals, and rubber and plastic goods. Meanwhile, in February 2020 monthly factory output in Indonesia increased – despite falling to record lows in China. Airlangga Hartoto, coordinating minister for economic affairs, told Bloomberg in March that Indonesia had an opportunity to fill the production gap created by China’s containment measures.

Trade Disputes

China and the US are among Indonesia’s largest trade partners for non-oil and gas goods and services, placing the country squarely in the middle of the ongoing disputes about trade tariffs and market access that began in 2018. President Jokowi has responded by cautioning against tariffs and calling for a multilateral approach to resolving tensions. The president took this message first to ASEAN and then to the G20 summit in Osaka in June 2019. After the US and China signed a phase-one agreement in January 2020 the outlook appeared brighter; however, progress – beyond an initial deal for China to purchase approximately $200bn worth of energy, farm and manufacturing goods and services – has stalled amid the Covid-19 outbreak. It remains to be seen whether the economic or diplomatic shocks of the pandemic might affect the terms of the agreement.

Currently, Vietnam is widely considered a regional leader in the race to benefit from the trade war. The country recorded a trade surplus of approximately $11.1bn in 2019, up from $6.8bn the previous year, as manufacturers sought alternative production bases to avoid US tariffs on goods originating in China. The export of electronics products drove the widening surplus as businesses restructured supply chains away from China.

How well Indonesia has done in this regard is a matter of some debate. According to estimates from the UN Conference on Trade and Development (UNCTAD), the main UN body dealing with trade, investment and development issues, the country received a record $24bn in FDI in 2019. UNCTAD credits this 12% increase from 2018 to foreign inflows into retail and wholesale trade, including the digital economy and manufacturing. UNCTAD’s “ASEAN Investment Report 2019” highlighted that a gradual shift had already begun as manufacturing started to move away from China due to structural factors leading to increased labour costs.

In October 2019 Rosan Roeslani, chairman of the Indonesian Chamber of Commerce and Industry, told local media that due to the development of a reciprocal trade relationship between the two countries, Indonesia’s textile association expected a 20-25% increase in garment exports to the US the following year. In addition, in July 2019 Taiwan’s smartphone components supplier Pegatron opened a $40m factory in Batam; however, stories of gains by Indonesian manufacturing, in light of US-China disruptions, are somewhat scarce.

Some explanation for Indonesia’s inability to capture greater displaced investment can be found in the World Economic Forum’s “Global Competitiveness Report 2019”: Indonesia ranked 50th out of 141 economies, down five spots from the previous year. The decline can be attributed to poorer performance in variables including the enabling environment, markets, human capital and the innovation ecosystem. The latter two, in particular, are at the forefront of President Jokowi’s second-term agenda (see Education & Human Capital chapter).


The Indonesia Investment Coordinating Board (BKPM) is seeking to address some of these challenges and reduce the time needed for Customs checks. Indonesian companies are currently required to pre-inspect shipments in the country of origin and in domestic ports, which requires extensive documentary proof and technical certification in some cases – like for horticultural products. It is possible that some of the relaxations introduced to ease import and export activities during Covid-19 could remain even once the pandemic is contained, depending on performance. In an effort to further ease the movement of goods, the government has prioritised the acceleration of the National Logistic Ecosystem: an integrated electronic platform to enhance time and cost efficiency by using blockchain technology to share information between importers, exporters, logistics players and the authorities.

Another positive step was made in September 2019, when the government announced that 119 out of the country’s 1372 bonded zones could manage their own trade without the involvement of Customs officers. Other trade catalysts include the near completion of phase one of development of Patimban Port in Subang, West Java, which will serve an automaker cluster in the Karawang industrial area and is slated to commence operations in the latter half of 2020; the continued development of port facilities and infrastructure at Batam, ahead of plans to launch two special economic zones (SEZs) in the area, also in 2020; and the granting of SEZ status in January 2020 to Java’s Kendal Industrial Estate, a joint venture between local industrial estate developer Jababeka and Singapore’s Sembcorp Industries that launched in 2018. Elsewhere, the government has continued to make human capital development the cornerstone of its policy agenda as it bids to equip the country’s vast workforce with the skills needed for innovative industries and high-value service sectors (see Education & Human Capital chapter).


Effective since the end of January 2020, the threshold for the payment of duties on imported shipments purchased via e-commerce was reduced dramatically, from $75 to $3. This move was an effort to protect local small and medium-sized enterprises (SMEs) from unfair competition, as there were cases in which importers could circumvent import duties by fragmenting shipments into small batches. Customs reported that e-commerce shipments from overseas exceeded 50m in 2019, up from approximately 19.6m the year before.

There is strong domestic pressure – caused by perceived unfair competition and dumping from China – to raise import tariffs on steel. This pressure is largely directed at high import tariffs on Indonesian steel entering China, some of which are as high as 100%; however, according to local media, the Chinese government reportedly agreed to consider relaxing these tariffs when Luhut Panjaitan, coordinating minister for maritime affairs and investment, met China’s President Xi Jinping in November 2019. Panjaitan also stressed that Indonesia seeks to export more downstream products to China, including products made from nickel ore, copper, lead and bauxite. Indonesian steel exports to the US, meanwhile, remain subject to a 25% import tariff.

In April 2020 Indonesia was hit by anti-dumping tariffs for some stainless steel products. The EU made the decision to impose the tariffs following an eight-month investigation into claims that two Indonesian subsidiaries had sold hot-rolled stainless steel sheets and coils within its trading zone below cost, benefitting from subsidies.

Meanwhile, Indonesia retains substantial non-tariff barriers that can slow trade and potentially discourage investment. These are reflected in the country’s ranking in the World Bank’s “Doing Business 2020” report, which places Indonesia 116th out of 190 economies for the ease of trading across borders. For example, aiming to protect local producers of yarns and fabrics, in October 2019 the Ministry of Trade announced that restrictions on textiles imports were to be tightened, requiring all textile importers to gain government approval before shipping in textile goods.


In 2019 Indonesia received approximately $24bn in FDI – excluding oil and gas, bank and non-bank financials, insurance, leasing, home industry and SME investment. This marks an increase of 7.7% over 2018 and equates to 87.5% of the government’s target. Singapore was the leading source market, responsible for 23.1% of foreign inflows, followed by China with 16.8% and Japan with 15.3%. The fourth-largest source was Hong Kong, with 10.2%, closely followed by the Netherlands, with 9.2%. Meanwhile, domestic direct investment totalled Rp386.5trn ($27.3bn) – equal to approximately 125% of the government’s target.

By sector, electricity, gas and water supply led Indonesia’s FDI in 2019, securing $5.9bn. This placed it ahead of transport and telecoms, including digital, with $4.7bn, and metals with $3.6bn – almost half of which hit in the fourth quarter.

Digital Economy

The digital arena is perhaps Indonesia’s greatest investment success story. E-commerce was on the country’s negative investment list as recently as 2016; however, a number of businesses may now be 100% foreign owned. These include marketplace websites that connect sellers and buyers; web portals that publish user-generated content; and sites that provide reservation services, such as those used in the hospitality segment.

Between 2013 and 2018 the digital economy attracted around $3bn in FDI, with substantially more poised to follow after a number of multinational technology companies announced their intention to expand operations in the country. Key among these, Amazon Web Services – a subsidiary of US e-commerce giant Amazon – selected Jakarta as the base for a series of interconnected data centres, and is targeting end-2021 or early 2022 for completion of the project. Meanwhile, Google and Microsoft have also pledged investments after receiving assurances on data storage regulations.

High-profile companies such as these are set to cement Indonesia’s position as a strategic digital centre, support the development of its start-up ecosystem and contribute to growing the country’s digital economy to an expected $130bn by 2025.

Oil & Gas

Investment in oil and gas remains a complex issue that illustrates the necessity of reform. Joint-venture partners Japan’s Inpex and Netherlands-headquartered Shell are working to secure land and formulate a development plan for the Masela project’s onshore 9.5m-tonne-per-annum liquefied natural gas (LNG) facility, which will use fuel from the Abadi offshore field – almost 20 years after its discovery. In October 2019 the government granted the two companies an extension for 27 years on their lease, allowing them to operate the field until 2055. This came after the major oil players opted for more expensive and technically difficult onshore – rather than offshore – processing, in a bid to develop a cluster of ancillary industries.

Meanwhile, BP is on track to start shipments to Japan from a new third train at its Tangguh LNG plant in 2021, one year behind schedule. These are signs that some progress is under way in the sector. Nonetheless, in early 2020 Indonesia decided to cease gas exports to Singapore by 2023 in a move to meet domestic demand, add value to the local industry and curb the trade deficit.

President Jokowi is also studying options to lower persistently high industrial gas prices that act as an obstacle to investment in industries including electricity, chemicals, food, ceramics, steel, fertiliser and glass – citing reduced taxation, a minimum domestic market obligation or reduced imports as possible strategies. In another move to reinvigorate the sector, in February 2019 the government announced a host of downstream oil and gas development projects with an combined cost just shy of $1bn; however, their viability remains uncertain.

Pembangkitan Jawa Bali, a subsidiary of stateowned power company Perusahaan Listrik Negara, aims to begin construction of a $129m floating solar power platform in West Java in 2021, following the early 2020 signing of a power purchase agreement with UAE renewables developer Masdar. The 145-MW project, slated for completion in 2022, will be Indonesia’s largest solar installation. The project is in line with a government target to raise the proportion of renewables in the energy mix from 9% in 2019 to 23% by 2025, and sidesteps the issue of land acquisition by virtue of being offshore.


Indonesia is seeking to incentivise electric vehicle (EV) manufacturers to establish a base in the country in order to develop a downstream industry for its reserves of nickel laterite ore, of which it is the world’s largest exporter. The government hopes to commence EV production in 2022, growing the segment’s contribution to approximately 20% of total car production by 2025 (see Industry chapter). The strength of the government’s resolve to successfully foster downstream development is evidenced by its decision to move up a ban on nickel ore exports – from 2022 to January 2020 – despite being subject to a lawsuit filed by the EU to the World Trade Organisation.

In April 2020 nickel miners called for an end to the export ban, citing falling demand due to Covid-19-related disruptions. However, the Coordinating Ministry for Maritime Affairs and Investment rejected the proposal that same month, on the grounds that the contribution of processed nickel exports to total exports had increased substantially in the first quarter of the year, thereby indicating promising potential to increase value added. Meanwhile, the Ministry of Energy and Mineral Resources revised regulations on the pricing of minerals and introduced a monthly minimum floor price, effective from mid-May 2020, to be set by the ministry for nickel ore in order to protect miners.

A draft plan on EV regulation includes import tariff incentives for technology and materials for battery-based EVs, as well as fiscal incentives such as value-added tax deductions for imported goods related to the EV industry. A decision has yet to be made on incentives available to EV owners. Hyundai Motor has pledged $1.6bn in related investments by 2030, while Toyota plans to spend $2bn to develop EVs in Indonesia between 2019 and 2023.

A number of international players looking to produce battery-grade nickel chemicals, such as those used in EVs, are awaiting environmental approval to realise their investment plans. China’s Tsingshan and partners, including Chinese battery firm GEM, aim to open a $700m high-pressure acid leaching plant at Morowali Industrial Park in Central Sulawesi, a nickel mining centre operated by Tsingshan that already processes nickel pig iron for stainless steel. The project is part of more than $3bn in planned investments in nickel chemicals and would be the first such plant to provide the nickel sulphate required to make lithium-ion batteries.


In June 2019 the government issued a regulation to incentivise investment in labour-intensive pioneer industries, which employ more than 200 workers whose labour costs do not exceed 15% of production costs. Players who invest in these segments are eligible for a net income reduction of up to 60% of their total investment value in the form of tangible fixed assets, including any land that is used for the business.

Investors engaged in pioneer industries may be eligible for a tax holiday, depending on the value of their investment. Available at a number of increments, the shortest tax holiday period is five years, available for entities whose investment is valued between Rp500bn ($35.3m) and Rp1trn ($70.5m); while a 20-year exemption is on offer for those at the upper end of the scale, whose investments exceed Rp30trn ($2.1bn). In the two years following the exemption period, players on this scale are eligible for a tax reduction of 50%.

The tax holiday regulation was passed in 2018. The following year the pioneer list was expanded to a total of 18 industries – adding agricultural, plantation and forestry processes that produce pulp, as well as digital economy services such as data processing. In 2019 a new mini-tax holiday was introduced for investments between Rp100bn ($7.1m) and Rp500bn ($35.3m), in the form of a 50% corporate tax exemption for five years followed by a 25% reduction for two years.

Hopes are high that a bilateral tax treaty with Singapore will entice Singaporean investors going forwards. The treaty was renewed in January 2020 with altered provisions including a reduced tax rate of 8% for investment in manufacturing-related industries – below the general tax rate of 10%.

More broadly, the March 2019 opening of phase one of Jakarta’s mass rapid transit line is a testament to the ability of multinational consortia – in this case, Japan-based companies partnering with state-owned Indonesian construction firms and backed by financing from the Japan International Cooperation Agency – to complete large-scale, complex infrastructure projects in Indonesia.

Although work on the $5.5bn Jakarta-Bandung high-speed rail service, undertaken by a China-Indonesia joint venture, has been delayed by a number of land compensation disputes, it remains on track to commence in 2021 – despite a number of more recent setbacks stemming from the global spread of Covid-19. The Jakarta-Bandung high-speed rail service is the most high profile of a raft of investments required to address the substantial infrastructure gap, which the World Bank estimates at a cost of around $1.5trn.

The number of infrastructure projects funded by overseas investors is accompanied by reminders of caution. “We want to balance economic and political security,” Bhima Yudhistira, an economist at the Institute for Development of Economics and Finance, told OBG. “Japan has invested heavily in infrastructure, but so has China.”

The current roster of overseas creditors may soon be updated to include the UAE. In January 2020 President Jokowi’s official visit to Abu Dhabi culminated in $22.9bn of investment pledges across energy, logistics, port construction, mining and agriculture. Ensuring that the headline-grabbing language results in concrete investments will be a key test of the government’s reform agenda.


In the near term, hurdles such as Covid-19 are likely to place pressure on Indonesia’s trade and fiscal position; however, the strength of the country’s consumer economy – and the digital sector in particular – should remain appealing to investors. Moreover, while President Jokowi’s administration has set itself a considerable investment reform task, the ambition and drive evident across key ministries suggests that if outright success is not achieved, then at least substantial progress will be made. Indonesia has considerable unrealised potential, and although there can be substantial costs and time barriers involved in investing and trading in the country, the returns are commensurate with the effort required to navigate them.