Indonesia has the world’s fourth-largest population and 16th-largest economy. During his 10 years as head of this G20 country, President Joko Widodo, better known as President Jokowi, has overseen significant socio-economic developments, implementing broad-based infrastructure upgrades and regulatory overhauls, strengthening the workforce, generating higher inflows of private and foreign investment, and boosting national productivity. Priority sectors – such as manufacturing, mining, tourism, ICT and financial services, among others – have been targeted to propel growth, and GDP has displayed robust and consistent expansion. Nevertheless, challenges remain in a country characterised by its social and geographical diversity. With 2024 being President Jokowi’s final year in office, the next phases of economic development will be significantly influenced by the country’s next president.
Election & Continuity
Prabowo Subianto, whose running mate was President Jokowi’s eldest son, Gibran Rakabuming Raka, secured 58.6% of the first-round vote on February 14, 2024, according to official results. Prabowo’s nearest rival was Anies Baswedan, an independent candidate backed by various political parties, with 25% of the vote, meaning that Prabowo’s lead was large enough that a second round of voting was not required. Prabowo’s victory should enable a smooth transition of power, given that he has stated his intention to continue with the bulk of President Jokowi’s policies.
One such policy is the plan to build a new capital city, Nusantara, on the island of Borneo at an estimated cost of Rp466trn ($30.3bn). The new capital is integral to the drive to more evenly spread economic activity throughout the archipelago, with the island of Java – which houses the current capital, Jakarta – accounting for around 60% of the country’s GDP and population. That, in turn, should aid the government’s drive to see Indonesia assume high-income status by 2045 – the year that marks the centenary of its independence from the Netherlands.
Other key policy developments in recent years include the enactment of Law No. 11 of 2020 (Job Creation Law). Although the Job Creation Law was declared conditionally unconstitutional on procedural grounds in November 2021, the government made the necessary corrections and enacted Law No. 6 of 2023 (see Trade & Investment chapter). This legislation constitutes a broad overhaul of investment and labour laws. Elsewhere, sector-specific regulatory upgrades are designed to transform key areas of the economy, including financial services (see Banking chapter). Industry – Indonesia is intent on driving downstream production – and digital economy are also expected to see regulatory upgrades (see Digital Economy chapter).
Structure & Oversight
Indonesia is composed of 38 provinces, with regional governments endowed with significant autonomy in governing their respective jurisdictions. While that dynamic is designed to optimise region-specific development, it is also known to cause inconsistencies regarding the application of laws and policies, particularly those related to business licensing. President Jokowi has worked to synergise central and regional government activity, with the advancement of this process a key objective of the new National Long-Term Development Plan 2025-45 (RPJPN 2025-45).
The Ministry of Finance (MoF) is the main central government authority steering the economy, and overseeing the formulation and implementation of sustainable fiscal policy. Through these policies, the MoF aims to enable the country to achieve the revenue and expenditure targets outlined in its annual state budget documents. The Directorate General of Taxation (DJP) works under the MoF umbrella, aligning its policy with broader state fiscal and economic objectives and realities. New income tax regulations were introduced on January 1, 2024, with rates ranging from 0-34%, depending on a range of specifications such as level of income.
The DJP collaborates with the Indonesia Investment Coordinating Board (BKPM) to offer a range of corporate tax and business incentives. BKPM manages the investment activity of both domestic and foreign entities, and works to ensure business regulation is conducive to the country achieving its development goals. Indonesia’s 20 special economic zones and regulation of foreign investment policy are integral to BKPM’s strategy, operation and mandate, and are central to the effort to more evenly disperse economic activity throughout the country.
Jakarta-based Bank Indonesia (BI) was established in 1953 and is Indonesia’s central bank, making it responsible for issuing policies aimed at stabilising and reinforcing Indonesia’s economy and financial systems. BI’s operational mandate is based upon several key laws and acts, including Law No. 4 of 2023 on Financial Sector Development and Reinforcement. Also referred to as the P2SK Law, this legislation is designed to modernise the financial services sector as a whole and marks a significant development for the economy.
Strategy
The National Development Planning Agency (BAPPENAS) is responsible for drawing up and implementing the country’s overarching development strategies. The most recent BAPPENAS medium-term strategy covered 2020-24. During that period BAPPENAS prioritised strategic organisation efforts and the implementation of development blueprints designed to help the country reach important government objectives, while also facilitating other development-related government bodies in increasing operational efficiency.
BAPPENAS is collaborating with EU-funded trade support organisation Arise+ Indonesia on the formulation of its next medium-term strategy, which will cover 2025-29 and focus on export and investment growth, and increasing economic cooperation. Additionally, a medium-term plan is being implemented to help guide the country towards the goals of the RPJPN 2025-45, with a draft version unveiled by President Jokowi and BAPPENAS in June 2023. The plan, which was developed through collaboration with various public and private stakeholders, focuses on augmenting state stability, sustainability and continuity, and the development of human capital.
Indeed, Indonesia is approaching a demographic sweet spot, as the country’s productive age population will reach 68.3m, or close to 25% of the total population, during the 2030s. The government is determined to capitalise on the opportunities this presents by enabling broad-based education and advanced skill development. Other key goals of the strategy involve increasing Indonesia’s regional and global influence, boosting GDP per capita, eliminating poverty and reducing the income gap.
GDP Performance
According to the IMF, Indonesia’s real GDP growth averaged 5% from 2014-19. The Covid-19 pandemic caused a contraction of 2.1% in 2020, before growth rebounded to 3.7% in 2021. Since then, growth has returned to normal levels, reaching 5.3% in 2022 and 5% in 2023.
The sectors recording the highest growth in 2023 were transport and storage, at 14%; accommodation and food service activities, at 10%; business activities, at 8.2%; information and communications, at 7.6%; and mining and quarrying, at 6.1%. In the first quarter of 2024 the top performing sectors in terms of contribution to GDP were manufacturing, at 19.3%; wholesale and retail trade, which includes the repair of motor vehicles, at 13.2%; agriculture, forestry and fisheries, at 11.6%; construction, at 10.2%; and mining and quarrying, at 9.3%.
Part of the RPJPN 2025-45 involves GDP per capita exceeding $15,000 by 2045, thereby enabling the country to assume high-income status by international measurement. GDP per capita rose from $3530 in 2014 to $5510 in 2024, representing an expansion of 56%. This growth is notably robust, particularly in light of the economic stresses of the pandemic and post-pandemic period. Additionally, the country’s population expanded from more than 252m to nearly 280m during that same 10-year timeframe, suggesting that while the government’s 2045 target is ambitious, it may well be achievable.
International Trade
Bolstering trade partnerships is another key priority for the country. Indonesia was party to around 15 trade agreements and partnerships as of early 2024, with the relevant government authorities working to expand that number and enhance existing agreements. Indeed, January 2024 brought the announcement of the expansion of Indonesia’s trade pact with Japan, while the government has also announced that it intends to develop new trade agreements with non-traditional global markets, with Central Asia and Latin America identified as key regions on which to focus.
Indonesia followed a trade surplus of $54.5bn in 2022 with another surplus in 2023, albeit with a somewhat narrower margin of $36.9bn. While moderations in global commodity prices during 2022-23 accounted for a portion of the decreased surplus, manufacturing sector exports, which are seen as key in driving the country’s push towards high-income status and central to multiple other economic goals, fell by around 9.3% over the course of 2023. Furthermore, exports from the agriculture, forestry and fisheries sector also fell by around 10%. However, imports fell by 6.9%, suggesting that in spite of the decline in manufacturing-related export value, the sector’s robust growth is being successfully harnessed to meet domestic demand.
Budget
In his final budget announcement as president in August 2023, President Jokowi proposed state expenditure of more than Rp3304trn ($215bn) during 2024. With a focus on food price stability, the figure represents an increase of 6% over the previous year. Public revenue for 2024 was forecast at Rp2781trn ($181bn), an increase of 5.5% over the revenue of Rp2637trn ($171bn) in 2023. Those figures would result in a fiscal deficit of roughly Rp523trn ($34bn), equal to nearly 2.3% of GDP, compared to the 1.7% deficit recorded the previous year.
In a bid to improve welfare and remuneration for civil servants, President Jokowi stated that he intends to implement an 8% salary increase and a 12% pension increase for civil servants. The government plans to introduce incentives for the use of electric vehicles, while the forecast for infrastructure spending in 2024 was announced at Rp423trn ($27.5bn). Meanwhile, the government aims to continually reduce national unemployment, which dropped from 5.3% of the working age population to 4.8% between August 2023 and February 2024, as well as to continue along the path laid out by short-, medium- and long-term development plans. Additional areas of focus include poverty eradication; addressing social and health-related issues, such as the prevalence of stunting in the country’s less-developed areas; inflation control; securing increased investment; boosting human capital; improving broader health care and education infrastructure and service provision; and pressing ahead with enhancements to industrial downstreaming and business environment regulations.
Interest, Inflation & Credit Rating
During 2022 the BI reverse repurchase rate rose from 3.5% to 5.5% amid challenging global economic conditions, defined by high commodity prices and widespread inflation. Interest rates remained high during 2023, with the reverse repurchase rate climbing 25 basis points throughout the year from 5.75% in January to 6% at the close of the year. The BI rate remained at that level until April 2024, when it was raised by a further 25 basis points to reach 6.25% in an effort to boost the stability of the rupiah.
The consumer price index (CPI) rose from 2.2% in January 2022 to a peak of 6% in September before moderating to 5.5% in December that year, resulting in an average of 5.5%. While that represents a significant 12-month increase, it was well below the global average that year of 8.7%. By the close of 2023 CPI had fallen to 2.6%, bringing the average for the year to around 3.9%, significantly lower than the global average of 6.8% and within the BI target range of 2-4%. BI envisages further reductions to the CPI during 2024, setting its target range at 1.5-3.5% for the year. Indonesia’s generally positive fiscal and economic performance in recent years, coupled with the structural challenges it faces, saw credit ratings agency Fitch give the country a “BBB” foreign currency issuer default rating and a stable outlook as of September 2023.
State-Owned Enterprises
As of 2021 there were over 100 state-owned enterprises (SOEs) in Indonesia, which were active in sectors ranging from utilities to telecoms and energy. The Ministry of SOEs (MSOE) has stated its intention to reduce that figure to around 44 by the end of 2024. SOEs are governed by a dedicated SOE Law and are also subject to the regulations enforced by Law No. 40 of 2007 on Limited Liability Companies, as well as to sector-specific policy. Permeating all sectors of the economy, SOEs were instrumental in the government’s response to the pandemic, aiding in vaccine production and distribution; and they are central to supply and value chain development.
However, there are suggestions that the extensive involvement of SOEs in the economy hinders private sector participation and development, deterring international investors due to perceived unfair competition within the country, with preference shown to SOEs in relation to tendering for government contracts and development projects. Meanwhile, a number of individual SOEs are not commercially viable and are therefore a drain on public finances.
Periodic reforms to the SOE segment have been implemented, reducing their influence while enhancing their benefit to the economy. In 1990 the value of SOE assets stood at around 90% of GDP; by 2022, according to Erick Thohir, minister of SOEs, the total value of such assets stood at around $600bn, below 50% of the IMF’s estimation of Indonesia’s nominal GDP that year. Furthermore, recent MSOE policies aimed at improving the performance of SOEs resulted in an 800% increase in combined net profit between 2020 and 2021, from Rp13trn ($845m) to Rp125trn ($8.1bn), while a further increase to Rp144trn ($9.4bn) was forecast for 2022.
While SOE cross-sectoral influence remains, they are being steered more towards commercial operations, with the bulk of SOE assets now owned by state-owned commercial banks. Similarly, the growing number of SOEs listed on the Indonesia Stock Exchange means that many are now just partially government owned – a measure designed to increase profitability, agility and transparency.
Nevertheless, the scale and breadth of the SOE ecosystem – and its embeddedness within the national economy – still presents significant governance challenges and obstacles for potential and existing private investors. The most recent reforms implemented by the MSOE focus on boosting SOE dynamism, performance and social benefit through streamlining and consolidation initiatives, and facilitating more public listings and increased partnerships with the private sector, with a core focus on harnessing SOEs’ influence to drive the growth of the country’s small and medium-sized enterprise ecosystem, while actively working to increase female presence in their boardrooms.
Fuelling Change
Indonesia has a wealth of natural resources, such as coal, copper, gold, tin, bauxite and nickel, in addition to plentiful reserves of crude oil and natural gas. Further development of mining activities, downstream industries and value chains plays a central role in the government’s economic development vision. In the coming decades policymakers will need to strike a balance between maximising profit and output, while meeting environmental responsibilities and targets.
The country’s coal production strategy, in particular, is under scrutiny, in light of Indonesia’s status as the third-highest coal producer globally, coal’s chief role in the national energy and export mix – coal exports rose 11% in 2023 to 518m tonnes – and its emissions-intensive nature. Spikes in global oil and gas prices in recent years have seen a concurrent increase in demand for coal, given its comparative affordability, with production rising from 687m tonnes in 2022 to 775m tonnes in 2023. A reduction to 710m tonnes is targeted for 2024, while the government aims to lower national annual coal production to 250m tonnes by 2060 – Indonesia’s target year for net-zero carbon emissions. “The public and private sectors are working together to implement carbon sequestration projects that can help the country achieve its carbon reduction goals in time,” Victor Rachmat Hartono, COO at Indonesian social initiative developer Djarum Foundation, told OBG.
Coal’s economic importance, coupled with the need to align economic development with international expectations to attract the level of foreign investment required to drive expansion, presents challenges moving forward. For example, the government’s goal of establishing the country as an electric vehicle manufacturing centre in the medium term relies heavily on coal-fired power. However, the strategic approach to decarbonisation laid out in policy documents such as Presidential Regulation No. 112 of 2022 on Accelerated Development of Renewable Energy for Electricity Supply, and the Ministry of Environment and Forestry’s 2030 climate strategy, could facilitate significant inflows of investment into renewable energy and related technologies in the decades ahead, balancing out the impact of reductions to coal production.
Outlook
Indonesia’s economy has held strong during global geopolitical unrest and economic instability – a testament to the government’s success in implementing broad-based infrastructure development and positive policy reforms. Challenges remain in aligning regional authorities with the goals of the central government, while better harnessing the influence of the SOEs to benefit broad socio-economic development is a work in progress.
Much hinges on a smooth transfer of government, but the incoming administration’s plan to align with the direction laid out by President Jokowi is cause for optimism for investors, as are recent enhancements to residency and property ownership regulation (see Real Estate chapter). With Indonesia’s demographic growth and a continued willingness from the government to work with the international business community, the country’s economy is expected to go from strength to strength in the coming years.
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