This report will focus on providing a comprehensive overview of the country’s current status. Subsequent updates to the country report will primarily cover quarterly and more timely updates.

Outlook of Indonesia

As the fourth most populous country globally, Indonesia boasts a significant economy, ranking tenth with a quarterly GDP of USD 201.8 billion in Q3 2023. Despite this, the economy experienced subdued performance in Q3 2023, underperforming expectations due to shrinking exports and softer household spending. However, the period saw positive developments, including reduced inflation and unemployment rates. Challenges in international trade emerged as commodity prices declined, but the ‘National Strategic Project’ is expected to boost the country’s infrastructure goals by 2024. The push for urbanisation, the move to the new capital “Nusantara”, and a focus on Sustainable Development Goals (SDGs) by 2030, along with prioritising Environmental, Social, and Governance (ESG) considerations through the Sustainable Finance Roadmap 2025, reflect a strategic approach towards sustainable growth.

The new Indonesian government, led by Prabowo Subianto with Gibran Rakabuming Raka as vice president, signals a significant political shift. Their administration aims to continue Jokowi’s development agendas, including major infrastructure projects and economic growth initiatives. Despite their forward-looking policies, Prabowo’s controversial past and human rights allegations raise concerns about the future of Indonesia’s democracy and human rights.

Socially, the nation is undergoing rapid urbanisation and a demographic transition, presenting both opportunities and challenges, including the need for job creation and promoting gender-balanced workforce participation. Technology trends in Indonesia show strong growth potential, especially in AI, drones, cloud infrastructure, and biometrics, despite lagging behind ASEAN peers in technology adoption.

From an environmental perspective, Indonesia’s rich natural resources and tourist attractions coexist with challenges like high emissions levels and vulnerability to natural disasters. The country’s commitment to the SDGs by 2030, initiatives like the ‘Green Taxonomy,’ and carbon emissions credit trading underscore its efforts towards sustainability and environmental conservation.

Key Takeaways on Indonesia’s 3Q 2023

• 4th most populous country and 10th largest economy: Indonesia stands as the ASEAN giant with its massive population size and growing workforce. Female workforce participation remains an issue, though there is a growing acceptance towards it.
• Industrialised economy with one of the busiest sea lanes: The government is making concerted efforts to ease business regulations. This includes the official creation of special economic zones and labour laws designed to support businesses. Tourism, particularly in Bali, plays a significant role, contributing to almost half of the tourist arrivals.
• Free Trade and Economic Partnership Agreements: Indonesia benefits from several Free Trade and Economic Partnership Agreements. These include the ASEAN-China Free Trade Agreement, which reduces tariffs on 90% of imports across 7,000 products; the ASEAN Trade in Goods Agreement, liberalising tariffs, facilitating trade, and removing non-tariff barriers; and the Indonesia-Japan Economic Partnership, which eliminates tariffs on 90% of goods, particularly in agricultural and industrial products.

Indonesia’s Landscape

Underperforming Economy in Q32023: Falling Exports and Spending Though FDI Remained Strong

In Q3 2023, Indonesia’s economy underperformed, with GDP growth failing to meet expectations due to declining exports and weakening household spending. However, it benefited from reduced inflation and unemployment rates. QoQ, its international trade saw recovery in Q3 2023, though overall exports diminished when comparing Q3 2023 to Q3 2022, attributed to the falling prices of key commodities like crude palm oil and coal. Imports grew MoM in July 2023, influenced by seasonal factors and dwindling exports. China remains Indonesia’s principal trade partner for both exports and imports. FDI inflow continued to rise from Q3 2021 to Q3 2023, making Indonesia the second-largest recipient of FDIs in ASEAN since 2020, trailing Singapore. Singapore has been the top FDI contributor to Indonesia since 2010, followed by Japan and China.

New Government Intending to Continue the Previous Administration’s Policies. Though Concerns About the New President Over Human Rights Remain Problematic

The formation of a new government under Prabowo Subianto, with Gibran Rakabuming Raka as his running mate, heralds a pivotal shift in Indonesia’s political landscape. Prabowo, a figure with a military background marked by controversy, including accusations of human rights abuses, brings a complex legacy to the presidency. The duo’s victory represents a continuity of the outgoing President Jokowi’s policies, with ambitious plans to elevate Indonesia among the world’s top economies and continue significant infrastructure projects, including the relocation of the capital to Nusantara. However, concerns linger over the potential impacts on Indonesia’s democracy and human rights record, given Prabowo’s past.

The Indonesian government is dedicated to completing significant infrastructure projects and programmes by 2024 through the National Strategic Projects (PSN), amounting to an investment of IDR 5,746 trillion. Political focus is increasingly on tackling climate change, with carbon trading and carbon exchange schemes set to launch in the latter half of 2023.

Muslim-Majority Population with Over Half of the Population Urbanised; Country Faces Low Tertiary Education and Underachieving Female Participation in the Workforce

Corruption remains a significant challenge in Vietnam, with a Transparency International Corruption Perception Index 2022 ranking of 77 out of 180 countries. Despite slow progress, Vietnam’s anti-corruption campaign, led by the Communist Party, stands as the most impactful in its history.

The majority of Indonesia’s population are Muslims, with urbanisation nearing three-fifths by 2023, spurred by enhanced infrastructure and job prospects, with Jakarta as the most densely populated city in the country and ASEAN. Despite the large populace, under one-fifth have tertiary education as of 2022, reflecting the country’s labour-intensive economy. Indonesia also faces challenges such as low female labour force participation, though shifting social norms are promoting greater female workforce involvement.

One of the Most Active Startup Scenes in ASEAN-6 with Government’s Drive for Better Digital Infrastructure

Its vast population underpins a significant digital economy, driven by an expanding urban population and internet users. Indonesia has a vibrant startup scene, boasting nearly ten unicorns and two decacorns. While it lags behind its ASEAN counterparts in technology adoption, it is poised for substantial growth in emerging technologies like AI, drones, biometrics, and cloud infrastructure. The government’s focus on developing safe digital infrastructure, integrating government institutions, rolling out 4G and 5G nationwide, and fostering innovation underscores a strategic commitment to enhancing the country’s technological ecosystem.

Abundant Natural Resources with Recent Release of Green Taxonomy as Part its Carbon Neutrality Goal

Indonesia’s rich natural resources and status as a tourist attraction are contrasted with challenges such as high emission levels and susceptibility to natural disasters. The country is dedicated to achieving the SDGs by 2030, with strategies like the introduction of the ‘Green Taxonomy’ and carbon emissions credit trading aimed at reaching carbon neutrality by 2060. The Green Taxonomy encourages businesses to align with the government’s sustainability goals, categorising 919 industry subsectors into three categories based on environmental impacts.

Land Ownership Limited to Foreign Ownership

Indonesia has tailored its tax rates to foster economic development and enhance global competitiveness, offering improved incentives expected to stimulate both foreign and domestic investments. Foreigners may only acquire land or homes under the Right to Use (Hak Pakai) title. Legal reforms and regulations such as Reg 10/2021 have been introduced to relax foreign investment restrictions, providing fiscal and non-fiscal incentives to identified priority business sectors.

Industry Spotlight

Leading Sectors in Indonesia

Chemicals: Indonesia, the Largest Oleochemicals Exporter Due to Abundant Palm Oil Supply

Indonesia’s petrochemical products serve the manufacturing industry, including plastics and textiles. Domestic companies are strengthening their petrochemical value chain through vertical integration. In February 2023, the government declared its aim to cease petrochemical imports by 2027.

Electronics: A Priority Sector Since 2018, Though Electronics Components Remain Dependent on China

Indonesia is working to become a leading export hub for consumer electronics in the ASEAN region. Since July 2023, the Indonesian government has implemented electromagnetic compatibility (EMC) testing to assure the quality of imports and enhance the competitiveness of domestic manufacturing. Moreover, LG and Sharp are expanding their production in Indonesia to encompass both components and end-products.

Information and Communication Technology (ICT): Digital Penetration Growth Fuels the Digital Economy

This sector receives robust government support, exemplified by a partnership with South Korea to develop ICT ecosystems for SMEs and infrastructural projects. In 2023, the country amended customs procedures for digital product imports, mandating that intangible goods, including software, digital tools, and operating systems, incur import duties.

Construction: A Key Contributor to GDP in Q323, Bolstered by New Capital Construction and FDIs

The construction sector experienced growth in Q323, with an expanding workforce throughout the year. A significant number of workers are moving from Jakarta to East Kalimantan to contribute to the new capital’s construction. In June 2023, the Turkish government expressed interest in investing in the new capital.

Consumer Market: Significant Market Size Driven by High Internet Penetration and Technology-Based Solutions

Indonesia’s vast consumer market, characterised by a large, youthful population, stimulates growth in the retail, e-commerce, and FMCG sectors. Government and private sector initiatives are leveraging this demographic advantage to improve consumer access to goods and services through digital platforms, highlighting the sector’s potential for ongoing growth and innovation.

Natural Resources: Vast Natural Resource Supply; The EV Battery Sector Benefits from Indonesia’s Large Nickel Supply and Governmental Industry Support

Indonesia’s abundant natural resources, including minerals, coal, and palm oil, underpin its export economy and industrial sector development. Initiatives to boost domestic value-added processing, such as nickel smelting for EV batteries, demonstrate strategic efforts to utilise these resources for greater economic returns and sustainable development. In August 2023, Tesla is expected to invest in Indonesia for the manufacture of EV battery materials.

Emerging Sectors

EV Battery Production: Indonesia Aims to Become a Global Leader in EV Battery Production

As the world’s foremost nickel producer, Indonesia is poised to capitalise on this asset to attract and drive investments in the EV value chain. The country has introduced regulations to ban raw nickel exports, aiming to bolster the local industry. Local demand for EVs is projected to constitute about 5% of vehicle sales in 2023, supported by government subsidies.

Fintech: New Capital Nusantara Aims to Establish Itself as a Premier Fintech Hub

The new capital’s ambition to become a fintech hub is reinforced by strengthening regulations and government initiatives aimed at financing MSMEs, indicating a promising growth trajectory for the fintech sector. With an expanding e-wallet user base and significant industry funding, the fintech sector is set for exponential growth, underpinned by regulatory support and a dynamic startup ecosystem.

Edtech: Rising Gen Z Population and Demand for Skilled Workforce to Drive Growth in Edtech

The government targets 80% of its 15 to 64-year-old population to undergo vocational education and training by 2024. With a burgeoning digital economy, Indonesia necessitates a skilled workforce to sustain this growth. Several edtech platforms are already collaborating with the government on upskilling projects.

Online Travel: Targeting 8.5 Million Inbound Tourists with Bali as the Prime Destination for Remote Working

Aiming for significant tourist arrivals and earnings in 2023, the online travel sector benefits from government initiatives and an increasing preference among Indonesians for using online travel agencies (OTAs). The sector’s growth is facilitated by partnerships promoting Indonesia as a remote working destination for digital nomads, and an increasing market share of OTAs in tourism bookings, highlighting the potential for further expansion.

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