Indonesia Economic Update Report
Quarter 2, 2024
In this issue:
Indonesia’s Economy Grew 5% in the Second Quarter, Driven by Strong Domestic Consumption, Government Spending, and Sector Improvements.
In the second quarter of 2024, Indonesia's economy displayed resilience, achieving a year-on-year (YoY) GDP growth of 5.05%, slightly lower than the 5.1% seen in the first quarter.
This performance was mainly driven by robust household consumption, strong exports, and increased government spending, which together supported the ongoing economic recovery. On a quarter-on-quarter (QoQ) basis, Indonesia’s GDP grew by 3.79%, a significant improvement compared to the 0.83% contraction in Q1. This marked the highest quarterly growth in a year, fueled by a surge in public activity following a smooth national election earlier in the year, and increased consumer spending during several major religious festivals.
Household consumption, which accounts for nearly half of Indonesia’s economy, increased by 4.93% YoY, slightly higher than the previous quarter’s 4.91%, but lower than the over 5% growth seen in earlier years. This increase was primarily driven by significant activity in the transportation and hospitality sectors, fueled by heightened travel and tourism during religious and school holidays, particularly the hajj pilgrimage, which contributed to a service trade deficit. The surge in travel-related expenditures also led to a widening of the current account deficit, which reached 0.9% of GDP (approximately $3 billion) in Q2, up from 0.7% in Q1. To manage this growing deficit and keep it under the legislated ceiling, the government may implement revenue-side reforms, including lowering tax thresholds, removing exemptions and improving audits. Despite these challenges, household consumption remained a critical growth driver, underscoring the recovery in consumer confidence and domestic demand.
Government spending also played a role in the economic performance, though its growth moderated to 1.42% in Q2, compared to the impressive 19.58% surge in the first quarter. The Q1 spike was largely driven by election-related spending in February. Indonesia’s government made substantial investments in education, including the implementation of free meals for students, as part of its strategy to enhance human capital. Significant government expenditure was also directed toward improvements in healthcare and social security systems, as well as ongoing infrastructure projects such as the construction of the new capital city, roads, and ports. Despite this deceleration, government expenditure continued to support economic activity, particularly in sectors related to public services and infrastructur e, which are critical to Indonesia’s economic transformation, especially in areas like energy, food, connectivity, as well as Information and Communication Technology.
On the production side, several sectors experienced notable gains. The agriculture sector recorded an impressive QoQ growth of 23.43%, highlighting its critical role in Indonesia’s economy. Other sectors, including transport (7.05%), accommodation and food services (4.14%), and education (6.72%), also posted significant rebounds as public activity resumed following the election. The manufacturing sector, which had contracted in Q1, showed early signs of recovery with modest growth of 0.3%, suggesting a potential stabilization in the country’s industrial base. Additionally, the utilities sector grew by 1.46%, while declines in mining (-2.17%) and construction (-1.72%) showed signs of slowing, indicating some stabilization in these key industries.
Despite the overall growth, Indonesia faced challenges, particularly with a widening current account deficit that reached its highest level since Q2 2020. Bank Indonesia highlighted that travel expenditures related to the hajj pilgrimage were the main factor behind the service trade deficit. However, the improvement in the balance of payments, with a Q2 deficit of $600 million compared to $6 billion in Q1, demonstrated that the country was managing its external accounts effectively.
In summary, Indonesia’s economic performance in Q2 2024 was shaped by strong domestic consumption, moderated government spending, and sectoral improvements. Despite external challenges, the country demonstrated its resilience and capacity to sustain growth in an increasingly dynamic global environment.
Indonesia’s Trade Performance: Positive Surplus Amid Challenges from Weaker Global Demand and Falling Commodity Prices
In the second quarter of 2024, Indonesia’s trade performance remained positive, although challenges emerged due to weaker global demand and falling commodity prices. The country recorded total exports of $62.79 billion and imports of $54.75 billion, resulting in a trade surplus of approximately $8 billion. While Indonesia maintained a trade surplus every month over the past four years, the surplus has been narrowing as exports continue to weaken. Exports grew by 1.72% year-on-year in April, marking the first expansion in 11 months. However, this growth was primarily driven by sectors like tourism and services rather than commodities like coal, which saw a 19.26% decline in value due to falling global coal prices.
Exports grew by 8.28% year-on-year in Q2, benefiting from increased foreign tourism and higher shipments of key commodities like nickel, jewelry, and machinery. Imports also rose by 8.57%, reflecting stronger domestic demand for goods such as mineral fuels, oils, and electronic equipment. This marked the highest import growth since Q3 2022. While export performance improved compared to Q1, with a 1.02% quarterly increase, imports rebounded by 2.82% after a decline in the previous quarter.
China remained Indonesia’s largest trading partner, accounting for 23% of exports and 29% of imports. Other major export destinations included the United States (10%), India (9.5%), and Japan (8%). Despite these improvements, the decline in global commodity prices and weakened demand from key markets, particularly China, continue to challenge Indonesia’s export sector. To protect domestic industries, the government had introduced import duties on products like footwear and textiles. However, these measures were later reversed due to concerns that they might disrupt the flow of essential imported materials, which are critical for domestic production.
Although Indonesia’s trade performance remains solid, it is still vulnerable to external pressures, particularly falling commodity prices. However, ongoing investments in key sectors and the expansion of tourism offer promising growth opportunities for the future.
Indonesia: A New Destination for Global Tech Giants
Indonesia’s large, young, and tech-savvy population is making it an increasingly attractive market for global tech investments.
Indonesia’s large, young, and tech-savvy population is making it an increasingly attractive market for global tech investments. With Generation Z comprising nearly 28% of the population and millennials representing 25.9%, these demographics are driving the rapid growth of Indonesia’s digital economy. As a result, global tech giants are increasingly focusing on Indonesia. From April to June, major industry players like Nvidia, Apple, Microsoft, and SpaceX made significant investments in the country, focusing on artificial intelligence (AI), digital infrastructure and potential electric vehicle (EV) related manufacturing. These developments are positioning Indonesia as a rising tech hub in Southeast Asia.
Nvidia, in partnership with a local telecommunications firm, has planned to build an AI center in Central Java. This $200 million project will focus on developing AI infrastructure and fostering digital talent, boosting local telecommunications and creating a center of excellence for AI in Surakarta. This initiative aligns with Indonesia’s broader ambitions to enhance its technological capabilities and will play a crucial role in the country’s digital transformation.
Apple has also expressed interest in expanding its presence in Indonesia. After a meeting with President Joko Widodo in April, Apple’s CEO revealed that the company is considering building a manufacturing facility in the country. This potential investment would support Indonesia’s goal of fostering technology partnerships and expanding local manufacturing capabilities, further solidifying Indonesia as a destination for global tech firms.
Following Apple’s announcement, Microsoft also unveiled a $1.7 billion investment plan over the next four years to expand its cloud services and AI capabilities in Indonesia. This includes building new data centers and providing advanced AI infrastructure to meet the growing demand for cloud computing services. Microsoft has also committed to training 840,000 Indonesians in AI skills, supporting the local developer community, and driving economic growth through tech-related industries. This investment highlights Indonesia’s role as a prime market for tech innovation and its potential to leverage AI for economic advancement.
SpaceX, led by Elon Musk, also entered the Indonesian market with the launch of its Starlink satellite internet service in May. This initiative aims to improve healthcare access in remote areas of the vast Indonesian archipelago, helping to bridge the country’s urban-rural digital divide. Musk has indicated that it is “very likely” his companies will invest further in Indonesia, particularly in the EV sector, which benefits from the nation’s rich nickel resources—essential for EV battery production.
In addition to digitalization investments, the Indonesian government’s ambition in the EV industry has also attracted various global players. By 2030, Indonesia aims to have 2 million electric cars and 13 million electric two-wheelers on its roads. The new capital city, Nusantara, is set to lead in smart transportation, with electric vehicles mandated for travel within and around the city. These initiatives align with Indonesia’s commitment to achieving net-zero emissions by 2060 or sooner, positioning the country as a key player in the global EV market. Meanwhile, Indonesia’s position as the world’s largest nickel producer, combined with its 2020 ban on raw nickel exports, has attracted significant investment into domestic nickel processing and the broader EV industry. This has fostered a collaboration between South Korea’s Hyundai Motor Group and LG Energy Solution, which recently inaugurated Indonesia’s first EV battery production plant with an annual capacity of 10 Gigawatt hours (GWh). This facility is part of a larger $9.8 billion investment to develop an EV supply chain in Indonesia, leveraging the country’s vast nickel and copper reserves. Meanwhile, Hyundai has planned to expand this plant with an additional $2 billion investment, increasing its capacity to 20 GWh.
In conclusion, Indonesia is rapidly emerging as a destination for global tech giants, with significant investments transforming the country into a key player in AI, cloud computing, EV production, and digital infrastructure. As these major tech firms continue to invest, Indonesia is not only solidifying its position as a technological and economic powerhouse in Southeast Asia, but also charting an ambitious path for future growth. With strategic initiatives aimed at fostering innovation and creating a conducive investment environment, the country is poised to attract even greater capital inflows, driving sustained expansion across its high-tech sectors.
Indonesia Set to Introduce New Immigration Policies to Attract Overseas Talent and Investors
Indonesia is on the verge of introducing new immigration policies, including a ‘Dual Citizenship’ and the ‘Golden Visa’ program. These initiatives are designed to attract skilled overseas talent and foreign investors as part of a broader strategy to boost economic growth by enhancing infrastructure development and supporting sustainable businesses in the innovative technologies, especially in food and beverage, textile and apparel, automotive, chemicals and electronics industries.
The government plans to offer dual citizenship to individuals of Indonesian descent and former Indonesian citizens currently residing abroad. This initiative aims to encourage skilled professionals to return to Indonesia and contribute to the country’s economy. By facilitating the return of highly skilled Indonesians, this policy aligns with the government’s broader strategy to harness the expertise and resources of its diaspora to drive innovation and economic growth.
In addition to the dual citizenship proposal, Indonesia has launched a long-term visa scheme known as the “Golden Visa”, specifically designed to attract foreign investors. Announced by President Joko Widodo, the Golden Visa program offers 5- and 10-year visas based on different levels of investment. For individual investors, a 5-year visa requires an investment of $2.5 million in setting up a company, while a 10-year visa demands a $5 million investment. The investment thresholds are doubled for investments made in the new capital city, Nusantara, currently being developed in Borneo. Those not interested in starting a business can still gain a 5-year visa by investing $350,000 in government bonds, public company stocks, or placing deposits. A 10-year visa in this category requires an investment of $700,000. The scheme also targets corporate investors, who need to invest $25 million to secure a five-year visa for their directors and commissioners, or $50 million for a 10-year visa.
President Widodo stated that the visa program aims to attract “good quality travelers” who can contribute to the nation’s economic growth. He noted, “We’re launching the Golden Visa to make it easier for foreign nationals to invest and contribute to Indonesia.”. Since its pilot phase last year, the Golden Visa program has already attracted nearly 300 applicants, bringing in $123 million in foreign investment. These new policies reflect Indonesia’s ambition to enhance its economic landscape by welcoming skilled professionals and substantial foreign investments. The President has set a goal to attract over $100 billion in combined investments throughout 2024, suggesting that the government will continue to promote favorable policies to incentivize foreign investment.
About this report
This report was compiled with contributions from the team of business experts in our Indonesia office.
ARC Consulting, a division of ARC Group, is an advisory firm specialised in supporting western companies operating in Asia. Our mission is to bridge between the business ecosystems of Asia and those in Europe and the US. Our services cover market entry and expansion, production and sourcing, cross-border M&A as well as ESG and operational improvement and compliance.
If you are interested in exploring how we can support your business in Indonesia, reach out through our contact page, or leave your email below for a representative to contact you directly:
References
Breaking News! BPS Lapor Ekonomi RI Tumbuh 5,11% di Kuartal I-2024 (cnbcindonesia.com)
Ini Faktor Pendorong Pertumbuhan Ekonomi Kuartal I 2024 | Republika Online
Tumbuh 22,1 Persen, Realisasi Investasi RI Kuartal I 2024 Capai Rp 401,5 Triliun (kompas.com)
Kemendag ungkap tantangan perdagangan nasional dan global pada 2024 – ANTARA News
Menakar mesin pertumbuhan ekonomi RI setelah kuartal I – ANTARA News
Surplus Neraca Perdagangan Meningkat (bi.go.id)
Volume Ekspor Tekstil Turun pada 2022, Lebih Rendah dari Masa Pandemi (katadata.co.id)
Indonesian Textile Exports Drop 14.78% In Previous Year – Textile Insights
Pabrik Tekstil RI Tumbang Lagi, Lebih 5.000 Orang Korban PHK (cnbcindonesia.com)
Indonesia’s textile industry requires regeneration, innovation (business-indonesia.org)
Kemenperin: Pemerintah Dongkrak Produktivitas Industri Tekstil dan Pakaian
Sekilas FTA – DJBC – FTA Knowledge Base (beacukai.go.id)
Indonesia-Gulf Cooperation Council Free Trade Agreement Free Trade Agreement (adb.org)
Pemerintah Bakal Tuntaskan Tiga Perjanjian Dagang Bebas Baru Tahun Ini (msn.com)
The IPEF agreement excludes lowering tariffs. So how does apparel benefit? (just-style.com)
Pengusaha Tekstil Happy, Menteri Jokowi Makin Kencang Atur Impor (cnbcindonesia.com)
Kinerja Industri Kulit, Alas Kaki dan Tekstil Moncer di Kuartal I-2024 (indopremier.com)
Kemenperin Catat Industri Tekstil dan Alas Kaki Dapat Investasi Asing Rp 3,5 T | kumparan.com
go.id – Angin Segar Industri Tekstil Indonesia
IEU-CEPA: 17th negotiation round discusses trade barriers – ANTARA News
IEU-CEPA Negotiations Tough, European Union’s Stance Always Fluctuates (kontan.co.id)
It’s time for the EU to make a (bilateral) move on Indonesia – CEPS
Indonesia Still Wants to Secure EU Trade Pact This Year (jakartaglobe.id)