Investment
Outlook
Indonesia - 2024
In this issue:
Indonesia’s investment landscape
Indonesia is rebounding strongly from the COVID-induced weakness, advancing its economic development
Despite persistent challenges posed by global macroeconomic headwinds, Indonesia’s economy in 2023 exhibited resilience. Declining commodity prices adversely affected crucial sectors, and coupled with a slowdown in key export markets, continued to hinder Indonesia’s economic growth potential, while various geopolitical uncertainties continued to escalate. Despite these challenges, optimism remains robust among both foreign investors and domestic consumers. With the government’s clear course in navigating the global inflation crisis and economic slowdown, as well as its large, young labor pool, Indonesia is positioned well to benefit as the global economy recovers.
Robust economic performance despite global headwinds
Indonesia maintained strong momentum as its economy closed out 2023 with a GDP (Gross Domestic Product) growth rate of 5% This indicates a return to pre-pandemic growth levels despite global headwinds. It places Indonesia’s performance among the region’s economies with Vietnam, Malaysia and Thailand experiencing similar or lower growth rates at 5%, 3.7% and 2%.
However, Indonesia’s economic performance in 2023 was constrained by several factors. An economic slowdown in key trading partners such as China, the US, and Japan, coupled with a decline in commodity prices, has adversely impacted Indonesia’s commodity-reliant exports. This was particularly evident in its top three export categories: mineral fuels, iron and steel, and animal/vegetable oils and fats, which collectively accounted for 43% of the country’s export value in 2023. Consequently, the export value decreased by 12.0% year-on-year to $259 billion.
Additionally, weak domestic consumption held back further economic recovery, as the Indonesian central bank, Bank of Indonesia, increased interest rates since mid-2022 to keep inflation levels between 2%-4% for 2023. With the inflation rate stable at 3.7% in 2023, domestic consumption is projected to rebound in 2024, playing a crucial role in driving Indonesia’s GDP growth, especially with expected low commodity prices.
In 2024, Indonesia is projected to sustain its economic growth momentum, with a forecasted GDP growth of 4.9%. Despite this positive outlook, Indonesia, along with several key Southeast Asian economies, continues to face constraints from a lackluster global economic environment and subdued domestic consumption. Nonetheless, these economies persist in outperforming leading global economies.
Resilient labor market backs Indonesia’s claim for increasing global relevance
From August 2022 to August 2023, Indonesia’s labor force expanded by 3.9 million individuals, reaching a total of 147.7 million people. This growth is attributed in part to Indonesia’s ongoing population increase and a higher labor participation rate, which rose by 0.9 percentage points year-on-year, from 68.6% to 69.5%. Notably, Indonesia boasts a youthful population, with a median age of just 29 years, contrasting with neighboring countries like Vietnam (32), Thailand (40), and Malaysia (31). Indonesia’s stable economic performance helped to reduce the unemployment rate slightly to 5.3% from the previous year’s 5.5%. A key development was the accommodation and F&B sectors absorbing the most additional workers (~1.2M) in 2023. This large uptick has been partly fueled by increasing domestic and international arrivals, as the number of foreign visitors neared pre-pandemic levels.
The substantial proportion of informal workers, accounting for 59.1% as of August 2023, remains higher than the pre-pandemic level of 55.9% recorded in August 2019. This disparity underscores the challenges in facilitating widespread participation in the economic recovery process. Despite a gradual decline from the peak of 60.5% observed in 2020, the pace of reversion to pre-pandemic levels appears sluggish. Nevertheless, Indonesia’s youthful demographic presents a significant opportunity to drive sustained economic growth, with 70% of the population falling within the working age bracket of 15-64 years. Supported by declining unemployment rates and an increasing labor participation rate, Indonesia is well-positioned to capitalize on this demographic dividend.
Effective Monetary Policy Stabilizes Rupiah and Maintains Inflation Below 4%
In mid-2022, the Bank of Indonesia started raising the interest rate from 3.5% iteratively up to 6% by the end of 2023. This preemptive measure aimed to mitigate imported inflation stemming from economies impacted by ongoing global conflicts, including the Russo-Ukraine war and current conflicts in the Middle East. In addition, capital flight to economies with restrictive monetary policies in the US and EU was limited. This was a result of the exchange rate of the Indonesian Rupiah stabilizing due to interest rate hikes by Bank of Indonesia.
Given the global trend of inflation gradually stabilizing and central banks in the US, UK, and the EU signaling potential interest rate reductions in 2024, it is anticipated that the Bank of Indonesia will follow suit by lowering interest rates in the second half of the same year.
The consumer price index in Indonesia also documented a modest 3.7% increase in 2023, highlighting a broader trend of stability as inflation has remained within a targeted 3% – 4.5% range in the last 6 years. For 2024, the World Bank expects 3.2%, benefiting as Indonesia’s exposure to imported inflation has been reduced. Stringent monetary policies implemented by key trading partners such as the EU and US have finally reduced inflation rates in their own economies. Additionally, initiatives by the Bank of Indonesia are to be credited for playing a vital role in keeping inflation in check despite a global surge in inflation.
Indonesia’s stringent and proactive monetary policy has had a stabilizing effect on the inflation rate. These measures are anticipated to contribute to a further slowdown in the inflation rate for 2024, projected by the World Bank to be at 3.2%.
Foreign direct investment (FDI)
Indonesia registered a realized FDI inflow of 47.5 B USD in 2023, a 13.7% YoY increase, according to Indonesia’s Investment Ministry, after growing 44.2% in the previous year. This FDI performance is in line with a regional upward trend as other ASEAN (Association of Southeast Asian Nations) economies have similarly benefitted from improving global macro trends with increasing investor confidence and reduced interest rates. Nevertheless, Indonesia’s FDI inflows appear to grow slower than Vietnam and Thailand as they recorded 32.1% and 43% YoY increases in FDI inflows in 2023. Indonesia has previously enjoyed tremendous success in attracting FDI in its key mining and metal and metal goods sectors but plummeting commodity prices for key goods have slowed the investment appetite of investors. Nickel and aluminum prices peaked in early 2022 but then fell by 68% and 36% respectively until the end of 2023.
In 2023, metal and metal goods continued to dominate foreign investment interest, attracting 23.4% of total FDI, maintaining a growth trajectory similar to 2022. Following closely, transportation, warehousing, and telecommunication secured the second position with 11.2% of total FDI. When combined with chemical and pharmaceutical, mining, and paper and printing, these top five sectors collectively accounted for 60.4% of Indonesia’s FDI inflows in 2023.
Indonesia’s strong existing trade frameworks with neighboring economies and other East Asian economies have helped attract FDI as the key investors are Singapore, China, SAR Hong Kong, Japan, and Malaysia, combined all accounting for 80% of realized FDI inflow in 2023. FDI was concentrated in only 5 of Indonesia’s 38 provinces, – West Java, Special Territory of Jakarta, East Java (all on main island Java), Central Sulawesi, and North Maluka, alone received 59.8% of all FDI. Java’s 6 provinces alone received 48.5% of the total FDI inflows in 2023.
Indonesia: Emerging Powerhouse in Global Investment and Infrastructure Development
in Indonesia
Indonesia is positioning itself as a premier destination for foreign investment, leveraging its strategic initiatives in infrastructure enhancement, special economic zones, and renewable energy to attract over $50 billion in the next decade. Key highlights include:
- Commitment to strengthening and balancing the domestic economy through infrastructure development.
- Focus on becoming a critical hub for foreign investors with special attention to industrial and special economic zones.
- Strategic measures to attract significant foreign investment, including the establishment of the Indonesian Investment Authority (INA).
- Strong momentum in the M&A market, especially in telecommunications, technology, and energy sectors, despite a cooling from a record 2021.
Strengthening the Domestic Economy:
Indonesia is embarking on a substantial infrastructure upgrade campaign, focusing on the construction of roads, ports, railways, and airports, alongside the expansion of telecommunications and broadband networks. The development is not just concentrated on the island of Java; efforts are being made to address unequal economic growth by optimizing infrastructure across the nation, including the new capital city, Nusantara. The Indonesian government is actively seeking investments in transport infrastructure through Public Private Partnerships (PPPs), aiming to modernize public transport and enhance regional connectivity.
Economic Zones and Foreign Investment
To position Indonesia as a key destination for foreign investors, the government has prioritized the development of industrial and special economic zones (SEZs). The objective is to attract more than $50 billion in foreign investment over the next decade, focusing on SEZ-oriented manufacturing. Infrastructure improvements, such as highways, drainage systems, high-speed internet, and ports, are crucial for supporting these zones.
Innovation and Environmental Focus
Indonesia is making significant strides in the energy sector, with a special focus on the electric vehicle (EV) market. The government has ambitious plans to expand access to renewable energy and establish downstream industries for mining and minerals, particularly those related to EVs and their components. This initiative is expected to attract foreign EV manufacturers to set up plants in Indonesia, as well as local players to emerge, leveraging the country’s rich natural resources essential for the EV sector.
M&A Market Momentum and Sustainability-related Government Initiatives
The M&A market in Indonesia has seen record volumes post-pandemic, with continued elevated levels in 2021, 2022, and 2023. This momentum is supported by governmental initiatives focused on key sectors such as telecommunications, technology, transportation, and energy. The Indonesian Government has introduced new taxes and pricing regulations to curb carbon emissions and manage emissions from the forest and land use sector effectively. Additionally, the 2022 Indonesian Just Energy Transition Partnership (JETP) aims to support a power sector transition aligned with global warming targets.
‘New’ sovereign wealth fund driving investment into the country’s infrastructure
The Indonesian Investment Authority (INA), established as a sovereign wealth fund in 2021, plays a pivotal role in attracting foreign investment for government projects in transportation, oil and gas, health, tourism, and digital technologies. INA is linked with the Ministry of State-Owned Enterprises (BUMN), highlighting its strategic importance in Indonesia’s investment landscape.
Indonesia’s comprehensive approach to infrastructure development, focus on renewable energy and the EV market, and the establishment of the INA sovereign wealth fund illustrate its ambition to become a leading destination for global investors. These initiatives, coupled with a favorable investment climate, position Indonesia uniquely in the global market, offering promising opportunities for foreign investors looking to tap into the Southeast Asian region’s potential.
Legal & regulatory updates making Indonesia more attractive for foreign investors
Indonesia is undergoing significant legal and regulatory reforms under President Joko Widodo’s leadership, aiming to enhance its global competitiveness and attract more Foreign Direct Investment (FDI). Key reforms include the Omnibus Law on Job Creation, liberalization of foreign investment policies, simplification of business registration through the Online Single Submission System, and measures to address bureaucratic inefficiencies and regulatory hurdles.
Presidential Leadership and Economic Reform
Under President Joko Widodo’s second term, Indonesia focuses on pandemic recovery, infrastructure, and human capital, with the 2020 Omnibus Law on Job Creation at the reform’s heart. This law is set to lower corporate taxes, reform labor laws, and cut bureaucratic red tape to boost competitiveness.
New presidential elections were held on February 14, and it seems that Defense Minister Prabowo Subianto will emerge as Indonesia’s new president.
Liberalizing Foreign Investment
The Indonesian government has shifted towards a more open foreign investment policy, as seen in the new investment list under Presidential Regulation No. 10, 2021, and its amendment. This move, coupled with the Positive List for Investment, wildly lifts restrictions on foreign ownership in various sectors (except for those reserved for the government or subject to certain conditions), signaling a significant liberalization effort.
Streamlining Business Operations
To facilitate business operations, Indonesia introduced the Online Single Submission System (OSS Risk-Based Approach), a digital platform that eases business registration and categorizes companies by risk level. Additionally, reforms like the Jobs and Investment Decree and MoT Regulation No. 36 of 2023 on import policies aim to provide legal clarity and simplify import procedures.
Overcoming Challenges for Foreign Investors
Despite progress, foreign investors face challenges such as restrictive regulations, economic nationalism, and legal uncertainty. These issues underscore the complexity of Indonesia’s investment climate, even as the country moves towards more investor-friendly policies.
Indonesia’s comprehensive approach to legal and regulatory reform demonstrates its commitment to creating a conducive environment for global investment. By tackling bureaucratic inefficiencies and opening its economy, Indonesia is poised to become a more attractive destination for foreign investors, despite ongoing challenges.
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. We are on a 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 operational improvement and compliance.
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