A consistent high level of COVID-19 infections and large-scale social restrictions have curbed business and consumer confidence, and in turn, economic activity in 2020. The IMF estimates real GDP contracted 1.5% in 2020, the first recession in two decades. The government’s renewed focus on infrastructure development, accommodative monetary policy and growing Chinese demand for commodities will support economic recovery in 2021.
A landmark omnibus bill introduced aims to remove bureaucratic and regulatory obstacles to investment, address labor market rigidities, and use tax reform to incentivize investment. If effectively implemented, such reforms could make it easier to do business, enhance foreign investment and export potential and sustain the economic recovery. FDI into Indonesia is low compared to regional peers and has moderated as a share of GDP from its peak in 2016. Indonesia has failed to capitalize on supply chains diversifying out of China, even though the country has substantial competitive advantages including a large domestic market, favorable demographics and natural resource wealth.
Longer term, favorable demographics and an expanding middle class bode well for raising consumption growth. Rising infrastructure needs and relocation of the capital away from Jakarta will support public investment in the mid-2020s.