Last updated: February 2023
Indonesia’s economic growth prospects are in line with the average of emerging and developing Asian peers, supported by a large, growing and youthful population. Creditworthiness and business climate indicators are above the regional average. However, Indonesia’s per capita income lags regional peers.
The above chart is a cobweb diagram showing how a country measures up on four important dimensions of economic performance—per capita income, annual GDP growth, business climate rank and creditworthiness. Per capita income is in current US dollars. Annual GDP growth is the five-year average forecast between 2023 and 2027. Business climate is measured by the World Bank’s 2019 Ease of Doing Business ranking of 190 countries. Creditworthiness attempts to measure a country's ability to honour its external debt obligations and is measured by its OECD country credit risk rating. The chart shows not only how a country performs on the four dimensions, but how it measures up against other countries in the region.
Indonesia experienced strong growth of 5.3% in 2022. The post-pandemic reopening of the economy boosted domestic demand while exports rose on higher external demand for, and prices of, Indonesia’s key commodities (coal, palm oil, and metals). Inflation remains elevated at 5.3% year-on-year in January 2023 amid higher import prices and a 30% increase in domestic fuel prices due to reduced government subsidies, raising cost pressures for businesses and households.
The outlook points to continued robust growth ahead. The IMF forecasts growth to average 5% per annum between 2023 to 2027 on the back of continued recovery in domestic demand and increasing infrastructure investment. Political stability and the implementation of structural reforms, such as those in the Jobs Omnibus law, should help to lift foreign direct investment. Still-elevated commodity prices will continue to support export receipts. Another year of open international borders and pent-up international travel demand should support further recovery in Indonesia’s tourism and broader services sectors.
Downside risks dominate the outlook. Indonesia is vulnerable to rising US interest rates and local currency depreciation, given its high dependence on capital inflows into local equity and bond markets and elevated external debt. Moreover, the recent increase in food and fuel prices in Indonesia may lead to further interest rate hikes to tame inflation.
Longer term, reforms to strengthen the business climate and public finances will boost growth over time. Major reforms to remove bureaucratic and regulatory obstacles to investment and address labour market rigidities should make it easier to do business and spur foreign investment. Favourable demographics and an expanding middle class bode well for raising consumption growth over the longer term. Rising infrastructure needs and relocation of the capital away from Jakarta will support public investment in the mid-2020s and beyond.
A bright economic outlook bodes well for income growth. The IMF estimates that per capita incomes will reach US$6,500 in 2027, up from around US$4,700 in 2022. But incomes are still below the Emerging Asia average, preventing GDP from growing even faster and generating more government revenue. Indonesia’s extreme poverty rate dropped from 19% in 2002 to 2% in 2019. However, rising inflation, if prolonged, poses risk to poverty reduction efforts and will hurt household budgets for a large segment of the population.
Country risk in Indonesia is low to moderate. Indonesia has an investment grade credit rating and an OECD country credit grade of 3. This indicates a low to moderate likelihood that Indonesia will be unable or unwilling to meet its external debt obligations.
Risk of expropriation in Indonesia is moderate. Indonesia has a track record of economic nationalism. The 2009 Mining Law introduced a raft of measures that impact on foreign investment—including domestic processing and majority-ownership divestment requirements. For instance, the divestment regulations stipulate that all foreign miners must divest 51% of shares to Indonesian companies by the tenth year of production. As part of the implementation of the mining law and its implementing regulations, Freeport and Rio handed over majority ownership of the Grasberg mine, the world’s second largest copper mine, to the Indonesian government.
Political risk in Indonesia is low to moderate. Politically motivated demonstrations occasionally occur throughout Indonesia, but not to the extent that it damages foreign investment. Flare-ups in recent years arise from religious-based tensions and student protests.
Indonesia has significantly improved on all dimensions of the Worldwide governance indicators, in part due to the introduction of the Omnibus bill. The bill has helped streamline regulations and simplify licensing processes, making it easier to do business in Indonesia. However, Indonesia lags behind the regional average on the measure of political stability and absence of violence.
Indonesia was Australia’s 14th largest trading partner in 2021. Total goods and services trade amounted to $16.9 billion in 2021, rising over $4.1 billion from 2020. Indonesia and Australia have a significant trade relationship; about 2,500 Australian companies export to Indonesia, and around 250 Australian businesses have a subsidiary in Indonesia.
Major Australian goods exports include wheat, coal, iron ore and sugar, molasses and honey. The entry-into-force of the Indonesia–Australia Comprehensive Economic Partnership Agreement (IA-CEPA) in July 2020 provides further opportunities for Australian exporters and investors to take advantage of Indonesia’s growth potential and diversify their businesses. Indonesia’s plans to develop mass tourism precincts across the country present opportunities for sustainable tourism, training and education, and the importation of quality Australian produce to support high-value tourism.
Goods imports from Indonesia consist mainly of refined petroleum, monitors and televisions, tobacco, footwear, wood and fertilisers.
Indonesia was Australia’s 10th largest source of student enrolments in 2022. Remote learning supported Indonesian student enrolments in Australian institutions through the pandemic. Easing international border restrictions helped tourism arrivals gradually recover in 2022, following the pandemic-induced slump in 2020 and 2021. Another year of open international borders and pent-up demand for travel should support further recovery in tourism, and broader services exports, in 2023.
To support the government’s economic growth objectives, Indonesia is looking to maximise the benefits of its demographic dividend, including through increased access to globally relevant education and training. President Widodo has set an ambitious target of adding 57 million skilled Indonesians to the workforce by 2030. That could open up opportunities for Australian education operators, particularly vocational education and training providers.
Indonesia is a small investor in Australia, owning a portfolio of about $600 million in 2021. The stock of Australia’s investment in Indonesia is larger, at $4.2 billion in 2021, albeit substantially lower than in prior years. The projected rise in Indonesian demand for consumer goods and services—particularly for premium food and beverages, education and healthcare, financial and ICT services and tourism—and its ambitious infrastructure investment agenda, offers significant opportunities for Australian investors and exporters.