Indonesia, the world’s fourth most populous country and the largest economy in Southeast Asia has demonstrated impressive resilience and economic growth in 2023.
Despite facing global challenges such as rising inflation, geopolitical tensions and their negative impact on supply chains, Indonesia has managed to navigate these hurdles and emerge as a beacon of economic stability in the region.
These geopolitical events have had a mixed impact on Indonesia’s economy; the war in Ukraine and the US-China trade war have no doubt created challenges for Indonesia, while on the other hand, the rise of regionalism and the growing importance of the Indo-Pacific has created some great opportunities and Indonesia is now well-positioned for future growth.
Indonesia’s success can be attributed to a combination of factors, including strong domestic demand, prudent macroeconomic policies, and a surge in foreign investment. Let’s have a look at some of these.
Domestic Demand Drives Economic Growth
Indonesia’s economy is primarily driven by domestic consumption, which accounts for over 50 percent of GDP. In 2023, domestic demand has remained strong, fueled by a growing middle class, rising disposable incomes, and improving consumer sentiment. This strong domestic consumption has been a key driver of economic growth, offsetting any slowdown in exports caused by global economic and political uncertainties.
Prudent Macroeconomic Policies Foster Stability
The Indonesian government has successfully implemented prudent macroeconomic policies that have helped preserve economic stability and foster a favourable investment climate. These policies include maintaining a stable exchange rate, keeping inflation in check, and implementing measures to encourage domestic investment and growth. The government has also been proactive in addressing supply chain disruptions and ensuring the availability of essential goods and services.
Surge in Foreign Investment Bolsters Economic Growth
Various reforms have been implemented aimed at streamlining investment procedures, reducing bureaucratic hurdles, and enhancing transparency; making it easier for foreign companies to do business in the country. The result of this has been an increase of more than 16 percent in Foreign Direct Investment (FDI) by Q3/ 2023, particularly in the manufacturing, infrastructure, and technology sectors.
Indonesia inaugurated its first high-speed railway in 2023, a US$ 7.3 billion project backed by China under the Belt and Road Initiative. Linking Jakarta to Bandung, it has already served 549,000 passengers since October, according to Tempo. Trading Economics reports that the largest recipient of the FDI was the base metal industry, followed by chemical and pharmaceuticals, and mining adding that some of the largest examples of FDI in 2023 include Google’s US$ 1 billion investment in a data centre and cloud services; Foxconn’s US$ 3 billion investment in an EV manufacturing facility; and SoftBank’s US$ 2 billion investment in a renewable energy project.
Reporting from Antara News, Tempo, Vietnam Plus, and Invest Indonesia among others, also list investments from Japan to the tune of a US$ 30 billion pledge over the next five years for infrastructure, manufacturing, and technology; UAE’s US$ 30 billion investment in infrastructure projects; Saudi Arabia’s US$ 1.1 billion investment in a refinery and petrochemical complex; South Korea’s US$ 1.5 billion investment in a petrochemical plant; China’s US$ 2.5 billion investment in a nickel processing plant; Singapore’s US$ 4 billion investment in a wide range of sectors, including technology, finance, and real estate; United States’ US$ 1.6 billion investment in promoting economic growth and development in Indonesia; Asian Development Bank’s US$ 500 million loan to boost human capital and improve labour productivity; Exxon Mobil’s US$ 15 billion investment to build a green petrochemical refinery and Carbon Capture Storage (CSS) facility; and the World Bank, who have approved a US$ 2 billion loan to support Indonesia’s infrastructure development.
The central banks of Indonesia and Singapore have also recently launched a cross-border QR payment linkage, a major step forward in financial integration between the two Southeast Asian nations, according to reports from Investing.com. This new system allows users to make retail transactions seamlessly across borders by scanning QR codes through mobile apps, specifically QRIS in Indonesia and NETS in Singapore.
Key International Agreements and Investments
There’s no doubt that the signing of trade agreements has also enhanced Indonesia’s attractiveness to foreign investors by providing greater market access and reducing trade barriers. In 2023, Indonesia signed several key agreements, including the Regional Comprehensive Economic Partnership (RCEP), the Indonesia-Korea Comprehensive Economic Partnership Agreement (IK-CEPA), and the Indonesia-United Arab Emirates Comprehensive Economic Partnership Agreement (IUAE-CEPA). These agreements are expected to boost Indonesia’s trade and investment flows, enhance market access for Indonesian products, as well as attract even more foreign investment.
MoUs Pave the Way for Future Collaboration
Indonesia has also signed several Memoranda of Understanding (MoUs) with different countries and organisations to promote cooperation in various sectors, which lay the foundation for future collaboration and partnerships that will contribute to Indonesia’s long-term economic growth and development by enhancing trade and investment flows, facilitating technology transfer and knowledge sharing, reducing tariffs and streamlining customs procedures.
Notable examples of MoUs signed by Indonesia in 2023 include an MoU with the UAE focusing on cooperation in various areas, including investment, trade, tourism, and renewable energy; an MoU with Japan, which will strengthen collaboration in infrastructure development, particularly in the construction of high-speed railways and smart cities; an MoU with South Korea focusing on cooperation in technology transfer, digital transformation, and the establishment of a joint innovation centre.
Macroeconomic Policies
Indonesia’s macroeconomic policies have also played a crucial role in maintaining economic stability and fostering a favourable investment climate. These policies include fiscal prudence to avoid excessive debt accumulation, maintaining price stability and keeping inflation in check. Focus Economics write that inflation fell to a one-year low in September at 2.3 percent, marking the country’s lowest inflation rate since February 2022.
So, what does the future look like?
There’s no question that Indonesia’s economic performance in 2023 has been impressive, and forecasts for 2024 remain encouraging, especially as it’s one of the fastest-growing economies in the world with an abundance of natural resources and a young, dynamic and expanding population.
Indonesia is also investing heavily in infrastructure, education, and healthcare, which all improve the country’s economic competitiveness creating new opportunities for businesses.
Terje H. Nilsen, CEO of Seven Stones Indonesia, says, “If you’re thinking of investing in Indonesia, you might also want to consider that there’s a wide range of opportunities from manufacturing to tourism, especially in Bali, which is already the country’s most popular tourist destination and is considering some far-reaching infrastructure improvements to support this such as an LRT system slated to begin in 2024. This would not only go a long way to reduce pollution and traffic congestion but would also open more of the island for a wider range of investments.”
If you’d like advice or more information about Indonesia’s investment opportunities, feel free to get in touch with us at Seven Stones Indonesia through [email protected]. We’d love to share our insights and predictions with you.