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Indonesia

Resilient growth amidst improved fundamentals

Last update – January 2025

Country rating 


LOW RISK FOR ENTERPRISE
Economic risk

Slight risk of payments disruption
Business environment risk
Moderate risk of payments disruption
Political risk

Moderate risk of payments disruption
Commercial risk
Low risk of payments disruption
Financing risk
Low risk of payments disruption
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Form of state
 Presidential Republic
Head of government
 Prabowo Subianto (President)
Next elections
 2029, legislative and presidential

Strengths & weaknesses

  • Fast growing economy
  • Abundant natural resources
  • Favorable demographics
  • Relatively resilient banking system
  • Solid public finances and sound fiscal policies
  • Weak legal system
  • Inefficient tax administration and strong informal economy
  • Dependency on commodities and China
  • Serious infrastructure gap compared to regional peers
  • Increasing inequality
  • Low levels of educational spending

Economic overview

Solid levels of growth in coming years

Indonesia has shown relatively strong GDP growth rates over the past two decades, averaging +5.2% in the 2000s and +5.4% in the 2010s. However, it was severely affected by the Covid-19 pandemic, suffering a -2.1% full-year contraction in 2020. The recovery in the following years brought GDP growth at +3.7% in 2021, +5.3% in 2022 and +5.0% in 2023. We expect Indonesia to continue to register solid levels of economic growth (around +5% through 2025-2026) on the back of a strong consumer base and easing inflation, investment in the context of global supply-chain diversification and a moderate rebound in global demand.

After expanding to around 6% of GDP in 2020 in the midst of support measures to tackle Covid-19 the pandemic, Indonesia’s fiscal deficit narrowed in the following three years. It is likely to expand slightly in 2025 and 2026, and approach but remain below the limit of 3% of GDP set by law. The expected higher fiscal deficit will likely be the result of higher government spending in social programs, education, healthcare etc.

In terms of monetary policy, Bank Indonesia (BI) went through a tightening cycle in 2022-2024 that raised the policy rate by 275bps to keep inflationary pressures in check and stabilize the rupiah. A first policy rate cut took place in September 2024 (-25bps), followed by a second one in January 2025. Further easing is likely in 2025 as inflation remains within the central bank’s target range of 1.5%-3.5%.

No imminent risk from structural vulnerabilities

Indonesia’s short-term financing risk is deemed low. Though not in alarming states, the following areas of structural macroeconomic vulnerabilities are worth monitoring: (i) fast-rising domestic credit and (ii) FX reserves for rupiah stabilization and external repayment. The long history of reliance on external financing has led to this vulnerability, especially under episodes of downwards pressure on the rupiah.

On the back of wider fiscal deficits and the recovery in domestic demand, real domestic credit growth increased rapidly in 2021-2022, before stabilizing at more manageable levels thereafter. The moderate rebound in 2024 should be monitored. The public debt-to-GDP ratio rose from around 30% pre-pandemic to about 40% in 2022. Efficient fiscal policies since then allowed the public-debt-to-GDP ratio to stabilize, and we expect this to continue in the coming years. On the external side, the annual current account balance was back in positive territory in 2021-2022 (after a decade of deficits) and is likely to register much lower deficits over 2025-2026 compared to the pre-pandemic long-term average. FX reserves reached higher levels in 2024, although they have not kept pace with the growth of imports. As a result, import cover dropped from 10 months at end-2020 to around six months in mid-2024. The latter is still an adequate ratio but the indicator requires monitoring. Meanwhile, Indonesia’s reliance on commodity exports also makes it vulnerable to a reversal in global commodity prices that could undermine investor confidence and external repayment capacity.

Business environment and political developments

Indonesia’s business environment is ranked above average in our assessment of 185 economies. The Heritage Foundation’s Index of Economic Freedom survey 2023 assigns Indonesia rank 61 out of 185 economies, given its good performance in government spending, tax burden, monetary freedom and trade freedom, though weaknesses remain in government integrity, judicial effectiveness and investment freedom. Meanwhile, the World Bank Institute’s annual Worldwide Governance Indicators survey indicates that government effectiveness, regulatory quality and rule of law have improved since 2011. Though the government has taken policy actions to achieve net-zero emissions by 2060, environmental sustainability remains in bad condition, considering Indonesia's coal-dominated energy mix and industry reliance on natural resources.

Prabowo Subianto was elected in the February 2024 Presidential elections and will likely follow former president Joko Widodo’s footsteps. Indonesia has traditionally been inclined towards protectionism of key industries and natural resources. Over his two terms in office, Joko Widodo had pushed consensus on this issue further towards acceptance of higher levels of foreign investment, especially in industries downstream of primary goods extraction. President Prabowo Subianto is expected to continue down this path. He retains a dominant majority in parliament – although it is smaller than the previous government’s and thus may face more hurdles from opposition parties. The next elections will be held by 2029.

Trade structure by destination/origin

(% of total, 2023)

Trade structure by product

(% of total, 2023)

Contact 

Francoise Huang
Allianz Trade
+33 (0) 184113427
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