The world economy is going through a period of slow growth. The International Monetary Fund (IMF) estimates that global economic growth in 2016 and 2017 will be around 3.4% and 3.6% respectively. Similar to the IMF, the World Bank estimates the numbers to be slightly lower at approximately 3.3% and 3.2% respectively.
Despite the global slowdown, the prospect of Indonesia’s economy remains positive. As a result of expanded fiscal and reserve buffers (Standards & Poor, May 2015), Indonesia’s economy is demonstrating resilience and has been able to respond swiftly to external shocks (Standards & Poor, May 2015). The country’s economy has reached its turning point in the last quarter of 2015, with the Gross Domestic Product (GDP) recorded at around 8,976 trillion Rupiahs (an increase of around 4.9% compared to 2014).
In 2014, Indonesia was ranked 16th largest economy in the world. As a result, stable growth in Indonesia is expected to be supported by public consumption and investments.
In 2016, the World Bank estimates a higher growth rate for Indonesia at around 5.3%, while the IMF predicts slightly lower at around 5%. The Oxford Economics also claims that the long-term outlook of Indonesian economy is relatively strong with a prospect of 5% economic growth rate in the real term until 2025.
In addition, Indonesia also has the 4th largest population in the world, with around 250 million people. Currently, around 45 million people are under the consuming class category, with approximately 50% of its population categorised as young people under 30 years old. The World Bank reports elucidates that this favourable demographic profile of Indonesia could serve as one of the powerful drivers of growth. With burgeoning middle-income class and educated workforce, there is a huge potential within the domestic market.
The World Economic Forum (WEF) has also acknowledged that market size is one of Indonesia’s key competitiveness factors. (Indonesia is ranked 10th in the market size category among the 140 countries observed in WEF’s Global Competitiveness Index).
Also, having the largest Muslim population in the world, Indonesia has an enormous potential to be a key player in the Islamic economic sectors, such as Islamic finance, halal business, as well as modest fashion and the creative industry.
Strategic Investiment Destination
Indonesia has been highly recognised as an ideal investment destination by several international organisations. The country was ranked first place as “Southeast Asia’s Top Investment Destination for United States’ Multinational Companies” by AmCham ASEAN Business Outlook Survey in 2015. Furthermore, in the same survey, Indonesia was among the best locations for potential new business expansion, alongside Myanmar and Vietnam.
Similarly, Indonesia was ranked 2nd for the “Most Promising Country for Business Development in December 2015” and “The Best Investment Destination in Asia for 2015” by Japan Bank for International Cooperation and The Economist respectively. In addition, Indonesia was ranked 14th globally in 2014 as a country with the highest Foreign Direct Investment (FDI) inflows by the UNCTAD, moving up five places compared to 2013. This prospect has also been highly acknowledged by the Asian Development Bank, which has allocated around US$1.6 billion of their portfolio in Indonesia with the possibility of expansion. Finally, three major credit ratings such as S&P, Moody’s and Fitch have also assigned a positive and stable outlook for Indonesia.
Large and Stable Economy
- 4th largest population in the world with 64% of population in the productive age (Median Age of 28.4)
- 2015 Dependency ratio: 49%
- 2015 GDP growth: 4.8% due to stable household consumption and robust investment growth
- Benign inflation in 2015: 3.35%
- Direct investment reached IDR 545.4tn for January – December 2015
- Rated as investment grade by Moody’s Fitch, Japan Credit Rating Agency and Rating & Investment
Consistent Budget Reform
- Budget reform as part of larger economic reform initiative
- Tax base to be broadened from one reduce dependency on commodities
- Fuel subsidies significantly reduced and spending redirected to more productive allocation – infrastructure, welfare, healthcare and education
- Prudent debt management by maintaining budget deficit at a safe level while diversifying sources of financing
New Economic Structure
- From commodity-based to industrialised-natural resources-based economy via infrastructure development
- From consumption-led to investment-led growth via a stronger manufacturing sector and more investment initiatives
- Policies to maintain purchasing power to stimulate domestic economy in the midst of weakening macroeconomic conditions
High Infrastructure Investment
- Three main sources of financing for IDR 5tn investment needs: State and regional budget, State-owned enterprises and PPP
- Continuing from 2015’s policy, infrastructure will be higher than fuel subsidy
- Infrastructure spending focused on basin infrastructure projects – arterial roads, railways, dams irrigation, small seaports and local airports
- Fiscal and non-fiscal incentives to attract infrastructure investment and promote PPP
Continuous Structural Reform
In view of Indonesia’s large amount of natural resources and a favourable demographic profile, the Government of Indonesia is committed to shifting from resource-based economy to manufacturing and value-adding sectors through policy reforms and infrastructure development. Starting from last year, the Government has significantly increased the budget allocation for infrastructure development at around 290.3 trillion Rupiahs or 15% of total spending. This allocation will continue to expand in 2016. This effort is aimed at reducing logistic cost among regions in Indonesia, as well as increasing efficiency, reducing operational budgets and providing higher profit margins for businesses.
Permit & Licensing Simplication
Income Tax Relief for Labor Intensive Industries
Incentives for Footwear and Apparel Industries
Simplification of Import Licensing for Drugs and Raw Food
Accelerating Infrastructure Development
Fuel Price and Electricity Adjustment
One Map Policy
Relaxation of Entry Visa Policies
Tax Incentives for REITS
Dwelling Time Optimization
Oil Refinery Development
Aviation Sector Incentives
Expansion of Coverage and Interest Subsidy for MSME
Special Economic Zones
Tax Incentives on Property
Boosting Housing Development
Integrated Logistics Zones
Predictable Labour Wages
Supported for Export-Oriented Industries
Village-City Logistics Improvement
Acceleration of Power Infrastructure
Relaxation of Foreign Investment List
In 2015, the Indonesian Government has also launched several stimuli to promote investment in the country, such as licence and permit simplification, tax incentives in the form of tax relief for labour-intensive industries, and enhancement of integrated logistic zones.
In conclusion, combining Government’s commitment and favourable economic factors, Indonesia is on a positive trajectory for greater growth and development.