Indonesia

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%.

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.