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. It was severely affected by the Covid-19 pandemic and related mobility restrictions, suffering a -2.1% full-year contraction in 2020 (the lowest growth rate since 1998). 2021 saw a moderate recovery, with GDP growing by +3.7%. External trade performed well (especially commodities exports), though domestic demand (in particular household spending) was capped by renewed Covid-19 outbreaks and a comparatively low rate of vaccination in the country. Prospects for the private sector should improve in 2022, with confidence strengthening as sanitary restrictions are gradually eased. Private investment is likely to step up and make up for declining fiscal spending.

With regard to fiscal policy, the government launched the national economic recovery program (PEN), a package of measures (e.g. social welfare, tax relief and cuts, credit guarantees etc.) amounting to 7.0% of GDP over 2020 and 2021. As a consequence, the fiscal balance, at around 2% of GDP in the 2010s, rose to around 6.0% of GDP in 2020 and 2021. From 2022, the government’s focus is likely to be on fiscal consolidation.

In terms of monetary policy, Bank Indonesia (BI) cut its policy rate by 125bp in total in 2020 and by 25bp in 2021. It also eased liquidity access and macroprudential constraints for commercial banks and relaxed loan conditions. BI has also been allowed by presidential decree to buy government bonds in the primary market. Inflationary pressures have been limited but should rise in 2022, which, along with monetary tightening in the US and an anticipated depreciation of the rupiah, will lead to BI starting a tightening cycle in 2022 as well.

Indonesia does not rank very well in the 2020 World Bank Doing Business survey (73rd), though there have been encouraging improvements in the past years. The areas where the country ranks comparatively better are access to electricity, protection of minority investors and resolving insolvencies. It is still lagging behind in areas such as starting a business, enforcing contracts, trading across borders, dealing with construction permits and registering property. In addition, state-owned enterprises still enjoy preferential treatment, despite efforts made to enhance competition. The government has, however, shown its willingness to bolster competitiveness with the Omnibus law, aimed at loosening labor market regulations. This passed in October 2020 despite large-scale protests.

President Joko Widodo – often called Jokowi – has a good track record, despite a recent fall in popularity due to the handling of the pandemic. His party (PDI-P) benefits from important political support in parliament due to numerous alliances across the political spectrum. The vice-president, for instance, popular among Muslim circles, enables the government to retain support of this community. However, the necessity for compromise risks lowering the effectiveness of policymaking and adopting reforms – especially in the fight against corruption. The next elections, both presidential and parliamentary, are to take place in 2024.