27 March 2020 (closed)
USD/IDR (16,230) -98.00 -0.60%
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Jakarta Composite Index (4,545.57) +206.67 +4.76%
Between the years 1965 and 1997 the Indonesian economy grew at an average annual rate of almost seven percent. This achievement enabled Indonesia to graduate from the ranks of 'low income countries' into that of the 'lower middle income countries'. However, the Asian Financial Crisis that "erupted" in the late 1990s had a dramatic impact on the Indonesian economy, resulting in a decline in gross domestic product (GDP) of 13.6 percent in 1998 and limited GDP growth of 0.3 percent in 1999.
Summary & Focus of Analysis
Between the years 2000 and 2004 a period of economic recovery took place with a combined average GDP growth of 4.6 percent annually. Hereafter, Indonesia's GDP growth accelerated (with the exception of 2009 when, amid global financial turmoil & uncertainty and plenty of capital outflows, Indonesia's GDP growth fell to - a still admirable - 4.6 percent) and peaking at 6.5 percent in 2011. This period of recovery and impressive accelerating economic growth between 2000 and 2011 was particularly attributed to rising household consumption (amid rapidly strengthening per capita GDP and purchasing power) and the 2000s commodities boom.
However, the 2000s commodities boom was also a big missed opportunity as the Indonesian government failed to reduce the country's dependency on (exports of raw) commodities. Thus, when commodity prices collapsed after 2011 Indonesia's economic expansion started to slow rapidly. Between 2011 and 2015 a period of alarming economic slowdown emerged.
This section discusses the economic performance of Indonesia, Southeast Asia's largest economy, since the late 2000s and zooms in specifically on the economic slowdown that occurred in the 2011-2015 period as well as the slow process of acceleration economic growth that started from 2016. For an analysis of Indonesia's economic growth during the New Order government, or an analysis of the causes and consequences of the Asian Financial Crisis, please click on the aforementioned links.
Indonesia Gross Domestic Product (GDP) Statistics:
| Average Annual
GDP Growth (%)
|1998 – 1999||- 6.65|
|2000 – 2004||4.60|
|2005 – 2009||5.62|
|2010 – 2015||5.63|
|2016 – 2017||5.05|
(in billion USD)
(annual % change)
|GDP per Capita
(in billion USD)
(annual % change)
|GDP per Capita
The base year for computing the economic growth rate shifted from 2000 to 2010 in 2014, previous years have been recalculated
Source: World Bank
Visible in the table above is that the global economic downturn brought on by the global financial crisis in the late 2000s had a relatively small impact on the Indonesian economy as compared to the impact it had on other countries. In 2009 Indonesia's GDP growth dropped to +4.6 percent, which meant that the country was still one of the top GDP growth performers worldwide (and the third-highest among the G-20 group of major economies).
Despite sharply falling commodity prices, a falling benchmark Jakarta Composite Index, higher domestic and international bond yields, and a depreciating exchange rate, the economy of Indonesia was still able to grow decently in 2009. This success was mainly attributed to sustained robust domestic consumption within the country. Domestic consumption in Indonesia (in particular private consumption/household consumption) contributes around 55-58 percent to the country's total national economic growth and therefore formed a "cushion" for the Indonesian economy when the global situation turned sour.
In 2010 the World Bank wrote that, amid robust economic growth, each year around seven million Indonesians are added to the country's middle class. Although the inflow into the middle class has been curbed due to the country's economic slowdown that emerged between 2011-2015, Indonesia still contains a massive consumer force that drives the economy and triggers rising domestic and foreign investment after 2010 (obviously many investors are eager to invest in a country where there exists a 260 million population that is characterized by rising per capita GDP, hence forming a potentially huge market for a whole range of products and services).
Determining the exact number of middle class Indonesians is a matter of definition. In late-2017 the World Bank said around 52 million Indonesians fall in the middle class category. However, research firms such as the Boston Consulting Group (BCG) and McKinsey set a lower bar and thus their number of middle class Indonesians is higher. But all institutions seem to agree that Indonesia's middle class will roughly have doubled by 2030. This rising number of middle income earners is a huge potential for economic growth.
However, after peaking in 2011 Indonesia's GDP growth started to stall in the 2011-2015 period. There are several factors that explain this economic slowdown:
• Sluggish Global Economic Growth; China in Focus
After rebounding from the global great recession (2007-2009), the pace of worldwide economic growth slowed between 2010 and 2014. Particularly the rapidly moderating economy of China caused concern. The world's second-largest economy grew 6.7 percent (y/y) in 2016, a 26-year low. Declining economic expansion of China has an immediate impact on Indonesia as both countries are important trading partners (exports to China account for nearly one-tenth of total Indonesian exports). It is estimated that for each one percentage point decline in China's GDP growth, Indonesia's economic expansion is curbed by 0.5 percent. Although China's economy rebounded to 6.9 percent (y/y) in 2017, the country's economic growth pace is expected to ease in the years ahead as the Chinese economy is experiencing several structural changes.
• Falling Commodity Prices
The global economic slowdown in 2010-2014 (and in particular China's economic slowdown) resulted in commodity prices falling to multiple-year lows. Being a major commodity exporter (and lacking a well developed downstream industry), Indonesia's export performance is affected heavily in times of low commodity prices (for example coal and crude palm oil). Low commodity prices are not only caused by weaker global demand but also because of an oversupply. During the 2000s commodity boom and after the great recession in the late-2000s (when institutions such as the World Bank and International Monetary Fund released far too optimistic global growth projections) many firms entered the commodities sector - or those existing companies invested to expand production capacity - causing a supply glut hence putting more downward pressure on commodity prices in the first half of the 2010s.
In 2016 there finally occurred a rebound in commodity prices led by improving crude oil prices which had fallen below the USD $30 per barrel level at the start of 2016. Obviously, rebounding commodity prices have a positive impact on the global economy.
• Bank Indonesia's High Interest Rate Environment
A high interest rate environment curtails credit growth and thus curbs economic growth. Starting in mid-2013 Indonesia's central bank (Bank Indonesia) raised its key interest rate (BI rate) from the historic low of 5.75 percent gradually, yet aggressively, to 7.75 percent in late 2014. Bank Indonesia tightened its monetary policy in an effort to combat high inflation (which accelerated sharply after several fuel subsidy reforms), curb the country's wide current account deficit, and support the rupiah which had been plagued by heavy pressures amid monetary tightening in the USA. Massive capital outflows from emerging markets, including Indonesia, emerged in most of 2013 due to the looming winding down of the USD $85 billion per month bond-buying program (US quantitative easing). In 2015 capital outflows from emerging markets re-emerged as the world was preparing for higher US interest rates.
In December 2015 the Fed raised its benchmark interest rate for the first time in a decade (followed by another rate hike in December 2016). However, as Indonesian inflation and the current account deficit improved to manageable levels, while the rupiah had stabilized against the US dollar from late-2015, Bank Indonesia could finally loosen its monetary policy. Throughout 2016 Indonesia's central bank was able to cut its interest rate drastically from a high of 7.75 percent at the start of 2016 to 4.75 percent at the end of 2016 (this also includes the change from the BI rate to the seven-day reverse repo rate as the central bank's new benchmark tool), hence allowing more economic activity. However, as per early 2018 credit growth has remained bleak in Indonesia.
• Politics of Indonesia
The year 2014 was a 'political year' for Indonesia as the country organized legislative and presidential elections. These elections were basically a battle between PDI-P backed Joko Widodo (the reform-minded market favorite) and Gerindra-backed Prabowo Subianto (a controversial former army general as well as former son-in-law to Suharto). Although it was expected to become an easy victory for Widodo, it turned out to be a close race (and even required a verdict from the Constitutional Court to confirm the result of the presidential election). For about five months, the year 2014 was plagued by severe political uncertainties (due to these elections) and led to a slowdown in investment realization, hence curbing the country's economic expansion. Both men are expected face off in a new battle for the 2019 presidential election, a race that may become just as tight.
As Indonesia is a young democracy, contains a highly pluralistic society, and has a large amount of swing voters (due to low party identification) surprises are more than possible. Hence, elections in Indonesia always give rise to a high degree of uncertainty and if there is one thing that investors hate it is uncertainty.
Legal uncertainty or uncertainty about the government's (economic) policies is also a major bottleneck as it makes investors think twice before deciding to invest in Indonesia (see also our Risks section). For example, in line with the 2009 Mining Law, Indonesia implemented the ban on exports of mineral ore in January 2014. Although this ban was not implemented in full force immediately (some miners were allowed to resume mineral ore exports provided they complied with several requirements, including the establishment of domestic smelting facilities) and although the aim of this new policy is actually good (reducing the country's reliance on highly volatile raw commodity prices), it also led to a sliding export performance for Indonesia as well as major concerns about legal certainty (because by suddenly changing the rules, the government breached many contracts).
Another political issue that hampers Indonesia's economic expansion is slow government spending. Due to red tape (bureaucracy) and weak coordination between government institutions (both on the central and regional level), government spending is not optimal.
• Bleak Household Consumption
Meanwhile, Indonesia's household consumption growth has been sliding and stagnating in recent years (see table below). Considering household consumption accounts for between 55-58 percent of Indonesia's overall economic growth, stagnant household consumption growth puts brakes on the nation's macroeconomic growth. The exact reason behind this trend is somewhat of a mystery and continues to puzzle analysts and policymakers. But given third-party funds in Indonesia's banking sector has risen sharply over the same period, it could mean that purchasing power has actually not weakened but Indonesian consumers simply prefer to save their funds rather than spend it. Some argue it shows a structural transition: the younger generations (millennials) are more aware of the importance to save funds on bank accounts, while the older generations of Indonesians lack such awareness. And as time goes by the role of the younger generations is increasingly taking over the role of the older generations in the Indonesian economy, hence this change in spending is now being felt.
Indonesia's Household Consumption Growth 2013-2017:
(annual % change)
Source: Statistics Indonesia (BPS)
Indonesia's Quarterly GDP Growth 2009–2018 (annual % change):
||Quarter II||Quarter III||Quarter IV|
Source: Statistics Indonesia (BPS)
Forecast & Outlook Indonesia's Economic Growth
Forecasts for Indonesia's economic expansion are positive in the sense that most - if not all - relevant international and domestic institutions expect to see accelerating economic growth for Indonesia in the years ahead. However, these institutions have become much less positive about Indonesia's GDP growth than several years ago - namely in the early 2010's - when most of these institutions expected to see the nation's growth rapidly return to growth levels above 6 percent (y/y). Apparently, few saw a period of prolonged global uncertainty coming that would drag down growth across the world, including Indonesia.
Even as recent as 2017 international institutions such as the IMF and World Bank still greatly overestimated the pace of Indonesia's economic growth. Both institutions put their GDP growth forecast for Indonesia at 5.3 percent (y/y) in 2017, while actual growth that year came in at 5.07 percent (y/y).
Growth Projections for the Indonesian Economy (annual % change):
|International Monetary Fund (IMF)||5.3||5.3|
|Asian Development Bank (ADB)||5.1||5.3|
¹ revised down from 5.3% on 6 June 2018
While we see a healthy Indonesian economy with good growth prospects over the long term, we want to emphasize that without a sudden surge in commodity prices and/or a sudden surge in household consumption it will require multiple years for Indonesia to come back at +6 percent (y/y) growth levels. If growth cannot be lifted by commodity exports and household consumption, then growth needs to originate from structural breaks from the past: the country needs to develop an export-oriented manufacturing industry (which requires a conducive business and investment climate), see massive infrastructure development (causing the multiplier effect and reduce logistics costs), and significantly improve the quality of local human resources.
Obviously, these are matters that require many years or even decades before being fully completed (and the process should be encouraged by all governments that formed along the way). Hence, we expect the country's economic growth pace to accelerate modestly in the years ahead before accelerating more rapidly after 2020.
Poll Indonesia Investments:
The Joko Widodo administration (2014-?) made a good start by significantly cutting energy subsidies and allocating the available funds to infrastructure and social development. The Widodo administration also released a series of economic policy packages aimed at attracting investment as well as strengthening the climate for existing businesses and strengthening people's purchasing power. However, not all packages are a success (and some have actually added some more confusion in the country's tax system).
By 2030 Indonesia should be able to rank among the world's top five biggest economies (after China, USA, India, and Japan). A promising sign is that in 2017 Indonesia became the latest member of the world's exclusive trillion dollar club (which consists of countries that have a nominal GDP exceeding USD $1 trillion).
Indonesia's GDP per Capita and Unequal Income Distribution
Indonesia's GDP per capita has risen rapidly over the past decade (although it was curtailed by the economic slowdown between 2011-2015). However, one can question whether per capita GDP is an appropriate gauge for Indonesia as Indonesian society is characterized by a high degree of inequality with regard to income distribution. In other words, there exists a gap between statistics and reality as the wealth of the 43,000 richest Indonesians (who represent only 0.02 percent of the total Indonesian population) is equivalent to 25 percent of Indonesia's GDP. The 40 richest Indonesians account for 10.3 percent of GDP (which is the same amount as the combined wealth of the 60 million poorest Indonesians). These numbers indicate a huge concentration of wealth within the small elite. Moreover, this income distribution gap is estimated to widen in the foreseeable future.
Indonesian per capita GDP has been rising robustly in the 2000s and beyond. Initially, the World Bank had forecast Indonesia to hit the USD $3,000 mark around the year 2020 but the country managed to reach this level a decade earlier. Reaching the GDP per capita level of USD $3,000 is considered an important step because it should result in accelerated development in a number of sectors (such as retail, automotive, property) because of rising consumer demand, thus being a catalyst for economic growth.
Composition of Indonesia's GDP; Agriculture, Industry and Services
The table below shows a remarkable development in the composition of Indonesia's GDP. Indonesia changed from being an economy highly dependent on agriculture into a more balanced economy in which the share of manufacturing (a type of industry) exceeds that of agriculture. This also implies that Indonesia lessened its traditional dependency on primary exports. It should be noted, however, that all three main sectors underwent expansion throughout the indicated period.
Sources: World Bank and CIA World Factbook
Contrary to our earlier prediction, the industry sector of Indonesia is being outperformed by the services sector in terms of their contribution to GDP (see the table above). While the role of the industry sector expanded strongly between 1965 and 2010 on the back of a rapidly growing manufacturing sector, it was suddenly the services sector that rebounded supported by the rapid development of the country's digital economy and advances in information and communication technology.
A remarkable characteristic of Indonesia is that the western part of the country has a significant larger share with regard to its contribution to GDP growth. Java (especially the greater Jakarta area) and Sumatra, together, account for more than eighty percent of Indonesia's total GDP. Primary reason for this situation is that western Indonesia is located close to Singapore and Malaysia. Together these three parts have historically functioned as the center of economic activity in Southeast Asia. The eastern part of Indonesia, however, is positioned in a more-or-less economic vacuum and is much less densely populated.
Indonesia's GDP in Global Perspective
The table below puts Indonesia's per capita GDP and real GDP in global perspective by comparing it to two important economic powers: the United States (USA) and China as well as the world's average.
Real GDP Growth Comparison (%):
GDP per Capita Comparison (in USD):
While most nations around the globe would envy Indonesia's annual GDP growth rate, few would like to have Indonesia's GDP per capita figure as Indonesia is still ranked outside the top 100 countries in the global per capita GDP ranking. Through a number of government development plans, the Indonesian government intends to raise the nation's GDP per capita to around USD $14,250 - $15,500 by 2025 but whether this ambitious target will be realized is highly doubtful and - as is mentioned above - this indicator does not reflect the (equal) distribution of income or wealth among the Indonesian society. Hence, good and effective government policy is needed to provide more Indonesian children with education and adults with employment opportunities.
It is also interesting to analyze the extent to which certain features of Indonesian culture (in particular the dominant Javanese culture) limits GDP growth (as compared to the influence of, for example, Chinese culture toward China's GDP growth). For more information on this topic, please visit our Indonesian Business Culture section.
Updated on 7 May 2018