Updated: Jun 8, 2021
The year 2020 was an unprecedented experience for all of us. The succession of COVID-19 outbreaks across the planet created a mass migration to a so-called ‘New Normal’ mode, whereby governments and businesses alike were forced to adopt new and previously-untested policies and procedures.
Despite the Indonesian government being caught off-guard in the first half of 2020, however, Indonesia is carving out a clear pathway to sustained economic resilience.
Investor sentiment towards Indonesia remains positive - due to the potential for strong economic recovery, coupled with an upbeat outlook for long-term growth.
In keeping with other countries, a full recovery will largely depend on the successful implementation of nationwide containment and vaccination programs. The Indonesian Ministry of Health is targeting the vaccination of 70% of the population to be completed by March 2022.
BI (Bank Indonesia) has responded proactively to slow the downturn.
For the short to medium term, monetary policy has adopted the dual roles of stimulating demand and stabilizing credit markets. Through interest rate cuts and liquidity measures, BI has endeavored to reverse the sharp decline in economic activity during the first half of 2020.
Fortuitously, with Indonesia’s economy being dominated by domestic consumption, the country is largely resistant to the impact of global downturns.
BI has cut rates and lowered reserve requirements for commercial banks in order to support credit growth. It has also adopted innovative measures by introducing a burden-sharing scheme worth USD 40 Bn. between BI and the government to support financing during the pandemic. This includes:
1. Purchase of government bonds to finance priority spending on public goods and services
2. Interest rate subsidy schemes for SMEs and large businesses.
Government spending is the instrument of choice to kick-start economic recovery in 2021. The prevailing low BI interest rate and the abundant liquidity reserves in the banking system will enable growth to be sustained.
Positive long-term growth outlook
Aside from the near term rebound from the pandemic, Indonesia has put in place the platform for long-term growth. In October 2020, DPR (Indonesian House of Representatives) approved the Omnibus Law on Job Creation. This is widely seen as the most comprehensive “Big-Bang” structural reform ever launched in Indonesia.
The Omnibus Law is designed to stimulate domestic and foreign investment by removing bureaucratic inefficiencies and providing much-needed regulatory transparency. It will also lower the reliance on commodity-based trade and stimulate growth in the added-value manufacturing sector.
RCEP membership to further facilitate growth
Indonesia also entered the RCEP Agreement (Regional Comprehensive Economic Partnership). This multi-national free trade agreement will embed Indonesia firmly into the global supply chain.
It will complement the Omnibus Law in advancing widespread structural reform in Indonesia. This is particularly critical given the disruption in global trade caused by the pandemic.
RCEP aims to streamline trade between the member nations through the harmonization of trading standards and tariffs, the implementation of enhanced legal protection frameworks and the adoption of non-discriminatory operating practices.
The foundations for growth in Indonesia have been firmly laid through prudent fiscal and monetary discipline. The remaining challenges for Indonesia are to overcome the COVID-19 crisis, to enact the Omnibus Law and to ensure that RCEP facilitates the global trading ecosystem going forward.
Indonesia is becoming a ‘magnet’ for investors
Notwithstanding these near-term considerations, Indonesia remains poised to become the 4th largest economy in the world by 2030.
As such, we are collaborating with investor groups from SE Asia, W. Europe and N. America - all of whom are looking closely at emerging value creation opportunities in Indonesia.
Investment expenditure accounts for around 30 percent of total GDP in Indonesia - the second-largest contributor after consumer spending - and the realization of foreign direct investment is forecast to increase by 10 percent in 2021. Want to know more about working with us in Indonesia?
Please feel free to contact our Jakarta office directly.
In the meantime, please do not hesitate to download our comprehensive view of the Indonesian economy.