Southeast Asia's Economic Powerhouse: Indonesia's Growth Prospects
Over the past few decades, Southeast Asia has emerged as one of the most dynamic regions in the world, with several countries showcasing exceptional growth trajectories. Indonesia, the fourth most populous country in the world with 286 million inhabitants, is one of them, ranking just behind three established engines of global economic growth: China, India, and the United States. Between 2000 and 2024, Indonesia's economy has grown at an average rate of 5%. This remarkable performance has been maintained despite a challenging period marked by the global financial crisis and the COVID-19 pandemic. Moreover, this growth has been achieved with notable stability, with only three years of growth below 4%.
Crossing the 8% Growth Threshold
President Prabowo Subianto, whose five-year term began in October 2024, aims to push economic growth to 8%, a level Indonesia has not seen in nearly three decades. However, the country faces a set of challenges that will test its ability to achieve these ambitious goals. Rising geopolitical tensions and escalating trade wars between major economies threaten to disrupt global trade and capital flows, creating uncertainty for Indonesia's export sectors. Furthermore, the decline in commodity prices and still-tight financial conditions in advanced economies pose a risk to investments in emerging economies and could continue to add volatility to currencies, including the Indonesian rupiah.
Key Factors Driving Indonesia's Economic Growth
In this article, we examine the key factors that will determine Indonesia's economic growth prospects this year.
Consumption: A Key Driver of Growth
Consumption will remain a crucial driver of economic activity, accounting for 55% of Indonesia's economy and thus a major factor in its performance. The resilience of consumption is supported by a robust labor market, which has shown a remarkable recovery since the COVID-19 pandemic. The unemployment rate has dropped from a peak of 7.1% in 2020 to 4.9% in 2024, the lowest level since 1998. To further stimulate consumption, the administration of President Prabowo proposes a series of measures, including a higher-than-expected minimum wage increase (+6.5%) and a reduction in the planned value-added tax hike for this year. Other stimulus measures include electricity subsidies, income tax reductions for workers, and a flagship program of free meals for children, covering 83 million beneficiaries and potentially reaching an annual expenditure of $28 billion. These initiatives, combined with a resilient labor market, will solidly support consumption this year.
Infrastructure and Capital Expenditures: A Robust Pipeline
Indonesia has a robust pipeline of infrastructure projects and capital expenditures that will reinforce economic growth. These initiatives, representing hundreds of billions of dollars, are a priority for the new government. Major projects are planned in the transportation (roads, bridges, railways, airports, ports), logistics, mining, and manufacturing sectors. A flagship project is the relocation of the capital from Jakarta to the island of Borneo, requiring investments of $33 billion.
Investment and Credit Growth
Measures will also be put in place to stimulate investment, in a context where credit is already growing at a rate of nearly 10% per year. The Bank of Indonesia will increase liquidity incentives of IDR 80 trillion (approximately $5 billion) for banks financing the housing sector, as part of a program aiming to build 3 million houses per year. Public investment and foreign direct investment (FDI) flows are expected to maintain a level of investment above 30% of GDP, contributing to robust economic growth.
Exports: A Key Contributor to Growth
Finally, exports will continue to support economic expansion, with the country relatively shielded from the direct impact of trade wars. In 2024, exports grew by 6.5% year-on-year, contributing 1.5 percentage points to real GDP growth, and are expected to maintain a solid performance this year. Indonesia is a crucial supplier of metals such as nickel and copper, essential for the global energy transition, and will benefit from growing demand for these products.
In a context of increased trade tensions between the United States and China, Indonesia could benefit from easier access to American markets for its competitive products, such as textiles, garments, and electronic equipment. In the medium term, these tensions will encourage the relocation of industrial activities to Southeast Asia, stimulating Indonesia's economy.
Conclusion
We forecast that Indonesia's economy will grow slightly above consensus, at 5.3% this year, driven by strong consumption, an ambitious infrastructure program, and a favorable trade environment.
