Indonesia’s economy is currently the 16th largest economy in the world with a nominal gross domestic product (GDP) of $1.19 trillion in 2021. It is the largest economy in Southeast Asia and is considered one of the emerging market economies globally.
Indonesia is a lower-middle-income nation and is classified as a newly industrialized country. It is a member of the Group of Twenty (G20) intergovernmental forum that works together to address issues surrounding the global economy.
The Indonesian economy mostly depends on its domestic market and government budget spending, along with its state-owned enterprises.
Since its independence in 1945, the country’s economic growth has faced numerous disruptions due to political instability, high levels of regulation, and dependence on oil prices. In the 1990s, corruption in the government was at its highest, leading to further economic distortions.
However, following the 1997 Asian financial crisis, the government took control of private-sector assets which were later sold for privatization. Since 1999, Indonesia’s economy has been growing between 4% to 6%.
In 2012, it outperformed India to become the second-fastest-growing economy in the G20, only behind China. However, due to the coronavirus pandemic, the country recorded its first recession in 2020 after more than two decades of consistent growth. The economy contracted by 2.07% that year.
Indonesia economy: GDP Annual Growth Rate (in%)
In 2021 the GDP grew by 3.69%, led by ease of containment measures, strong government support and as stronger commodity prices that pushed exports to record highs.
In January 2022, the International Monetary Fund (IMF) has revised its GDP growth estamates fro Indonesia to 5.6% for this year from 5.9% earlier and also downgraded its 2023 prediction to 6.0% from 6.4%.
The IMF cited pandemic uncertainty, expected global monetary tightening, and the country’s own scaling back of monetary and fiscal stimulus as reasons for the downward revision.
Currency and Central Bank
Indonesia’s official currency is the rupiah, whose name comes from the Sanskrit word rupyakam, meaning silver. It is divided into 100 sen, but due to high inflation, all coins and banknotes in sen have been rendered obsolete.
Bank Indonesia serves as the country’s central bank and is currently headed by its governor, Perry Warjiyo. The bank was founded in 1953 after the private Dutch bank, De Javasche Bank or Bank of Java, was nationalized three years post following the country’s independence from the Netherlands.
Indonesia Inflation (in %)
While the central bank focused on macroeconomic and financial stability last year, it has recently adopted a hawkish tone, and plans to begin unwinding easy monetary policy in March, with hikes in its reserve requirement ratio.
Its other policy measures include strengthening prime lending rate (PLR) transparency, boosting Quick Response Code Indonesia Standard (QRIS) uptake, and continuing to socialize the use of local currency settlement (LCS) alongside other relevant institutions.
Meanwhile, inflation in Indonesia remained under the government’s target of 2-4%. In January 2022, Indonesia’s annual inflation rate has risen by 2.18%, the highest since May 2020.
Industry and Trade
The country has a young population of 278 million with a workforce of 131.05 million people as of 2021. Over the years, Indonesia has transformed from being an agricultural economy into a more balanced one, detaching from its previous dependency on primary exports.
Indonesia’s agricultural sector comprises 13% of the country’s GDP while providing employment to 27% of the labor force. It is the second-largest producer of natural rubber globally. Other major agricultural products include rice, sugarcane, coffee, tea, tobacco, palm oil, coconuts, and spices.
Meanwhile, the industrial sector contributes to about 38.2% of the GDP and employs 22.6% of the workforce. Products manufactured in Indonesia include textiles, cement, chemical fertilizers, electronic products, rubber tyres, clothing, and shoes.
Indonesia’s service sector has grown to be the biggest contributor to the country’s GDP at 44.4% and employs 49.6% of the workforce. Banking and tourism are two of the largest service sectors in the country.
Indonesia Balance of Trade
The country ranks 30th in total exports globally. Its main export products are coal briquettes, palm oil, petroleum gas, automobiles, and gold. Indonesia holds the world’s largest nickel reserves and is also a major producer of several other key metals like bauxites, tin and nickel ore. It is also the world’s biggest producer and exporter of palm oil and ranks as the world’s seventh largest LNG exporter.
Meanwhile, the nation is also ranked 30th in total imports, with refined petroleum, crude petroleum, vehicle parts, telephones, and petroleum gas as Indonesia’s main import products. The country’s main import partners are China, Singapore, Japan, Thailand, and the US.
Survey and Rankings
In the World Bank’s Ease of Doing Business 2020 rankings, Indonesia’s economy maintained last year’s position at 73rd among 190 countries with a score of 69.6. The World Economic Forum’s Global Competitiveness Index (GCI) rankings have been paused for 2020, but in 2019, the country fell by places to the 50th spot with a score of 64.6.
Additionally, the country also went down by two places in the Heritage Foundation’s 2021 Index of Economic Freedom from the 54th to 56th in the world and is currently 10th among Asia-Pacific countries. The country also remained in the “moderately free” category.
Stock Exchanges and Capital Markets
The Indonesia Stock Exchange was formed when the Jakarta Stock Exchange and the Surabaya Stock Exchange merged in 2007 and has 750 listed companies, with around 6.4 million total stock investors, as of September 2021.
The Jakarta Composite Index (JCI) and the Jakarta Islamic Index (JII) are the two primary stock market indices used to measure the performance of the Indonesia Stock Exchange. As of November 2021, the Indonesia Stock Exchange is ranked 1st in Southeast Asia and 21st globally (by market value).
The bond market in Indonesia has experienced steady growth over the past few years. Currently, it offers a diverse selection of debt instruments that cater to both local and foreign investors. Bonds may come in the form of the Bank Indonesia-issued Certificate of Central Bank or Sertifikat Bank Indonesia (SBI), government bonds or government debt securities, and corporate bonds.
As of March 2021, Indonesia’s domestic currency bond market has grown by 36% from the previous year to $330.4 bn. About 89% of these are government bonds while corporate bonds comprise 9% of the total. The remaining percentage is made up of central bank issuances.
According to Asian Development Bank (ADB), the total outstanding amount of local currency bonds and sukuk (Islamic bond) by the end of June 2021 was nearly exactly double the amount at the end of June 2016. While the bond market continues to be dominated by sovereign issuances, outstanding corporate bonds and sukuk have increased by more than 50% in the past 4.5 years.
Real Estate Market
Despite the pandemic, real estate prices in Indonesia have remained relatively steady. However, property prices are on a downtrend, with up 1.77% in 2019 compared to 2.95% in 2018 and 3.5% in 2017. In 2020, property prices fell by 0.2% (adjusted for inflation).
In Jakarta, the typical cost of buying an apartment is $311,400, or about $2,595 per square meter. Meanwhile, the average monthly rent in the capital is $1,840. This gives apartment owners a yield of approximately 7.09%.
Indonesia Housing Index (in %)
The Indonesian real estate market is expected to register a CAGR of 17.63% during 2018-2027. Researcher Morder Intelligence attributes this to the country’s favourable demographic composition, increasing urbanization, rising per capita income, and a significant young population emerging as first-time homebuyers in the next few years.
Source of graphics: tradingeconomics.com