As one of Southeast Asia's key economic powerhouses, Indonesia is poised for an era of sustained growth and stability, presenting a wealth of opportunities for investors and local businesses. While stock market performance in recent years has been subdued, this presents an opportune time for discerning investors to identify undervalued assets with strong long-term potential.
Indonesia's consistent economic expansion, coupled with a rapidly growing middle class, offers a compelling proposition for long-term investments. The government's dedication to economic reform — simplifying bureaucracy, streamlining business operations, and modernizing taxation and labor regulations — has fostered an environment that inspires confidence.
Additionally, Indonesia's strategic geographic positioning, abundant natural resources, and active participation in global trade agreements further enhance its appeal. The nation's pivotal role in the global supply chain, particularly within the context of the "China+1" strategy, underscores its significance. With rich mineral reserves, cost-competitive manufacturing capabilities, and a skilled workforce, Indonesia emerges as an ideal alternative for companies seeking to diversify their manufacturing bases and enhance their supply chain resilience.
While innovative companies such as GoTo, Grab, and certain fintech firms have experienced stock market challenges recently, it is important to realize that these are early-stage ventures operating in a dynamic and rapidly evolving landscape. The long-term potential of these companies remains significant, driven by their innovative business models, strong market presence, and ability to tap into Indonesia's growing digital economy.
However, while the stable economic environment provides fertile ground for local businesses to flourish, Indonesia cannot afford to become complacent.
Three key challenges for Indonesia's continued economic growth
1. Expanding industrial diversification for sustainable growth
The emphasis on commodities, particularly food and beverages, is limiting growth and diversity in Indonesia’s manufacturing sector. Given the volatility of commodity prices, over-reliance on this sector could lead to vulnerabilities during economic downturns. A concerted focus on industrial diversification, particularly in manufacturing, agriculture, and mining, is needed to unlock new pathways for growth and innovation.
2. Geography and mobility complicate economic growth for all Indonesians
Indonesia’s geographic complexity exacerbates the discrepancies in economic opportunities for Indonesians living in different parts of the archipelago. Ongoing infrastructure development — encompassing roads, ports, airports, and digital connectivity — will enhance accessibility, reduce logistical costs, and open new markets, empowering businesses to scale with greater efficiency.
3. Income and labor inequalities pose a risk to Indonesia's growth ambitions
Prioritizing initiatives in social welfare, such as strategic investments in education and healthcare, are needed to cultivate a more skilled and productive workforce. Additionally, social programs that boost domestic consumption will stimulate demand for goods and services, providing a thriving marketplace for local businesses.
To maintain its promising trajectory, Indonesia must tackle these hurdles head-on, maintain regulatory consistency, and take a stronger stance on its prominent positioning within Association of Southeast Asian Nations (ASEAN) economies by playing an active and strategic role in the region.
Indonesia's final push for growth in its 20-year development plan
Indonesia is in its final five-year phase of a 20-year development plan (RPJPN 2005 to 2025), which has seen the country significantly reduce poverty and build the economy to upper-middle group status. This final phase aims to increase Indonesia’s self-reliance and economic prosperity by improving its human capital and competitiveness in the global market.
As part of this, Indonesia’s new government seeks to foster a robust economy that benefits domestic and international stakeholders. Among the initiatives that have been announced to boost the economy are infrastructure development with continued investment in roads, ports, airports, energy, and digital infrastructure; comprehensive tax reforms, such as lower corporate tax rates and simplified administration; industrial diversification, particularly in manufacturing, agriculture, and mining; and investment in social welfare, such as healthcare, education, and direct cash transfers to low-income households.
Indonesia's major infrastructure investments fuel growth
The Indonesian government is investing heavily in infrastructure projects that will transform the country's landscape and create new business opportunities. The Trans-Sumatra toll road is one example of a key investment that promises to improve connectivity across Sumatra, opening new markets and reducing transportation costs. Likewise, the expansion of the mass rapid transit and light rail transit systems in Jakarta will ease congestion and improve transportation efficiency, while new and upgraded ports will enhance Indonesia's logistics capabilities and facilitate international trade. Significant international investments have also been made in mining, refining, and manufacturing, with major players like CATL, Panasonic, LG Chem, Volkswagen, and Tesla showing keen interest. The Palapa Ring project, meanwhile, will expand fiber optic networks, improving internet connectivity across the archipelago.
At the same time, Indonesia is committed to reducing its carbon emissions with its most recent enhanced Nationally Determined Contribution (2022) targets pledging to reduce greenhouse gas to 31.89% (unconditional) and 43.2% (conditional) as compared with a previous NDC of 29% and 41%. To balance its sustainability objectives with continued economic growth, the country has rolled out various decarbonization technologies, including renewables and biofuels. Indonesia is also emerging as a critical player in the global electric vehicle (EV) industry and is actively exploring opportunities to develop a carbon capture utilization and storage (CCUS) ecosystem into a solution for domestic and international industrial emitters.
Other developments include establishing a new capital city (Nusantara) in Kalimantan, which promises to drive economic growth and create a modern, sustainable urban center. Renewable energy projects will contribute to a cleaner environment and generate opportunities in the green energy sector, and transit-oriented developments will integrate urban centers that promote sustainable living and economic activity.
The expansion of liquefied natural gas infrastructure will ensure a reliable energy supply for industries and households, and investments in clean water and flood control will improve public health and protect communities from natural disasters.
Indonesia’s competitive edge amidst changing global economy
Indonesia is well positioned to benefit from changes in the global economy, with the rebalancing of global supply chains being the most immediate opportunity. Multinationals and Asian companies have responded to geopolitical tensions and pandemic-era disruptions by diversifying their manufacturing locations and supplier networks as they adopt “China+1” strategies. China’s share of global consumer exports, meanwhile, has fallen by between 4 to 6 percentage points, depending on the product, since 2019.
Indonesia’s large and relatively low-cost labor pool makes it a natural alternative. In our conversations with global sourcing executives, the country is cited as an increasingly attractive option as multinationals seek to diversify their sourcing footprint. Its political stability relative to other peers, such as Bangladesh or Sri Lanka, is also a positive. The country’s agricultural and mining exports have grown steadily in recent years. But, as importantly, so have manufactured exports, with shipments of clothing and footwear rising 22% and 67% over the past three years.
However, Indonesia faces a highly competitive environment. Vietnam has captured the large share of production relocations as part of China+1 strategies, as much as 6 percentage points of global market share in some categories. Malaysia is attracting investment from semi-conductor players. Thailand is capturing printed circuit board relocations. India is also a fast-emerging competitor. Indonesia’s policymakers will need to demonstrate long-term strategic vision — from building infrastructure to supplying clean energy — to attract foreign players over other regional competitors.
Negotiating a wider set of foreign trade agreements (FTAs) will help in bolstering the country’s competitiveness. Indonesia has already signed agreements with ASEAN, which it chaired in 2023, China, South Korea, Japan, India, and Australia. These agreements provide preferential access to a vast market of more than 2 billion people. However, more work needs to be done with other major markets. The country is negotiating an agreement with the European Union but has yet to progress on a broad agreement with the United States.
Foreign investors are rediscovering Indonesia’s opportunities
There is meanwhile growing excitement among multinationals over Indonesia’s domestic opportunities. The country’s GDP growth rates have overtaken those of China for the first time in decades, and the growth gap, which was 5 percentage points in the 2000s, has shifted marginally in Indonesia’s favor. But Indonesia will again face competition from other countries, especially India. But putting the right domestic policies in place, which match or better those of its peers while playing to the country’s unique strengths, will pay dividends.
Encouragingly, foreign direct investment appears to be strengthening, after several years of slower growth. In the first quarter of 2024, Indonesia achieved a notable investment realization of IDR 401.5 trillion (approximately US$ 24.7 billion) according to Bank Indonesia — an increase of 22.1% over the previous quarter. Key sectors such as manufacturing, mining, telecommunications, and transportation continue to lead as the highest contributors to this figure, with the food and beverage industry also emerging as a significant earner.
Chinese companies are also a growing source of investment. China's foreign investment flows were already pivoting back to ASEAN countrie prior to the Covid-19 pandemic — when Chinese corporates recognized the opportunities of connecting to the region's supply chains and large markets. Indonesia is already in a strong position. The latest data shows it as the top-ranked Asian destination for Chinese FDI, excluding the region’s major financial hubs of Hong Kong and Singapore, with inflows averaging $3.4 billion between 2021 and 2023.
Indonesia’s ability to navigate a complex global environment and maintain its middle-power neutrality, and so avoid any worsening of geopolitical tensions, will maximize foreign investment inflows. So far, the country has attracted investment from a range of economic powers, including China, Japan, Europe, and the United States. It is an enviable mix that ensures Indonesia is receiving varied capital and technology inflows that support local market development, as well as the continued evolution and innovation of the corporate sector.
Indonesia's new era brings significant growth potential
Indonesia's new era presents a unique opportunity for businesses and investors. With a stable government, robust economic policies, a growing digital economy, and significant investments in infrastructure, the country is poised for sustained growth and development.