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Indonesia’s economy is currently the 16th largest economy in the world with a nominal gross domestic product (GDP) of $1.19 tn 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.
In 2012, Indonesia outperformed India to become the second-fastest-growing economy in the G20, only behind China.
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 October 2022, the International Monetary Fund (IMF) revised its GDP growth estimates for Indonesia to 5.3% for the year from 5.6% earlier and also downgraded its 2023 prediction to 5.0% from 6.0%.
The IMF cited pandemic uncertainty, central bank rate hikes, global inflation and slowing external demand.
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 (BI) 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 in 2021, it has adopted a hawkish tone in 2022.
To combat inflation, BI has raised interest rates by 175 basis points, and was rewarded with an easing inflation in November. Headline annual inflation rate stood at 5.42%, compared with 5.71% in October.
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 29th 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.
China, the US, Japan, Singapore, and India are Indonesia’s leading export partners.
Meanwhile, the Indonesian economy 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.
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 777 listed companies, with more than 6.4 million total stock investors, as of January 2022.
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 July 2022, the Indonesia Stock Exchange is ranked 12th in Asia-Pacific by market cap.
Bond Market
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.
Indonesia Bonds have fared better than most emerging market bonds in 2022. A report by Bloomberg showed that global funds picked up $1.5 bn worth of Indonesia bonds in November, the most in three years.
The current yield on Indonesia 10-year government bonds is hovering around 6.9%, whereas Bank Indonesia’s key interest rate stands at 5.25%.
Real Estate Market
After real estate prices in Indonesia have remained relatively steady in 2020 and 2021, prices started to fall in 2022. Real residential prices in the country’s 14 largest cities fall by 2% in Q2 year-on-year, following y-o-y declines of 0.51% in Q1. However, according to Bank Indonesia, residential property sales rose by 15.2% in the second quarter of 2022 compared to the same period last year, while the last four quarters saw stead declines between 10% to 15.2%.
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.
Affordable housing projects in Indonesia, which are supported by the government, foreign investors, and organisations such as the World Bank, are expected to boost the real estate market going forward. In 2015, the Indonesian government launched the ‘One Million Houses’ (OMH) programme, which aims to build at least one million houses per year. In 2022, this goal was reached in November with 1.05 million housing units.
Source of graphics: tradingeconomics.com
