In recent decades, Southeast Asia has emerged as one of the most dynamic regions in the world, featuring some of the fastest-growing economies. This group of countries includes Indonesia, the fourth most populous country in the world. During 2000-2023, the average growth rate for the South-Asian economy was 5%. This is a remarkable performance, sustained during a challenging period that included the highly volatile years of the Global Financial Crisis, the European Sovereign Debt Crisis, and the Covid-pandemic. Furthermore, this was achieved with notable stability, with only three years of growth below 4%.
Following decades of robust growth and stability, underlying structural challenges threaten to decelerate the pace of progress from Indonesia. Institutional reforms and further trade openness are needed to improve efficiency and attract more FDI, allowing the country to be set up for the next growth phase. But the environment is generally constructive.
The newly elected president, Prabowo Subianto, who just took office in October for a five-year term, is set to ensure economic continuity and a pro-business agenda. In our view, Indonesia is set to maintain its strong, stable growth of around 5% for the coming years. Three main factors sustain the positive outlook, despite headwinds, such as increasing US protectionism and volatile commodity prices.
First, demographics is a secular or long-term tailwind for Indonesia. The population continues to expand rapidly. Importantly, the composition of the population favours a faster economic expansion over the next decades. With a relatively young population, the numbers of workers is set to continue growing faster than the number of dependents, creating a demographic dividend, i.e., a condition in which the share of the working-age population (15 to 64) is larger than the non-working-age population.
This dividend started in 2013 and is set to continue producing tailwinds until the early 2040s. The demographic dividend is projected to boost real GDP growth by at least 1% per year over the next two decades. During this period, Indonesia is likely to add more than 100 million people to the consumer class. This is a massive expansion that is only short of Chinese and Indian figures.
Second, Indonesia’s fiscal rule will continue to provide certainty and remain a pillar of macroeconomic stability for the country. Since 1967, Indonesia has a had a fiscal rule setting a deficit ceiling of 3% of GDP, and since 2004 a debt ceiling of 60% of GDP.
In recent decades, the deficit was only allowed to exceed the ceiling via presidential decree during the Covid-pandemic in 2020 and 2021, after which it was quickly returned above the legal limit. Public debt has recently stabilised around 40% of GDP, lower than other ASEAN economies, and is expected to remain steady or below this level, on the back of 5% real GDP growth and the 3% ceiling for the deficit as a share of GDP. This fiscal discipline secures strong sovereign credit ratings well within "Investment grade” level by all major credit ratings agencies, and relatively narrow sovereign interest rate spreads. The new government is widely expected to maintain fiscal discipline, which will help maintain low borrowing costs and investor confidence. This means CAPEX for infrastructure could be maintained at more reasonable costs for both the government and the private sector, favouring investments and growth.
Third, Indonesia has a robust pipeline of major infrastructure and CAPEX projects that should support a pick up in investments. The collection of infrastructure endeavors, which amounts to hundreds of billions of USD, is expected continue as one of the main priorities of the new administration.
Major infrastructure projects are expected in sector such as transportation (roads, bridges, railways, airports, ports), logistics, mining, and the facilities needed for new manufacturing plants.
A key driver for additional infrastructure spending includes the plan to move the capital city from Jakarta to the island of Borneo. The move follow past steps of other regional peers such as Malaysia and Myanmar, and should both de-congest the currently overcrowded Jakarta and support a broader effort to integrate the archipelago. Costs are estimated at USD 33 Bn. Strong infrastructure investment is expected to be supportive of growth.
All in all, the outlook for Indonesia remains positive, underpinned by a continuation government with a pro-business agenda, favourable demographics, a sound fiscal framework, and a robust pipeline of infrastructure as well as CAPEX projects.
— By QNB Economics