Indonesia, the largest economy in Southeast Asia with a population of more than 260 million people, has been enjoying incredible GDP growth after the Asian financial crisis in 1998. The country’s GDP per capita has steadily risen between 3.5% to 7%, making this the fastest growth among G20 countries. Today, Indonesia is the world’s fourth most populous nation and a member of the G20 with a GDP per capita of roughly $3,800.

Economic overview

Since 2000, Indonesia's economy has mostly been driven by domestic consumption and domestic investment, both of which contribute nearly 90% of total GDP. This is a unique proportion compared to other Asian nations such as Thailand, Singapore, China, and Malaysia where the figure ranges from 55% to 75%. Contrary with Indonesia, government spending and export of those countries have a much higher contribution towards their GDP.

Indonesia is also enjoying a demographic bonus with more than half of its population in the working age. Over the last 15 years, the workforce has increased by 30 million people and wages have doubled which triggered the economic boom. As a result, Indonesia is on track to be one of the world's top 10 GDP countries in the next few decades (currently ranked 16th).

However, for the last several years the economy has been slowing due to both external and internal factors. Lower commodity price and China's economic slowdown (part of global recession) believed to be the external factors. Internally, Indonesia also faces several challenges. Beside several issues such as low labour productivity and high labour cost, and political stabilization, one of the main drawbacks that Indonesia is currently facing is lack of infrastructure development.

Infrastructure Development

With 17,000 islands, Indonesia is the world's largest archipelago. Infrastructure has its challenges in this country. Although Jakarta nowadays looks like a modern city, the rest of the country is still underdeveloped due to decentralisation, especially in transportation infrastructure. In fact, a transportation infrastructure quality index showed that Indonesia is the lowest among the G20 countries. In the last 15 years, infrastructure development has lagged behind. Under President Joko Widodo's administration, infrastructure has been the top priority. The government has rolled out massive programs from power to sea and transport across the archipelago, in collaboration with private players.

It is estimated that approximately USD $350 billion is required for infrastructure development. However, there is a limitation in terms of the government’s capability to fund the spending. Around 30% of the required funding will come from private financing, while 50% from public and 20% from SEO. This is another challenge because even though the financing is secured, private funding has to overcome red tape and regulatory burdens as one of the main challenges of the infrastructure development.

The National Medium Term Development Plan (“RPJMN”) which runs from 2015 to 2020 focuses on infrastructure development and social programs. The central government infrastructure spending plan for 2015 to 2020 totalled IDR 2,216 trillion (USD $187.0bn7) over five years.

Infrastructure Policy

The President is targeting to raise Indonesia’s position in the World Bank’s Ease of Doing Business index to 40 (in 2016 was still 109). In the last few years, the government launched a number of major new initiatives to attract private investment and to create a conducive investment environment for private infrastructure financing, these include:

• 13 economic policy packages (“deregulation packages”) focusing on the deregulation of investment and tax incentives.
• The Investment Coordinating Board (BKPM) developed a one-stop integrated services centre and launched an online permit application system.
• A revised Negative Investment List (Daftar Negatif Investasi – DNI) was issued increasing the limit on foreign ownership in certain sectors.
• Public-Private-Partnership (“PPP”) directives: to stimulate PPP projects by expanding eligible sectors and offering a more favourable legal framework.
• Land Acquisition Law: land acquisition procedure to 583 days and allow for revocation of land rights in the public interest. This is crucial as many projects were previously held up by extended land acquisition disputes.
• Strategic Projects and Priority Projects: There are 248 projects that are identified by the Government which have strategic value to Indonesia’s economy. Thirty of these projects are identified as Priority Projects. The special committee named KPPIP is tasked to monitor and speed up the deliveries of those projects.
• Establishment of Lembaga Manajemen Aset Negara (“LMAN”): LMAN is an agency to manage and expedite the state’s assets acquisition, including land.

Infrastructure Challenges

There are several economy-wide critical success factors:

• Stable investment climate
• Leadership, a strong political will is a critical factor in driving forward bottlenecked projects.   
• Change in SOEs’ attitude toward partnering with the private sector, reducing to see PPPs as a last resort,
• Government coordination. There continues to be a lack of coordination between the central, provincial, and regional governments
• Land acquisition: Land acquisition has historically delayed many projects.

As the demographic bonus will taper off in 2030, Indonesia will face a new set of challenges to sustain its tremendous growth. The government needs to enhance its policies, attract foreign investors and ensure the inequality and infrastructure gap is minimised.

For more information about Indonesia's economy or infrastructural development, email Satriyo Adhi via the contact details listed below. 

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