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Macroeconomic analysis: Indonesia


We have analysed the Indonesian economy on various factors, namely: 1. GDP, Consumption, and Savings. 2. Financial Intermediation. 3. Labour Market. 4. Trade. 5. Currency stability. 6. Long-term growth perspectives. 7. Fiscal policies. We have presented the facts and made a section-wise analysis. Finally, we have given a qualitative weight to each of the section and presented an overall score regarding the attractiveness of Indonesia as an investment destination.


· Indonesia is the world’s fourth most populous nation and 10th largest economy in terms of purchasing power parity. It is the largest economy in Southeast Asia and has charted impressive economic growth since overcoming the Asian financial crisis of the late 1990s.

· The current medium-term development plan is the last phase of the 20-year plan. It aims to further strengthen Indonesia’s economy by improving the country’s human capital and competitiveness in the global market.

· With its economy impacted by the pandemic, Indonesia went from upper-middle income to lower-middle income status as of July 2021.

· Indonesia has predominantly been an agricultural economy, but since the advent of the New Order, policy focus has shifted to the manufacturing, industrial, and services sectors. [1]

· The rate of urbanization has improved over the last three decades in Indonesia. The rural population declined from 50.1% of the total population in 2010 to 44.3% in 2020.[2]

· Indonesia has been a net exporter country with a rise in exports by 40.5% and imports by 39.0% during 2021. The largest category of exports were mineral products (17.1% share) and the major import categories were machinery and electronic equipment (29.2%). The majority of all the exports (27.3%) and imports (39.2%) were conducted with one country – China. The highest gross value was added in the following sectors - Mining and Quarrying, Manufacturing; Electricity, Gas and Water supply

The 1997 Southeast Asian financial crisis saw the government take charge of a major portion of the private sector, acquiring non-performing bank loans and corporate assets, later sold for privatization.

[1] Fitch Report Indonesia [2] Marketline Macroeconomic Outlook Report: Indonesia

Figure 1: GDP growth vs household consumption

Figure 2 Various macroeconomic datapoints for Indonesia

To analyse the political, technological, and socio-economic conditions of the country, we used the PESTLE framework:

Table 1: PESTEL framework for Indonesia

We have analysed the GDP of Indonesia using the expenditure approach which adds up all the components of spending of the Indonesian government.

Expenditure approach:

Private Consumption- Private consumption accounted for 54.4% of nominal GDP in Indonesia in 2021.

Table 2 :Private consumption

Government Consumption- Government consumption accounted for 9.1% of nominal GDP in Indonesia in 2021. Employee compensation, usage of goods and services, consumption of fixed capital were the economic areas of maximum expenditure by the government.

Table 3: Government consumption

Fixed Investment- The current Indonesian government has prioritised infrastructure improvement to boost long term growth. The investment cost accounted for 30.8% of the nominal GDP in 2021.

Table 4: Fixed Investment

Net Exports- Indonesia’s net exports contributed 2.74% to nominal GDP in 2021. During the pandemic the external demand surged, while the imports remained low. The country’s imports will rise as it resumes its infrastructure growth path. Mineral fuels, mineral oils, products of their distillation, bituminous substances and mineral waxes accounted for 15.7% of Indonesia’s exports in 2020.

Table 5: Net exports

Impact of Covid on Indonesian GDP

The Indonesian economy contracted by 2.1% in 2020, compared to 5.0% growth in 2019. With country-wide lockdown measures, the imposition of domestic and international travel bans, and businesses slowing and closing, the country’s overall employment was greatly affected. The consumption expenditure plummeted, contracting by 1.9% in 2020. The pandemic hit women particularly hard and deepened pre-existing gender inequalities. Women experienced significant job losses, as many of them were employed in hard-hit industries, such as textile and clothing, retail, and hospitality. As a result, male average disposable income is nearly double that of females in the country.[1]

Economic Measures to Recover from the Pandemic

· The government announced a stimulus package of ~75 IDR Tn (4.55% of GDP) to prevent the Indonesian economy from shrinking. The stimulus aims to strengthen the overall healthcare system, direct more spending towards social protection to boost consumption, provide tax incentives to corporates, and save enterprises from going bankrupt and workers from being laid off.

· The Central Bank of Indonesia cut interest rates for the fourth time in 2020, as the economy struggled to contain the pandemic. On July 16, 2020, the policymakers reduced the key lending rate by 25 basis points to 4.0%, after the government warned of a recession. The repo rate was further reduced to 3.5% by September 2021.

· According to the IMF, as part of a national economic recovery program (PEN), the Indonesian government introduced permanent reductions of the corporate income tax rate from 25% to 22% in 2020−2021. To support credit creation, the Indonesian government placed state funds in selected commercial banks to enable banks to increase leverage and guaranteed working capital loans for labour-intensive corporations. [2]

Consumption, Saving and Investment

In the early 2000s, Indonesia was underbanked despite the financial markets recovering after the Asian Financial Crisis. The government pursued various strategies and initiatives to improve access to formal financial institutions for poor households and SMEs that included: deregulation, education, no-frills bank accounts, financial identity programmes, and government-backed small business loan programmes. The Indonesian government also incentivised the commercial banks to establish more branches and install more ATMs.

[1] Supra Note 2; Analysis Passport [2] Supra Note 2;

Figure 3: Expansion of Banking in Indonesia

More accounts meant that more money would be saved theoretically. This is because the default stance of the people would be to save in their bank account. Because of these policies, the saving rates have increased despite decreasing interest and decreasing inflation because of governmental stability. The low repo rates have facilitated tremendous growth with the controlled inflation. But because of the rising threat of inflation from -0.2% to +6%, we can expect the repo rate rising in thefuture.

Figure 4: Inflation(Annual in %)

Figure 5: Gross Savings

  • Although overall savings cannot be attributed only to financial institutions because of under-utilization of banks, the savings are attributed to informal ways of savings, for example saving clubs. The saving rates are 21% in banks and 30% in the informal sectors[1] (33% cumulative)[2]. The main concern is that the rate of savings as a percentage of GDP has remained stable since 2009, but the repo rate is decreasing. This seems to have been facilitated by the low rate of inflation but with inflation rising, gross saving have to increase as a percentage of GDP for the repo rate to be constant. We also see the gross savings decreasing during Covid-19 pandemic because of lost jobs (which was countered by lowering of repo rate and stimulating the economy with loose monetary and fiscal policy, and reaction to the pandemic.

  • With the decreasing interest rate over the years, user cost of capital (“uc”) decreases. Marginal product of capital (“MPk”) does not shift, keeping everything else constant.

[1] [2]

Figure 6: MPC and uc impact[1]

  • Therefore, we see that the new equilibrium would be at a higher capital. Therefore, capital required to reach the equilibrium has risen in Indonesia. This means that keeping everything else constant (labour and technology), we would have increasing MPk for higher amount of capital than in previous years when the interest rates were higher.

  • The corporate tax rate was steady at 25% till 2021. In 2021, the corporate tax rate changed to 22%. According to the Ricardian Equivalence[1], given that the government consumption changed minimally, we can expect the corporate tax rate to increase in the long term and normalize to around 25%.

[1] G1= (T2-G2)/(1+r) +T1


Because of inflation, the repo rate could be expected to increase and with an unchanging labour force and technology, we could see an upward shift in “uc”. This would mean that the same capital would give decreasing marginal returns and government should start investing in technology or increasing the labour force. We can conclude that higher repo rates would incentivise more savings and hence increasing use of bank accounts. As savings increase, it would put downward pressure on lending rates, but as repo rate increases due to monetary policy, there would be an increasing floor to the same. This would mean a slower economic growth in the future. This would further mean long term reduction in the wages and increased unemployment for the foreseeable future, leading to decreased Marginal Propensity to Consume (“MPC”). We can also expect the fiscal and monetary policy to become tighter in the long run.


Indonesia is a bank-based economy. The financial intermediation and monetary transmissions occur through financial markets. While banking institutions act as major financial intermediaries in the country, non-banks and capital markets are secondary sources of financing.

Government bonds and corporate equities form most of the foreign investment flow to Indonesia, directly influencing the equity prices, exchange rates and movement in bond yields. The liquidity from these portfolios also affects interest rates and bank lending.[1] Foreign investors hold almost 40% of government bonds and 64% of corporate equity holdings.

The corporate offshore borrowing has increased over the past five years due to the following reasons-

· The fact that corporates are free to resort to offshore financing, unlike banks

· Corporate financing needs have expanded beyond the lending capacity of domestic banks in the wake of the commodity boom since the 2008 global crisis

· Borrowing costs in overseas markets are lower than in the domestic market

Bank’s capital and credit analysis:

Figure 7: Capital adequacy ratio of Indonesian banks[1]

[1] [1]

Under Basel III, the minimum capital adequacy ratio that must be maintained is 8%.[1] We can see that currently it stands above the Basel III requirements and hence banking system in Indonesia has better capabilities to absorb economic shocks which is beneficial to the depositors. The ratio increased from 7.8% in 2007 to 13.2% in 2021 at a rate of 3.8% compounded annually.

The domestic credit stood at 53.7% in 2020 from 37% in 2009. This is expected to have increased further in the next 2 years due to loose monetary and fiscal policy introduced during pandemic. The domestic credit growth rate was around 3.4% compounded annually. It implies that banks are increasing their capital adequacy ratio faster than the growth rates in lending, which can be perceived as a very positive indicator to the banks’ risk management. Due to loose fiscal monetary policies due to Covid, the loan-to-deposit ratio has decreased because of liquidity injection in the economy and reduced dependency on deposits to finance loans. Pre Covid, while the loan-to-deposit ratio hovered around 80-81%, it decreased to 62% in 2021 which bolstered the trust on the financial system and reduced the probability of bank runs in Covid as is evident in the graph below. This is also attributable to the lowering of interest rates due to Covid, which encouraged investments and consumption in the economy.

During Covid (2020-2021), with lower DPKs (deposits in the bank) because of lower returns on the deposits[2] and higher risk-adjusted returns in the other asset classes, the loan-to-deposit ratio was further lowered. If this ratio is maintained, the banks would have greater public trust, but we can expect these ratios to be normalized and converge to 75%+ levels in the coming years with tight monetary and fiscal policy in the future.

[1],banks%20must%20maintain%20is%208%25. [2]

Figure 8: Domestic credit provided by financial sector (% of GDP)

Figure 9 : GDP Growth[1]


Non-performing loans (NPL):

The NPL ratios have weakened from 2.3% to as high as 4.3% in 2020. Although below the regulatory threshold of 5%, the ratio of NPL is a matter of great concern and the regulator has incentivised loan restructuring. [1] With the pace of debt restructuring decreasing, we can expect steady growth in the loan market, which will have to be financed by deposits because of tightening monetary and fiscal policies due to inflation concerns. The bad loans should start decreasing as the money becomes tight.


With banks reducing their leverage during Covid, we see better trust in banks ((D+K)/K). We see the probability of bank runs decreasing but this would be normalized in the after-effects of Covid (tight monetary policy), thereby increasing the risk for depositors. Since the ratios are well above the regulatory and Basel III thresholds, there is room for erosion. As the effects of Covid mitigate, we can again see the pre-covid loan to deposit ratios of around 80% and capital adequacy ratios not having a significant impact. We will also see the banks giving more loans to increase their profits but with recent increase in bad loan ratios, banks will have more sophisticated screening and monitoring policies to escape the regulatory scrutiny and maintain the regulatory standards. The prevailing ratios have put the banks and the economy in a great position to survive significant downturns and circumvent the effects of the depositor non-coordination, but we can expect the ratios to normalize which would put the economy in slightly worse off conditions than it is now and will make the banks slightly vulnerable to downturns and depositor non-coordination. Overall, the banks will still be in a good shape to protect depositor money and overall, the risks regarding bank and financial failures are low in Indonesian economy.


Let us consider equal weightage for each of the event. This would help us understand the shortage of labour. First column lists the policies introduced by the government or subsisting problems in the economy of Indonesia concerning the labour market. The second column shows whether the supply or demand side of the labour market supply-demand curve, shown in the curve below, is impacted by column 1. Third column envisages the shift attributable to column 1 and fourth column attributed the shift to a particular labour class.


Figure 10: Labour market equilibrium

Table 6: Analysing the shifts in labour demand-supply

Our recommendations: We recommend that the government increase the spending to stimulate the economy to tap into the vast labour market and prevent emigration. They shall also have strict laws and enforcements to deal with the strikes so that the MNCs have the incentive to invest more in the market. The government should also increase its investment in skill training and healthcare infrastructure so that productivity of the labour can be increased and the market becomes more appealing. The government should further encourage digital learning so that labour can become employable. Female labour is an untapped demographic in Indonesia and the government should introduce equal opportunity laws for the hiring to be inclusive. The Indonesian government could follow the Indian government’s model to encourage to encourage labour participation in the services and manufacturing sector because of decreasing marginal product of labour in the agricultural sector.

The number of shifts according to labour class are as per the table below:

Table 7: Determining curve shifts

Therefore, as we have given equal weight to each shift by identifying the limited number of factors, we can see that for the:

1. Skilled labour force, the demand curve would shift to the right. This means that the equilibrium for the labour market would have a higher market wage and higher labour quantity in the foreseeable timeframe.

2. Unskilled labour force, the supply curve shifts to the left. This means that the equilibrium for the labour market would have a higher market wage and lower labour quantity in the foreseeable timeframe.


· Indonesia has a domestically focussed economy, mainly driven by household consumption and government-led investments, with a comparatively smaller role in trade and private investments.

· Recent Economic recovery has been supported by investment activity in infrastructure development, the key attractions over the medium term are Indonesia’s large market size. Indonesia will benefit greatly from increased use of technology to boost worker productivity. [1]

SWOT of Trade

Table 8: SWOT analysis of trades Indonesia [1] Fitch: Investment and Trade

Composition of Indonesian Trade

Figure 12: Imports & Destination

Figure 11: Exports and Destination

· As per the gravity equation of bilateral trade, the countries that are closer in distance and have larger economies tend to trade more as is evident from Figure 11 & 12 above.

· Indonesia has a comparative advantage due to its availability of natural resources and should focus on export of coal and fuel-based products.

· The largest product category exported is chemical, industrial and fuel exports in export revenues, seen from the graphs above. Coal and solid fuel products accounted for 9% of the total exports followed by and food and agriculture exports. This highlights the future demand for capital equipment that the country will require to support the expansion of its domestic manufacturing industry.

· The largest import category is given by machinery and complex manufactured product. China, Japan, Singapore, and India accounted for 40.7% of total export. Indonesia's main importing partners were China, Japan, the US, and Malaysia. These five nations have increased their representation within the Indonesian market over the recent past.

Trade Barriers

Indonesia's membership to ASEAN has resulted in the country having low applied average import tariff rate of 2.27% but other barriers still make Indonesia significantly less open to trade. The government seeks to prevent other countries from capitalising on the wealth of its natural resources and allow its local industries to become more competitive with those of other regional manufacturing-orientated peers. There is significant trade bureaucracy involved for supply chains both when exporting out of and importing into Indonesia. Indonesia has seen trade and investment policy uncertainty and inconsistency continue to detract from the country's strong appeal as a trade and investment destination[1].

Current Trends of Balance of Payments

· The Balance of Payments recorded a low deficit at USD 0.8 Billion in Q4/2021, supported by a maintained current account surplus amidst a capital and financial account deficit. Given, I=S-CA.

Current Account

· The current account continues to book surplus due to high goods trade. A goods trade surplus increased the current account surplus due to rising global demand and commodity prices like coal, which improved export performance. The recovering domestic economic activity led to improvement in exports and imports.

· The performance of current account was also supported by an increase in the secondary income account surplus due to Government grants in the health sector for handling the Covid-19 pandemic. On the other hand the services trade balance deficit widened due to the increasing transportation services deficit affected by rising import freight services payments.

Capital Account

· The capital and financial account in the first quarter of 2022 recorded a USD1.7 billion deficit (0.5% of GDP), reducing from USD2.2 billion (0.7% of GDP) in the fourth quarter of 2021. The performance of the capital financial account has improved due to increase in the direct investment.

· Investor optimism concerning the promising domestic economic outlook induced the increasing net inflow of direct investment.The surplus was mainly supported by rapid export performance in line with increasing demand from trading partner countries and high global commodity prices, amidst increasing imports as the domestic economic recovery progressed. Meanwhile due to global financial market uncertainty and geopolitical tensions between Russia and Ukraine foreign capital outflows of portfolio investment was observed.[2]

· Consequently, as we know that CA is high and S is low, we can say that there is lesser investments in the projects. This would harm the economy in the long run because MPK and MPL would not increase. Which is also evident from the negative capital accounts that harm the overall investments in Indonesia.

Brief Analysis of Future Trends of Trade

[1] Fitch: Indonesia and Trade [2] Indonesian Govt Website

Figure 13: World Interest Rates, Savings and Investment during supply shock

Figure 14: Impact of Increasing Investment

From Figure-13, we see that given the current account surplus of Indonesia, any adverse shock in the economy in Indonesia, like spread of Covid-19, could lead to reduction of the current account surplus.

From, Figure-14 similarly, the investment of the government or the private players in technology and services would lead to increasing future marginal product, and decrease the current account surplus, as Indonesia would become a more promising place for investment. The above could be achieved by spending less on consumption or providing subsidies and investing in human capital development or technology to increase marginal returns from the same.

Currency and Exchange rates

TheIndonesianrupiahistheofficialcurrencyofIndonesia.Its value has declined significantly overtime. From being valued at 45 IDR/ USD in 1945, it is now traded at ~14,500 IDR/USD. In 1978, Indonesia converted from a fixed exchange rate system to a managed float system. However, post the Asian financial crisis in 1999,the managed float system was given up and replaced with a free-floating form.

As we know,we can only control two of the three things that affect exchange rates,i.e.:monetary policy, fixed rate of exchange, or free trades. Indonesia by removing the fixed, and dirty float, has given up control of the exchange rates. And because of that, they are able to have a free trade economy and can control their monetary policy.

Figure 15: IDR/USD over the years

In the recent past, the Indonesian rupiah has shown great fluctuation and is currently devalued from the highs it traded at in 2016. The devaluation accelerated during the Covid pandemic in 2020-21. In 2022, the consumer price inflation in Indonesia increased from 2.6% in March to 3.5% in April, the highest in over four years, and approaching the 4.0% limit set by the central bank- Bank Indonesia. This acceleration in inflation was driven by high commodity prices and has eroded households’ purchasing power and corporate profits. Let us understand the effects of the same and predict the possibilities using the monetary policies through the Covid and the future respectively. When the Covid hit the economies, the demand curve for IDR shifted to the left and the interest rate decreased due to the same. Fearing an economic slowdown, banks across the world had to increase the supply of money through capital injection which was achieved by repo rates decreasing to achieve the same level of outputs. But due to this effect, the supply of money increased tremendously, more than pre covid eras with supply of money not being justified by the prevalent repo rates. Exacerbated by the supply chain disruption because of Covid and the Ukraine war, the inflation started picking up, because the supply of the consumables has not increased even to the pre covid levels. Because the supply of IDR had to be artificially shifted to the left. We predict that repo-rate will hike soon which would impact the exchange rates in the short term. To compensate for the impact of providing higher subsidies on increased global oil prices, the government has mandated a reduction on the allocation for money spent on other parts of the economy which could lead to depletion of Indonesian reserves and worsening performance of the Indonesian Rupiah.

Exports and Imports

The IDR/ USD exchange rate is correlated to the value of Indonesia’s exports to other countries. As can be seen from the charts above, the exchange rate was higher in 2020, indicating a weak Indonesian rupiah in 2020 due to a lower value of exports. In 2021, as the Covid pandemic eased, Indonesia was able to enhance its exports which helped bring down the exchange rate and relatively strengthen the Indonesian rupiah against the US dollar. On the other hand, the value of goods imported by the country has also increased between 2016 and 2021, with a blip seen in the year 2020 due to the Covid pandemic. Increasing value of imports has a counter effect on the exchange rates, bringing down the value of the Indonesian rupiah versus the US dollar.

FDI inflows to Indonesia have declined since 2017, although there was an increase in the year 2019. This decrease in FDI inflows has had a negative impact on the exchange rate of the Indonesian rupiah against the US Dollar. This decrease in FDI inflows has reduced the demand for the Indonesian rupiah and has therefore contributed to the decline in its values5. Indonesia’s forex and gold reserves have increased ~50% between 2015 and 2021. However, we observe a decline in between the years 2017 and 2018, post which the forex and gold reserves have again shown steady growth. This period of decline from 2017 and 2018 had a direct impact on the exchange rates as can be seen above, where the Indonesian rupiah decreased in value compared to the US Dollar, between 2017 and 2018. With the Hikes in US interest rates owing to the pandemic, investors are moving their money from the developing economies to the US economy to get stable returns. Given the current financial system and USD being used as a base currency, the performance of the currencies of the developing countries would worsen that includes IDR.

Table 9: FDI

Purchasing power parity

Given that the purchasing power parity remains same in the long run, we can make predictions regarding the same. Taking base year as 2010 calculation and keeping CPI 100 for both the countries, we had CPI(USA)= 124.3 and CPI (Indonesia)= 156.5 in 2021. The exchange rate in 2010 was 8441 IDR/USD and 14269 IDR/USD in 2021.6 Using CPI(USA)/CPI(IDR)= Spot (USA/IDR) --> we predict a slight appreciation of the currency in the long term because it has depreciated much more than the purchasing power parity. Using the arbitrage argument for a 10-year t bill for USA-2.93% and risk-free rate of 10 year bond in Indonesia-7.476%, (1+rf(USA))/(1+rf(Indonesia)) is less than 1, that means the IDR might depreciate further because of arbitrage argument. As arbitrage is most likely to hold true, we might see the correction in interest rate, decrease purchasing power parity, or further depreciation of the IDR.

All the short-term indicators seem to point towards a depreciating IDR in the short term and appreciation of IDR or depreciating purchasing power in the long term. Also, we recommend investments in technology because we are price takers, so that MPK and MPL can be improved. In the short term, Indonesia is doing a great job in taking advantage of its comparative advantage.

Long Run Growth in Indonesia

Figure 16: Macroeconomic forecasts (long term)

We expect that Domestic demand will remain the key driver of growth for Indonesia, but this component of GDP will face headwinds due to the devastating impact of Covid-19 on unemployment and incomes. The worsening labour market situation will reduce private consumption growth out to 2025. Government schemes such as working capital loans provided to small- and medium-sized enterprises and a push for digitalisation across the economy will cushion the blow that the Covid-19 crisis will most likely cause. Nonetheless, the labour market will most likely remain soft over the medium term. The next presidential elections will be held in 2024 which will increase private consumption government handouts and pre-election spending helps boost demand. As the government's policies will improve there may be a surge in FDI. Urbanisation would most likely be sped up with better infrastructure, facilitating greater private consumption growth. [1]

According to the Solow Model, we know that investment in ideas and technology lead to long-term growth in a country. Therefore the growth of the IT services industry is highly correlated with the gross domestic product (GDP) of a country. The IT services industry follows the same curve as technology does which means that the IT services industry will grow as technology grows, with slight variations across countries. [2] The performance of the industry will be around a CAGR of 11.5% till 2024, which will to drive the industry to a value of $16.9bn by the end of 2024.

The country currently has low R&D expenditure, accounting for less than 1% of its GDP. The low R&D expenditure is taking a toll on the number of patents granted. Low R&D expenditure indicates that the country must do a lot more in terms of fostering innovation. Though there has been an increase in the number of patents filed by Indonesia in the past years, 2020 witnessed 17 patents due to poor R&D funding hindering the growth of the R&D sector.

Indonesia’s proportion of high technology exports in terms of manufactured exports is way below several Southeast Asian countries like the Philippines, Malaysia, China, and Thailand(See Figure Below). However, despite low R&D expenditure Indonesia is a pioneer in stem cell research and therapy. [3] The Indonesian government is a proponent of medical, and agricultural innovations. The government should propagate technical research to bolster the country’s domestic telecom and IT market, to align more closely with the global market. Indonesia has revised its policies on technology transfers and the entry of foreign investment. The government’s ultimate objective is to achieve global significance in technological and scientific innovations to lessen its dependence on foreign technology. This makes Indonesia an imitator and not an innovator and the growth is mainly being fuelled by the capital investment per unit of labour and imported technology, which increases the factors of productivity in the short term. The long-run aggregate supply might have shifted to the left due to Covid and war disruptions, and the loose monetary policy shifted the short-run aggregate supply to the right, and we are now seeing the economy shift to the new LRAS. This seems to be a global phenomenon and not specific to Indonesia.

[1] Fitch Solutions Indonesia Risk Report [2] Market Line: IT Services in Indonesia [3] PESTLE Country Analysis Reports -Indonesia

Figure 17: R&D Expenditure

Figure 18: Showing the new equilibrium due to Covid and war.


Indonesia’s budget for 2022 is based around the idea of returning to normalcy, soon. To cover the extraordinary fiscal stimulus undertaken during the pandemic, Indonesia has been running larger-than-usual deficits in the last two years: 6.14% of GDP in 2020 and an approx. 5.82% in 2021. By this year, Bank Indonesia wants to bring this down to 4.85 percent. With low interest rates, a strengthening rupiah, and a narrowing current account deficit, Indonesia can consolidate a post-pandemic economic recovery.

Moving forward, global economic uncertainty is expected to remain elevated given the looming risk of an economic downturn and persistently high global inflation in several countries. This means that even though the downturn is foreseeable, Indonesia cannot be loosen its monetary and fiscal policy due to the inflation caused by the supply chain disruption. Therefore, Bank Indonesia is bolstering its policy mix as follows:

1. Strengthening exchange rate policy to maintain Rupiah stability.

2. Support managing inflation in line with economic trends.

3. Accelerating liquidity policy by strengthening the effectiveness of increasing reserve requirements and Rupiah monetary operations.

4. Maintaining prime lending rate transparency in the banking industry.

5. Strengthening international policy by expanding cross-border payment connectivity, promoting trade and investment in priority sectors in synergy with the relevant institutions

Ongoing geopolitical tensions between Russia and Ukraine, accompanied by China's strict implementation of the zero-Covid policy, have impacted supply chain disruptions. This global economic climate has pushed up international commodity prices significantly, thus intensifying inflationary pressures globally.

Indonesia’s BoP is expected to stay solid, thanks to the current account which is expected to maintain a surplus in the second quarter of 2022, further helped by a positive trade balance and strong exports of most major commodities and despite a larger services trade deficit as more Indonesian travellers visit abroad.

Meanwhile, foreign capital inflows to domestic financial markets demonstrate a net inflow of USD1.5 billion in the second quarter of 2022. We can also expect the trend to continue before bottoming out to recession.

A positive yet lower than previously projected capital and financial account will also support BOP performance in 2022, amid strong foreign direct investment (FDI) in response to the propitious domestic investment climate.

But the main problem is with respect to the signore. With growing inflation, keeping the supply of real money would lead to a net loss for the people doing business in Indonesia, including the foreigners. But the government is taking the right steps to curb the effects of inflation. We can also expect the lending market to shrink as the lenders lose value due to rising inflation- Fisher formula. Lastly, because the fiscal deficit was financed by monetary printing, inflation is going to be difficult to tame, a problem observed worldwide.

Figure 19: Govt Budget

Figure 20: Budget Deficit

Cross Country Analysis of Southeast Asia [FY’22 Forecasts]

Note: Southeast Asia = Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand, Vietnam

Indonesia currently has the least political and economic stability in the short run compared to other countries in the region. With the government trying to ease barriers of trade and employment , we can predict that in the long term there will be lesser operational risks and more investments in the country. However, the main downside risks to Singapore as well as other smaller Asian economies is the possibility of a sharp slowdown in China's economy[1].

Among high inflation and lower growth projections, economic growth in several countries, including the US, Europe, Japan, China and India, is expected to be lower than previously projected. This has prolonged elevated global financial market uncertainty, while restraining foreign capital flows and exacerbating currency pressures in developing countries, including Indonesia.[2]


We have compiled qualitative scores based on the analysis discussed in this paper. We would then be aggregating the scores, out of 10, based on the weightage of each score and then calculating an aggregate score, that would help us forecast the investment attractiveness of Indonesia.

[1] Fitch Solutions: Asia Monitor South East Asia Version-2, January 2022 [2];;

Our recommendations:

For investors: We give a weighted score of 7.5342/10 to Indonesia as the destination for long-term investments. This score has certain factors like shift in long-run aggregate supply, the impact of which would be consistent across economies of different countries. We would still advise the investors to tread carefully with the foreseeable recession in the long term and weigh for interest rate cuts before making the investments to get favourable valuations. We would also advise the potential investors against the unfavourable labour markets, lower MPC, lower economic growth in the future. The inflation might cause significant seigniorage losses in the foreseeable future.

For government: We recommend that government relaxes the labour laws so that foreigners can find work in the country and the wages do not increase exponentially. Government shall increase the spending and consider selling the stake in PSUs or other government owned entities. Government shall incentivise investments in technologies and R&D to increase the factors of productivity that might compensate for higher wages in the future. By doing so, Indonesia will shift the long run aggregate supply shift to the right which has been drastically effected due to Covid. Indonesia shall also reduce its dependency from imports of commodity and shall start exporting services as well by increasing the education. Indonesia shall also continue taking appropriate measure to curb inflation and reducing seigniorage and preserving the lender worth.

By Siddharth Dalmia

The StartUp Sherpa



· Fitch Report Indonesia

· Marketline Macroeconomic Outlook Report: Indonesia

· Ibid; Economic Finance and Trade Indonesia



· From class slides.







· Fitch: Investment and Trade

· Fitch: Indonesia and Trade

· Indonesian Govt Website

· Fitch Solutions Indonesia Risk Report

· Market Line: IT Services in Indonesia

· PESTLE Country Analysis Reports -Indonesia

· Fitch Solutions: Asia Monitor South East Asia Version-2, January 2022



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