Indonesia Economic Update 2023 q1
Indonesia Economic Update 2023 q1
Indonesia Economic Update 2023 q1
Economic Update
Brace for Impact?
Back in early 2020, we saw global supply and demand slump as the pandemic hindered mobility and
crippled many economic activities. Later on, as vaccines became available at the end of 2020, demand
started to recover. However, during 2021, scattered production networks could not keep up with the rising
demand. This caused a hike in prices, driving the world into a high inflationary period that had not been
seen for decades. In 2022, supply chain pressure was significantly eased. However, the Russia-Ukraine
war fuelled inflation further as the conflict cut the supply of crucial energy and food commodities. By the
end of 2022, the world was on the brink of a cost-of-living crisis.
Entering 2023, we expect three things to dominate global economic dynamics. First, the fight against
commodity price increases. Second, the prolonged Russia-Ukraine war. Third, aggressive monetary
tightening to combat inflation by central banks around the globe. The situation is even more complicated
because countries face significant debt burdens, leaving only limited choices for action.
Looking at domestic economic dynamics, we have seen the Indonesian economy thriving and recovering
after the pandemic, with strong economic growth of 5.31% and an inflation rate of 4.4% in 2022. The
combination of pragmatic social distancing measures, various subsidies, economic relaxation, and social
assistance was crucial to Indonesia’s success in escaping the turmoil of the pandemic. Nevertheless, the
efforts were costly, with Indonesia’s total public debt-to-GDP ratio increasing from around 30% before the
pandemic to over 40% after the pandemic.
We expect Indonesia’s economy to grow by 4.8% in 2023 and inflation to decrease to 4.0%. These
numbers undoubtedly reflect a global economic slowdown, although they still put Indonesia among the
fastest-growing large economies globally and ensure it will remain an engine of growth for the Southeast
Asia region. Consumption, which contributes to more than 50% of Indonesia’s total GDP, is expected to
stay strong and become a significant source of growth. In addition, high commodity prices have
significantly boosted Indonesia’s state budget since more than a third of Indonesia’s exports are
commodities and significant revenue contributors for the government. The potential sources of the
slowdown are expected to primarily be external factors such as the weakening of investment and trade.
This report is the first PwC Indonesia Economic Update. This edition focuses on recent global economic
developments, especially significant sources of global uncertainties, and provides broad coverage of
Indonesia’s recent economic developments. We also give special attention to Indonesia’s green transition
and decarbonisation efforts. Specific updates regarding poverty, health, education and governance are
also discussed.
We hope that this report brings significant value to readers and serves as a guide to those interested in
Indonesia’s economy.
2
Contents and Disclaimer
PwC Indonesia. 2023. PwC Indonesia Economic Update: Brace for Impact? First Quarter 2023.
Jakarta: PwC Indonesia.
3
Key Points
2 export, investment and household spending growth. However, downside risks, such as
weak global demand, capital outflow, currency pressures and tight global financial
conditions could potentially hinder growth momentum over the next four years.
Indonesia's economy is expected to experience a mild slowdown in 2023. Growth is
3 projected to be 4.8% in 2023. Nevertheless, the figure is encouraging considering that the
world’s economies are expected to experience a major ‘slowbalisation’ in 2023 as the
battle against inflation continues.
The increases in subsidised petrol and global commodity prices pushed up annual inflation
4 in 2022. Inflation has since cooled down as Bank Indonesia has been switching to a more
aggressive monetary policy stance. However, inflation is expected to stay above Bank
Indonesia’s target of 2-4% in 2023.
Trade
Indonesia has revived its international trade activities while strengthening trade
5 partnerships with other economies. Such measures are expected to provide a cushion
against the economic uncertainty of 2023.
Potentially low export growth could arise from slowing global growth, but Indonesia’s core
6 commodity exports (i.e. coal, palm oil, and nickel products) would remain in strong demand
as long as the Ukraine war drags on.
Investment
Indonesia’s foreign and domestic investments reached their all-time high in 2022. The Job
Creation Law, which harmonises government policies from the regional to central levels,
7 has improved the attractiveness of investing in Indonesia. Sustainable investment, which
seeks to balance financial returns with Environmental, Social, and Governance (“ESG”)
aspects, is the key area to focus on over the next ten years.
Government and Development
The Government of Indonesia has made efforts to mitigate the potential adverse effects of
8 economic uncertainty, focusing on shielding purchasing power and nurturing investment
opportunities while still making strides towards a green transition.
The Government of Indonesia’s efforts to improve living standards are constrained by its
9 budget capacity, and the government needs to increase coverage and quality
infrastructure. More focus on Eastern Indonesia is expected considering the uneven
development that disproportionately affects the region.
The Government of Indonesia’s current priority is to maintain purchasing power through
10 smart subsidies and concurrently keep its budget deficits below 3% of Indonesia’s GDP. It
seeks to do this primarily by increasing tax and non-tax revenue and improving spending
efficiency.
4
What makes Indonesia’s economy
safe (and not)?
Consumption Investment
- Strong bases and the biggest contributor of GDP - Indonesia’s quarterly foreign direct investment
- High levels of consumer confidence (+100) C (“FDI”) realisation consistently posted new records
- Smart subsidies (e.g. for fuel and electricity) and
social assistance programmes from the government
I in 2022
- Only a mild slowdown in the top sources of FDI is
protect consumption from external shocks expected in 2023
- Manageable inflation (4.4% in 2022)
Government Trade
- High commodity prices increase non-tax revenue - Surpluses have been consistently posted since 2020
- Strong revenue streams sustain expenditure and
X- - Main trading partners only expect moderate
subsidies
- Manageable budget deficit (2.8% of GDP in 2022) G M
slowdown
- Regional Comprehensive Economic Partnership
- Concerns regarding budget absorption (quantity (“RCEP”) ratification is a strong catalyst for trade
and quality) growth
C-I-G-X-M at Glance
The projections for the global economy as a whole are gloomy, but emerging Asian economies are the exception. We
expect Indonesia to experience only a mild slowdown. To understand why, we would like to use the basic GDP formula,
which comprises consumption (C), investment (I), government spending (G), exports (X), and imports (M). The overall
projection for each of these five components looks promising, although some slowdowns are expected, especially for
components that rely heavily on external factors (investment and trade).
Consumption remains the most significant contributor to Indonesia's economy, having contributed more than 50% of
GDP over at least the last ten years. The share remains stable at around 55% from 2010 to 2022. Consumer confidence
was maintained at an optimistic level (>100) in 2022, as reported by Bank Indonesia. In addition, the Government of
Indonesia (“GoI”) was relatively successful in shielding consumption from global inflationary pressure with various
subsidies such as those for fuel, electricity and social assistance. Combined with accommodative monetary policy, such
initiatives resulted in a manageable 4.4% inflation level in 2022. With inflation peaking globally and central banks
worldwide remaining cautious, we expect Indonesia's domestic consumption to remain strong. The coordinated effort
between fiscal and monetary policies is essential to maintaining purchasing power.
Investment became the second largest contributor to Indonesia's GDP, with a 32.1% contribution in 2022. During 2022,
the quarterly FDI realisation figures kept hitting new records. Based on 2021 data, the top five FDI contributors are
Singapore (expected growth in 2023 of +2.3%), China (+4.5%), Japan (+1.2%), Hong Kong (+3.9%) and Malaysia
(+4.0%). These countries are expected to experience a mild slowdown in 2023 but comfortably avoid recession, in
contrast to advanced Europe economies. The easing of zero-COVID restrictions in China means that the country now
expects accelerated growth and investment in 2023. From the sectoral perspective, based on Indonesia’s FDI realisation
in 2022, the top sectors are base metal and metals manufacturing, mining, chemicals and pharmaceuticals,
transportation, and telecommunications.
The government budget is essential to maintaining Indonesia's economic growth. Although the GoI is still struggling to
achieve the 15% tax-to-GDP ratio target, its budget’s role remains to be an important source of national growth. High
commodity prices always have a dichotomous impact on Indonesia's fiscal budget. High energy prices, especially for oil
and fuels, have a negative impact as the GoI needs to pay more for subsidies. However, high commodity prices for
commodities such as coal, gas and palm oil bring a significant windfall to government revenue, mainly due to the tax and
royalties from these commodities. Total government revenue in 2022 increased by 30.58% YoY. We therefore expect there
to be sufficient budget for subsidies to shield consumption and manage inflation. However, there are concerns on
absorption capacity, both in terms of quantity and quality.
Lastly, from the trade perspective, Indonesia has been performing strongly and has been consistently posting trade
surpluses since 2020. We expect this trend to continue, considering Indonesia's primary trading partners will only
experience a mild slowdown, and Indonesia’s top export commodity prices remain strong. The top five Indonesian export
destinations, along with their growth projections in 2023, are China (+4.7%), USA (+0.2%), Japan (1.2%), India (+5.4%)
and Malaysia (+4.4%).
5
How did we arrive here?
Global trends over the past three years have been marred by the rise of and
recovery from the COVID-19 pandemic, escalated tensions among major
economic partners, supply chain disruptions, unprecedented degrees of
inflation and increases in commodity prices.
The timeline below provides a brief geopolitical and economic overview of the events that
occurred in the years 2020, 2021 and 2022.
Global
● On 31 January 2020, Britain left the European Union and entered a one-year transition period
as it settled into its newfound position in the world.
● On Black Monday – 9 March 2020 – the Dow Jones Industrial Average (“DJIA”) fell by nearly
3,000 points due to panic buying, which caused banks and reserves to cut interest rates and
provide stimulus cheques to help keep economies afloat.
● On 4 August 2021, COVID-19 had infected more than 200 million people, although many
developed countries started to reopen their economies.
● Between 15-16 November 2022, world leaders gathered in Bali for the G20 Summit to
discuss significant issues concerning the world economy, including green transition, recent
development of the COVID-19 pandemic and Russia's war on Ukraine, while repledging
commitments to keep the peace and ensure productivity.
Indonesia
● On 1 January 2020, Indonesia implemented a nickel export ban to protect domestic
production and sustainably create more value-added nickel products in the future.
● On 15 February 2022, Indonesia passed a bill to relocate its capital city to Nusantara (Ibu
Kota Negara/“IKN”) in the Eastern Kalimantan province.
● On 30 December 2022, Indonesia lifted its COVID-19-related restrictions to enter the
endemic period.
6
How did we arrive here?
Detailed geopolitical and economic events that happened in the years 2020, 2021 and 2022:
This unprecedented global phenomenon posed challenges to ways of working and connectivity, changing the
1 lives of millions of people worldwide.
Many were unprepared for the severity and contagiousness of the virus. When the World Health Organisation
2 (“WHO”) declared a pandemic in March 2020 and casualties began to increase at an alarming rate, there was
widespread panic. This led to countries shutting down borders to protect domestic interests.
Cost-cutting mechanisms affected many sectors and led to many workers becoming unemployed. Consumers
3 also altered their purchasing behaviour, with many buying only necessities. As a result, many emerging
countries dependent on labour, trade and tourism were heavily affected.
In March 2020, Indonesia implemented large-scale social restrictions (Pembatasan Sosial Berskala
Besar/“PSBB”) and reached an all-time high unemployment rate of 7.1% in August 2020. In addition, the
4
controversial Job Creation Law signed in November 2020 was met with public outrage for being too
pro-foreign-investment and debilitating the existing conditions of domestic workers and the environment.
2021: Mass vaccination and reopening of economies tempered by supply chain and labour market disruption.
Global vaccine deployment offered a new path out of the pandemic in 2021. Nations slowly opened up their
1 borders and resumed halted activities in what came to be known as “the new normal”.
The vaccination reach differed from country to country. Each was faced with its own specific challenges regarding
2 economic and social recovery.
President Joe Biden’s inauguration at the start of 2021 promised USD 1.9 trillion in economic relief, which was
3
estimated to increase US GDP growth by 6%. The bill was later signed in March 2021.
The unexpected recovery in the demand for goods and services was at a crossroads due to a shortage of workers
and manufacturing facilities being strained at maximum capacity. When a container ship blocked the Suez Canal in
March 2021, many fleets bringing cargoes of raw materials, equipment and numerous other goods faced delays in
4
reaching their destinations. This incident created a daily total loss of USD 10 billion and resulted in many industries
having to rely on existing inventories in response to shortages, which contributed to the increase in global inflation
to 3.4%.
Supply chains and labour markets were put into further disarray when the more deadly and contagious COVID-19
variant – Delta – appeared. Despite Indonesia’s extension of its public activities restrictions, enforcement of mask
5
mandates and provision of vaccinations to persons aged 18 and above throughout the year, Indonesia still reached
a peak of more than 30,000 deaths in July 2021.
6 In August 2021, the total number of infected cases exceeded 200 million worldwide. By November 2021, the Delta
variant had spread to 179 countries and was closely followed by the Omicron variant.
The effects of President Vladimir Putin’s so-called "special military operation" in Ukraine added another layer of
1 disruption to financial, human and commercial links around the world. Such disruption was most evident in Europe,
Asia and Africa
2 Hit with international sanctions from the G7 and other countries, Russia’s trade activity stagnated.
A crisis in commodity prices erupted. Food (e.g. wheat, cooking oil) and energy (e.g. petrol, gas) were the hardest
hit. In April 2022, vegetable oil prices peaked globally (prices increased by 23%), which affected household
spending and industries reliant on oil. Gas prices also hit an all-time national high of USD 5 per litre in June. To
3
remedy some of its fallen revenue, Russia retaliated to the price caps on its oil and other products by announcing
export bans aimed at the G7 and other countries complying with the caps. Such bans were announced in
December 2022 and will take effect in early 2023.
The widespread increase in prices led to inflationary pressures and the slowing down of many economies. In
response, central banks increased their national interest rates.The Fed increased its interest rates to 0.4%
4
(marking the first increase since 2018) in March 2022 and Bank Indonesia similarly increased its interest rates to 7
3-4.5% (again marking the first increase since 2018) in August 2022.
1. Global Economic Update
The fight against commodity price increases, the prolonged war in the Ukraine
and rising interest rates are expected to be the key economic stories in 2023.
Despite such challenges, as we enter 2023, the global economic outlook
appears to be more optimistic than expected as the probability of recession has
reduced.
1.1. Global Economic Overview
Figure 2. Global, G7, E7 and Indonesian economic growth, Consumer Price Index (“CPI”) inflation and policy
rates
Policy rate
Economic growth CPI inflation
Economic 2018 2023f 2028f CPI 2018 2023f 2028f Policy 2018 2023f 2028f
growth Inflation rate
Global 3.27% 1.85% 2.75% Global 2.92% 5.17% 2.69% Global 3.21% 4.78% 3.27%
Indonesia 5.17% 4.80% 4.96% Indonesia 3.20% 4.00% 4.04% Indonesia 6.00% 6.25% 6.50%
Threat of stagflation (i.e. low growth with high inflation) accompanied by contractionary
monetary policies. Global GDP is projected to grow by around 1.6% in 2023. US economic growth is
estimated to slow down to 0.2%, which will represent a mild downturn rather than a technical
recession. On the other hand, the economic outlook in the Eurozone is bleaker, likely due to the
reduced supply and higher prices of natural gas. In the case of E7 countries, India is predicted to be
the fastest growing G20 economy, while Indonesia's economy is estimated to experience the highest
growth in Southeast Asia. China's GDP is expected to expand by 4.7%, subject to how the country
shifts away from its zero-COVID policy.
Inflation rates are expected to fall by at least a quarter in around half of the Organization for
Economic Co-operation and Development (“OECD”) economies due to a combination of tighter
monetary policy and slowing global demand; such factors should put downward pressure on prices in
2023. Having a high starting point, Turkey is projected to experience the sharpest fall in inflation from
73% in 2022 to around 42% in 2023. China might become one of the few countries that sees its
inflation rate rise in 2023; this could occur due to its insulation from inflationary pressures in 2022.
Overall, despite the general fall in inflation rates that has been predicted, annual inflation is expected
to remain above target in 2023 in almost all the countries that experienced high inflation in 2022.
Sources: PwC Global Economy Watch (2023); World Bank (2023); IHS Markit (2023); PwC Analysis (2023).
Notes: G7 countries consist of the United Kingdom, Germany, France, Italy, Japan, United States, and Canada. 8
E7 countries consist of the People’s Republic of China, Russia, Indonesia, India, Mexico, Brazil, and Turkey.
1. Global Economic Update
9
1. Global Economic Update
The increase in wholesale energy prices globally pushed overall commodity price indexes in
2021 and 2022. Commodity price indexes started to increase in early 2021 in the wake of the
COVID-19 pandemic and growing international demand. During the pandemic, many suppliers had to
restrict production and limit labour work hours, which led to global supply chain disruption. The
disruption has caused commodity prices to diverge, with energy prices increasing more than
non-energy prices.
The Russian-Ukraine conflict pushed up the prices of commodities further Commodity Price
in 2022. Commodity prices increased in Q1 2022, reflecting the effects on the
global economy of the trade sanctions imposed by the EU, the UK and the US. Growth (Q4 2021-
The increases in prices were more significant for commodities where Ukraine and
Russia are large exporters such as natural gas, crude and refined petroleum, Q4 2022)
coal, nickel, fertilisers, wheat and sunflower oil.
+183% +28%
Australia Rubber
Coal
146
+69% -4%
South Africa Rice
Coal
+38% +28%
Source: International Monetary Fund (“IMF”) (2023), Primary Commodity Market (2023)
NIckel Wheat
Note: 1) Equally weighted average crude oil spot price of West Texas Intermediate (“WTI”), Brent, and Dubai 10
1. Global Economic Update
The Global Economic Policy Uncertainty (“GEPU”) index peaked at the onset of the economic
crisis triggered by COVID-19. During the early stage of the COVID-19 pandemic, the global index
surged in all G7 countries, reflecting the risks and uncertainties affecting government policies and
regulatory frameworks.The index remained stable in 2021 as the global economy began to recover
from the pandemic, but rose again in 2022 due to the Ukraine war.
382
303
241
216
106
86
Source: Baker, Scott, Bloom, and Davis (2016), Measuring Economic Policy Uncertainty (accessed in 2022)
The GEPU index increased throughout 2022. The GEPU index reached its annual peak in the first
quarter of the year. The index has reached levels close to what was seen around the September 11
attacks in the United States in 2001 and the United Kingdom’s 2016 vote to leave the European
Union. However, the global index was lower in Q1 2022 than in the early stage of the COVID-19
pandemic, at which time the index reached the highest level seen in the past three years. Some of
the main triggers for rising uncertainty in 2022 included high inflationary pressures, the appreciation
of the US Dollar against other currencies, interest rates hikes, and supply chain disruptions.
Countries in Europe ranked higher than the rest of the world in terms of economic policy
uncertainty. Countries that have a significant economic relationship with Russia, including Germany,
the UK and France, had the highest uncertainty index in Q4 2022, indicating the pronounced impact
the Ukraine war has had on Russia’s trade partners. Germany, with the steepest increase of 133%
from Q3 2021 to Q3 2022, was the most affected by the war. A high uncertainty index in a given
country may be reflective of the lack of clear direction in the country's policy making, which can lead
to prolonged delays in spending and investment by households and businesses.
Notes: 1) GEPU is an index constructed based on newspaper articles regarding policy uncertainty from leading newspapers. It counts the
number of newspaper articles containing the terms “uncertain” or “uncertainty”, “economic” or “economy”, and one or more policy-relevant terms.
11
1. Global Economic Update
The global financial market remained relatively stable amid recession fears over the past three
years. Global financial market volatility, which is measured by the Volatility Index (“VIX”)1 and
systemic risk (“SRISK”)2, has not exhibited a sudden increase or decline, except for during the onset
of the COVID-19 pandemic in Q1 2020. Volatility declined as economies started to recover from the
pandemic in Q1 2021, but rose again in Q1 2022 due to the Ukraine war. Both the VIX and SRISK
declined in December 2022, reaching their lowest levels in more than three months.The decline was
likely to be due to investors' increased bullishness about the stock market’s future prospects in Q4
2022 as compared to Q3 2022.
Notes: 1) The VIX measures the expected volatility of the US stock market over the coming 30 days. 2) SRISK measures the capital shortfall of a
firm (and can be aggregated to country level) conditional on a severe market decline.
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1. Global Economic Update
FDI remained in fluctuation in 2022, although to a lesser extent than what had been observed in the prior
few years. When compared year on year (“YoY”), global FDI outflow and inflow in Q3 2022 grew by 7.1% and
18.3%, respectively. In 2021, the US made and received the highest amount of FDI at 23.6% and 23.2% of total
global FDI, respectively. If the US maintains or increases its interest rate in 2023, higher FDI inflow may be
potentially induced in 2023 as the higher return on investment may attract more foreign investors.
Figure 7. Global Foreign Direct Investment Flow, Figure 8. Global Top 5 FDI Flows (2021)
2017-2022 (USD billion)
FDI Outflow
429
USA Germany Japan China UK
352
$403.1B $151.7B $146.8B $145.2B $107.7B
(23.6%) (8.9%) (8.6%) (8.5%) (6.3%)
FDI Inflow
Slower global export growth in merchandise has been observed recently. Export merchandise YoY growth
experienced a steep increase from Q2 2020 to Q2 2021 as border restrictions that were put in place at the
beginning of the COVID-19 pandemic were relaxed and economies adjusted themselves to function alongside the
pandemic.
However, export merchandise YoY growth started to decline after its peak in Q2 2021 at 46.3%; by Q3 2022 it had
reduced to 12.4% with a trade value of USD 6,241 billion. The decline in 2022 occurred as the growth in export
value was measured relative to the value in 2021 when global trade was already in recovery. Growth peaked in
2021 as the growth in export value was measured relative to the value in 2020 when global trade was hit the most
by the pandemic.
International institutions such as the OECD expect slower growth in 2023. This is derived from the forecasted lower
import demand due to the anticipated economic downturn of major economies and the prolongation of the
Russia-Ukraine war.
Figure 9. Global Merchandise Export Value and Growth, 2017-2022 Q3 (USD billion and %YoY)
= Global merchandise
export value
12.4%
The Government of Indonesia has made efforts to mitigate the potential adverse
effects of economic uncertainty, prioritising shielding purchasing power and
nurturing investment opportunities
2.1 Perppu UUCK was ratified in the hope of providing reassurance for investors in the midst of global
uncertainty
The GoI ratified the Government Regulation in Lieu of Law No. 2/2022 for the Job Creation Law (Peraturan
Pemerintah Pengganti Undang-Undang Cipta Kerja/“Perppu UUCK”) on 30 December 2022. This overrides the
Supreme Court decision in 2021 that declared the Job Creation Law (Undang-Undang Cipta Kerja/“UUCK”) to
be conditionally unconstitutional.
The GoI argued that Perppu UUCK was necessary due to the looming threat of global economic downturns.
Through this regulation, the GoI expects that it will be able to provide the necessary legal assurance for
investors to mitigate the potential negative impacts.
Something to note is that the contents of Perppu UUCK related to investment are relatively unchanged
compared to the original UUCK. As of now, the main difference can be found in the labour section, specifically
in the provisions related to the minimum wage and outsourcing.
However, it remains to be seen whether there will be implementing regulations from Perppu UUCK that could
affect the investment provisions that were previously established by the original UUCK.
Figure 10. Comparison between UUCK and Perppu UUCK regarding labour regulations
Minimum wage
UUCK Perppu UUCK
The minimum wage formula is based on The minimum wage formula is based on
economic growth and inflation. economic growth, inflation, and certain
indices.
Note: Under GR 36/20211, the minimum wage is also
calculated based on: Note: Further provisions, especially those pertaining to
1. Average consumption the indices that will be used, are subject to implementing
2. Average number of household members regulations that have not been formulated.
3. Average number of working household members
Outsourcing
UUCK Perppu UUCK
The removed article initially stipulated under The regulation reinstated the provision that a
Law 13/2003 that a company might company may subcontract part of its work,
subcontract part of its work and included although provisions regarding the kind of work
provisions regarding the kind of work that that can be outsourced are subject to
could be outsourced. implementing regulations that have not been
formulated.
Sources: Indonesian Legal Brief (2022); PwC Analysis (2023).
Note: 1) GR 36/2021 is one of implementing regulations under UUCK
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2. Key Highlights in Indonesia
2.2 Nusantara, Indonesia’s new capital city, is Figure 11. Eight Key Principles of Nusantara
envisioned to be a “Global City for All”
Initial stage of moving to the new capital Develop the infrastructure and ecosystem of 3
(2020-2024) cities1 to accelerate the development of East
● Develop main infrastructures Kalimantan (2035-2045)
● Initial relocation of public servants ● Complete city intra and interconnectivity
● President to celebrate Indonesia’s 79th ● Become the number 1 FDI destination
Independence Day in the new capital in 2024 ● Become the top 5 destination in South East Asia
for global talent
Develop the new capital as a resilient core area Reinforce the reputation as a “Global
(2025-2035) City for All” (2045 onwards)
● Develop priority economic sectors ● Become one of the top 10 livable cities in
● Complete relocation of core government to the new the world
capital ● Reach net zero carbon emissions and
● Reach Sustainable Development Goals (SDGs) 100% renewable energy
target ● Become one of the leading competitive
cities in the world
Notes: 1) The three cities refer to Nusantara, Samarinda, and Balikpapan. 2) Bhinneka Tunggal Ika is the official national motto of Indonesia, inscribed in the National
emblem of Indonesia, translated as “Unity in Diversity”.
Sources: Bappenas (2023); PwC Analysis (2023) 15
2. Key Highlights in Indonesia
2.3 Indonesia split Papua into three new provinces: 2.4 Indonesia is gearing up towards the 2024
Highland Papua1, Central Papua, and South Papua. general election
Figure 13. Papua’s new provinces and their Figure 14. 2024 general election indicative timeline
respective economic potential
Election timeline
Highland Papua
2021 GRDP: IDR 12.6 trillion 29 July ‘22 - 13 Dec ‘22
Top 3 sectors: Election participant registration
1. Agriculture, forestry, and fishery and verification
6 Dec ‘22 - 25 Nov ‘23
2. Construction Legislative nomination
3. Public administration, defence, 19 Oct ‘23 - 25 Nov ‘23
and social security Presidential nomination
28 Nov ‘23 - 10 Feb ‘24
Election campaign
14 Feb ‘24
Voting day
15 Feb ‘24 - 20 Mar ‘24
Vote recapitulation
1 Oct ‘24
Legislative oath of office
20 Oct ‘24
Presidential oath of office
Central Papua
2021 GRDP: IDR 81.7 trillion
Top 3 sectors: Figure 15. 2024 general election estimated budget
1. Mining and quarrying
2. Construction and potential economic impacts
3. Wholesale and retail trade
Estimated budget IDR 76.6 trillion
In 2022, Indonesia renewed its Nationally Figure 16. Indonesia’s future green development
Determined Contribution (“NDC”) into Enhanced
NDC, whereby it increased its carbon emission
reduction commitment from 29% to 31.89% for its Key drivers of Indonesia’s green
unconditional commitment and 41% to 43.2% for its
conditional commitment, given international support.
economy development
Indonesia has taken several measures in realizing its National Energy Grand Strategy (“GSEN”) to
NDC. For example, it released the Low Carbon
1
replace General National Energy Plan (“RUEN”)
Development Indonesia (“LCDI”) by the National
Development Planning Agency (“Bappenas”) in
October 2017. It is an initiative that aims to preserve 2 Carbon cap-and-tax and carbon cap-and-trade to
economic and social growth through low carbon begin implementation in the power sector
development and minimization of natural resource
exploitation.
3 Pilot Coal-fired Power Plant (“CFPP”) early
LCDI consists of policy recommendations with their retirement
respective indicators and targets for in various sectors.
It can generally be grouped into: 1) Commitment on
forest protection; 2) Commitment on renewable energy; 4 Incentives to replace internal combustion engine
3) Measures for increased land productivity; and 4) (“ICE”) vehicles with electric vehicles (“EVs”)
Energy efficiency and waste production.
Sources: United Nations Framework Convention on Climate Change (2022); BBC Indonesia (2023); Tempo (2023); PwC Analysis (2023), Ministry of
17
Environment and Forestry (2022), Low Carbon Development Indonesia (2023), Ministry of Energy and Mineral Resources (2023)
3. Green Economy
Figure 17. Targeted and Realised Renewable Energy Figure 18. Illustration of the hybrid cap-and-tax and
Share in National Energy Mix (%) cap-and-trade policy
Carbon Carbon
Trade Trade
12.3%*
Entity A Entity B Entity A Entity B
3.2 Carbon Cap-and-Tax and Cap-and-Trade Figure 19. CFPP Carbon Cap by type and size
Sources: National Energy Council (2022), Ministry of Environment and Forestry (2022), Ministry of Energy and Mineral Resources (2022) 18
3. Green Economy
3.5 Hydrogen Potential Globally, oil refineries are the largest users of
hydrogen. The demand for hydrogen in refineries may
Hydrogen has a wide range of applications, from increase as pollutant regulations continue to tighten
refining oil to petrochemicals to steel (e.g., as the permitted amount of sulphur in oil products
manufacturing. Hydrogen in its purest form can be continues to decrease). Global demand for ammonia
used as a raw material for industrial processes. and methanol is expected to grow by up to four times
Hydrogen can also be combined with other inputs to due to their increasing use as fuels and economic
produce hydrogen-based fuels and feedstocks, growth in developing countries (through growing
primarily feedstock for the chemical and refining agriculture demand). As seen in the figure below, the
industries. In the chemical industry, hydrogen is mostly ammonia and methanol sectors together account for
used as feedstock to produce ammonia and methanol, almost half of the demand for hydrogen for the period
while in a refinery, hydrogen is used to process crude from 2019 to 2021.
oil.
Figure 22. Global Hydrogen Demand by Sector
Hydrogen can be a feasible energy alternative for (Million tonnes)
large-scale transportation such as long-distance trucks 91.2 89.5 94.3
and aviation, as opposed to batteries in EVs that are
more suited for small-scale transportation. Hydrogen
can also be used to partially substitute natural gas to
provide heat for industrial processes, including those of
the steel industry. Hydrogen’s use cases in different
industries will continue to evolve.
Note: 1) Co-firing refers to the incorporation of a second material to partially substitute for coal during the combustion process of energy
production. The reduction of coal usage in the co-firing power plants can reduce the GHG emitted, as compared to coal-firing power plants.
Sources: International Energy Agency (2022), Institute for Essential Services Reform (2022), Mitsubishi Heavy Industries (2022), Ministry of
20
Energy and Mineral Resources (2022), Tempo (2022)
4. Gross Domestic Product
Economic recovery and growth were gaining traction throughout 2022, supported
by strong export, investment and household spending growth. However,
downside risks such as weak global demand, capital outflow, currency pressures
and tight global financial conditions could potentially hinder growth momentum
over the next four years.
Amid global uncertainty, the Indonesian economy continued to grow above a 5% rate
throughout 2022. The Indonesian economy has expanded in 2022, after two years of fluctuations
due to the pandemic and supply chain disruption. Real GDP growth has recovered from 3.7% in 2021
to 5.3% in 2022. The growth in 2022 has recovered to the pre-pandemic level of 5%.
+72%
in nominal terms from
Q4 2021 to Q4 20222
In nominal terms, Indonesia’s GDP is still The economic expansion in 2022 was supported by
dominated by private consumption. The share has strong export, investment and household spending
remained consistent throughout the last 12 years. growth. In nominal terms, private consumption,
Private consumption, government spending, government spending, investment, and net exports
investment and net exports contributed 56.4%, 8.2%, have grown by 10.0%, -3.3%, 9.1% and 53.6%,
31.6% and 3.8% of total GDP, respectively, in nominal respectively, in 2022. Net exports contributed the most
terms in 2022. to economic growth in 2022. The sudden increase in
commodity prices that resulted from the Ukraine war
Figure 24. Breakdown of Indonesia’s Nominal GDP has increased the value of Indonesia’s palm oil and
Components (trillion Rupiah)2 coal exports, thereby strengthening the country’s
IDR 19,588* trillion3
/ USD 1,245 billion4 current account balance. In addition, the drop in
COVID-19 cases and successful vaccination
programme throughout 2022 have lifted the mobility
restrictions in Indonesia. As a result, household
consumption steadily increased throughout 2022.
Notes: 1) Real GDP is seasonally adjusted., 2) Household expenditure and
expenditure of non-profit organisations serving households are combined to
become the private consumption component, while gross fixed capital
formation and inventory changes are combined to become the investment
component, 3) Total GDP value included the statistical discrepancy between
GDP value by expenditure approach and by income approach, 4) Conversion
to USD uses the Bank Indonesia middle exchange rate listed on 30 December,
2022 of IDR 15,731/USD.
4.2 Gross Regional Domestic Product (“GRDP”) Figure 25. Regional Real GDP Contribution vs Regional
Real GDP YoY Growth in Q4 2022 (%)
Disparity between regions remains a concern to
address. Java Island contributed the most to the
Indonesian economy; The total GDP combined for
all Javanese provinces accounted for 57% of
national GDP in 2022. At the provincial level,
Jakarta remained the largest contributor to the
Indonesian economy; it accounted for 17% of
national GDP in 2022, followed by East Java (14%),
and West Java (13%). Meanwhile, North Maluku
grew the most, with a yearly growth of 50% in 2022,
reflecting the significant impact of the rebound from
the pandemic.
5.1 Inflation
Inflation picked up significantly in 2022 after a relatively modest rate in 2020 and 2021. The
strong increases in price levels in 2022 were caused by surges in global food and energy prices,
post-pandemic growth in domestic consumption and increases in domestic subsidised fuel prices.
Indonesia’s consumer price index peaked at 6% in September 2022. The administered1 price
component of inflation contributed the most to the price increase, with an estimated increase of
13.3% between Q4 2021 and Q4 2022. Inflation cooled down in Q4 2022 following Bank Indonesia’s
aggressive monetary policy stance and the slowdown in food inflation. However, inflation remained
elevated at 4.4% at the end of 2022; Bank Indonesia failed to meet its target of 2-4%.
Figure 27. Indonesia’s Consumer Price Index (“CPI”) Growth (%YoY) vs BI Seven Days Repo Rate
(“BI7DRR”)
Consumer confidence in Indonesia has remained stable despite rising inflation. The Consumer
Confidence Index (“CCI”) has followed a relatively stable trend with a compound annual growth rate
(“CAGR”) of 0.02% throughout 2022, in contrast to the spike in inflation in 2022 and the rate of 4.4% seen at
the year end.
Furthermore, consumer confidence remained optimistic in 2022 with a CCI value of more than 100 each
month and a value of 120 at the year end. This was a turning point from the peak period of Delta-variant
COVID-19 cases in July and August 2021 in Indonesia, which caused the CCI to fall under 100, which could
be read as pessimistic. The optimism in 2022 may have arisen from the relaxation of restrictions related to
COVID-19 as the pandemic became more controllable.
4.4%
The stability in CCI. This stability could partially be attributed to the introduction of the BI Seven Day Repo
Rate by Bank Indonesia, in 2016, which replaced the more conventional BI Rate. This monetary
transmission mechanism can affect money supply within one week, rather than a year as previously. BI has
also proactively managed inflation fluctuations by establishing inflation control task forces, both at the
national and regional levels, that act based on four pillars. Each task force has the authority to initiate
intervention measures based on each region’s inflation drivers. The four pillars for inflation control taskforce
are as follows:
1) Price affordability: Ensuring price stability on both producer and consumer levels, lowering
exchange rate volatility, and demand diversification.
2) Supply availability: Empowering domestic producers (especially food), ensuring export and import
flexibility, as well as reinforcing institutions.
3) Smoothness of distribution: Encouraging interregional trade cooperation and improving trade
infrastructures that improves direct and virtual connectivity.
4) Effective communication: Repairing data quality and strengthening central and regional
coordination.
24
5. Monetary and Financial System
The consumer price increase in transportation has surpassed that of primary needs components.
This is shown by the 15.3% YoY growth of the Consumer Price Index (“CPI”) for transportation in December
2022, as compared to those for; 1) Food, Beverages, Tobacco, 2) Clothing and Footwear, and 3) Housing,
Water, Electricity and Home Fuel with 5.8%, 1,4% and 3.8% YoY increase respectively.
The relatively high growth in CPI for transportation was driven by the 19.1% CPI increase in its
subcomponent of ‘Operation of Personal Transport Equipment’. This was influenced by the hikes in
Indonesia’s fuel prices as the government reduced some of the subsidies in September 2022, causing the
subsidised fuel price to increase by 30.7%1. This policy was taken as a response to the surge in global
energy prices during the first half of 2022.
Figure 39. Consumer Price Index Component Growth in December 2022 (%YoY)
Notes: [1] The price of Pertamax 92, Pertalite and Solar (subsidised fuels) increased from Rp.12,500/litre to Rp.14,500/litre, from
Rp.7,650/litre to Rp.10,000/litre and from Rp.5,150/litre to Rp.6,800/litre on 3 September 2022, respectively (Pertamina, 2022). 25
5. Monetary and Financial System
The steady growth of Indonesia’s commercial bank loans was hampered by the pandemic.
Despite Bank Indonesia’s accomodative monetary policy, bank lending activity shrank in 2020 amid
the growing uncertainty during the pandemic, which reduced demand for both household and
businesses loans. Bank Indonesia and the Financial Service Authority (Otoritas Jasa
Keuangan/”OJK”) intervened in 2020 by giving a stimulus and relaxation on credit (e.g. giving
borrower a chance to restructure and/or delay payment). The number of loans has recovered
post-pandemic, despite the slow start in 2021.
The number of total loans to households and businesses had increased as of September 2022.
Total loans from commercial banks increased by 11% from September 2021 to 2022, reflecting the
recovery in consumer confidence in 2022. Household and business loans increased by 9% and 11%,
respectively, indicating restored consumption and investment activities in 2022.
Sources: The Financial Services Authority (Otoritas Jasa Keuangan/’”OJK”), Banking Statistics Sep 2016-Sep 2022
26
Notes: 1) Multipurpose loans are credits granted to individuals for various personal purposes (consumptiom) which are covered by sufficient collateral.
5. Monetary and Financial System
The Rupiah depreciated against the US Dollar following the announcement of the first case of
COVID-19 in Indonesia, reaching 15,884 USD/IDR in March 2020. At the end of 2020 and
throughout 2021, the Rupiah stabilised with the easing of global financial conditions and with support
from Bank Indonesia’s bonds issuance programme. However, the Ukraine war and ensuing political
uncertainty have again triggered the depreciation of the Rupiah as investors have become
increasingly risk-averse.
Sources: Badan Pusat Statistik (2023), PwC Global Economy Watch (2023).
The Rupiah began to stabilise against the US Dollar in Q4 2022. In response to improved investor
risk sentiment, the pace of the Rupiah’s depreciation slowed as of late 2022. The Rupiah has
stabilised in the past month, supported by improvements in investors’ risk appetites around the world.
The rupiah is projected to depreciate in early 2023, conditional on the gradual recovery of the
Chinese economy and the stabilisation of global conditions, but the magnitude of the global shock
may keep investors away until late 2023 or later.
The volatility of financial markets, caused by the growing risk of a deeper global recession, could
potentially trigger capital outflows from Indonesia and drive a sharp depreciation of the Rupiah in the
long term. These risks include significant monetary policy tightening by major central banks that Bank
Indonesia would be unable to match, which would further depress investors’ confidence. In either
case, Bank Indonesia would have limited room for monetary policy maneuvering to curb inflation.
27
5. Monetary and Financial System
5.6 Unemployment
Prior to the spread of COVID-19 in February 2020, Indonesia’s unemployment rate1 had been declining – the national
unemployment rate declined from 6.2% in 2015 to 5.2% in 2019. The unemployment rate then steeply increased to
7.0% in 2020, following the large number of jobs that were lost during the early phase of the pandemic.
While the unemployment rate came down quickly over the last two years, the rate will potentially tick up in
2023. With economic growth expected to decline from 5.3% in 2022 to 4.8% in 2023, the labour market is expected to
tighten, thereby potentially increasing the unemployment rate.
Notes: 1) Unemployment is a situation where a person is actively looking for a job but is unable to find work. The unemployment rate is estimated
by determining the share of the labour force that is unemployed as a percentage of the total number of people in the labour force. 28
6. Trade
Indonesia has revived its international trade activities while strengthening trade
partnerships with other economies. Such measures are expected to provide a
cushion against economic uncertainty in 2023.
Indonesia’s trade balance was at its peak in 2022 after the trade deficit in 2019. Indonesia has
returned to being a net exporter since 2020 and posted a trade surplus of USD 54.5 billion in 2022,
standing as the highest trade surplus achieved for several years. It experienced a 41.6% YoY net
export or trade surplus growth in Q4 2022. Furthermore, Indonesia had greater total trade value in
2022 as its total trade (export and import) value surpassed the pre-pandemic value; there was a
56.2% increase in nominal value in 2022 from the 2019 level. Indonesia’s Ministry of Trade projected
a trade surplus of USD 38.3 to 38.5 billion in 2023, which represents a 29.4% to 29.7% decrease to
the 2022 trade surplus.
The projected slowdown in trade growth is likely to be induced by the global economic uncertainty
and weaker demand expected in 2023. The United States (“US”) was Indonesia’s second-largest
export market in 2022. Given the low economic growth projection of the US in 2023, Indonesia’s
international trade may potentially be impacted through lower net exports to the US.
14.6
Export
China USA Japan India Malaysia
$65.92B $28.20B $24.85B $23.38B $15.45B
(22.6%) (9.7%) (8.5%) (8.0%) (5.3%)
Import
China Singapore Japan Malaysia South Korea
$67.72B $19.41B $17.18B $12.48B $11.72B
(28.5%) (8.2%) (7.2%) (5.3%) (4.9%)
29
6. Trade
Indonesia is strengthening its trade partnerships with multiple economies. Among many trade
agreements, the Regional Comprehensive Economic Partnership (“RCEP”) has been one of the most
highly anticipated agreements. It officially entered into force in Indonesia on 2 January 2023.
RCEP is expected to strengthen the trade partnership between Association of Southeast Asian
Nations (“ASEAN”) members, China, South Korea, Japan, Australia and New Zealand. The
agreement has several aspects such as tariff elimination for goods, preferential market access for
certain goods, simplified customs procedures, and many others. As per 20 December 2022,
Indonesia was participating in the following trade agreements, discussions and explorations:
Agreements that have either been signed, ratified, or implemented are as follows:
27 ● Japan ● Preferential Trade Agreement
Trade ● Pakistan Developing Eight (“PTA D8”)
Agreements ● Palestine ● Trade Preferential System among
● Chile (Trade in Goods) Organisation of Islamic
● Australia Cooperation Member States
● European Free Trade (“TPS OIC”)
Association (“EFTA”) ● ASEAN Scope
● Mozambique ● Trade Facilitation Agreement
● Korea (“TFA”)
● United Arab Emirates ● Indonesia Fisheries Subsidy
● RCEP
17 ●
●
European Union
Chile (Trade in Services)
●
●
Tunisia
Mauritius
Trade ● Turkey ● Morocco
Discussions ● Pakistan (Trade In Goods ● Canada
Agreement/“TIGA”) ● Mercado Común del Sur
● Bangladesh (“MERCOSUR”)
● Iran
Spending
DKI Jakarta Central Java East Java
Source: Badan Pusat Statistik Indonesia (2023)
210.22 Trillion 148.21 Trillion 134.54 Trillion
Rupiah Rupiah Rupiah
The top five trade commodities in terms of regional (18.6%) (13.1%) (11.9%)
trade value in 2021 were coal (non-agglomerated),
Selling
cars and vehicles, oil fuel, crude palm oil, and
cigarettes and tobacco, which together accounted for DKI Jakarta East Kalimantan West Java
260.17 Trillion 211.14 Trillion 136.35 Trillion
37.5% of the total national transaction value in 2021. Rupiah Rupiah Rupiah
The transaction value for coal (non-agglomerated) (23.0%) (18.7%) (12.1%)
alone amounted to IDR 227.24 trillion, equivalent to
20.1% of the total regional trade transaction value in
The majority of regional trade in 2021 was
2021.
distributed via land transportation. This is supported
by data showing that DKI Jakarta, as the top selling
Figure 39.Top 5 Regional Trade Commodities in
province in 2021, made its biggest sales to West Java,
Value for 2021
Central Java, and East Java, which are all accessible
1 Coal by land transportation.
Cars & vehicles, for Figure 41. Regional Trade Transportation Modes in
2 passengers 2021
3 Oil fuel
Account for
4 Crude palm oil 37.5% 77.56% 18.88% 3.56%
Land Water Air
Regional Trade Transport Transport Transport
5 Cigarettes, tobacco
Indonesia’s foreign and domestic investments reached their all-time high in 2022. The Job
Creation Law, which harmonises government policies from the regional to central levels,
might have improved the attractiveness of investing in Indonesia. Sustainable investment,
which seeks to balance financial returns with Environmental, Social, and Governance
(“ESG”) factors, will be the key area to focus on over the next ten years.
7.1 Foreign Direct Investment (“FDI”)
This increasing trend may potentially be emphasised by the
FDI flow in Indonesia reached its highest level in export ban of nickel ore that has been enforced since
Q4 2022, which was mainly investment into January 2020 as part of the GoI’s attempts to drive
downstream industry development in the mining and investment to the downstream domestic nickel industry.
petrochemical sectors. FDI has been increasing
sharply since Q4 2021 and reached its peak in Q4 Indonesia received the highest FDI flow from
2022 at USD 12.2 billion with a 45.8% YoY growth rate. Singapore. This flow totalled USD 13.3 billion, equivalent
The Job Creation Law was signed in 2020 with to 29.1% of Indonesia’s total FDI value in 2022. Singapore
implementing regulations made in 2021. The has regularly been among the top FDI sources in Indonesia
implementation period was the same period as the over the past years. Singapore and Indonesia signed an
sharp increase in FDI. MoU on energy cooperation and an MoU on bilateral
partnership on green and circular economy development in
The Job Creation Law was developed with the January 2022. These agreements were expected to
objective of attracting investment and thus may have strengthen their partnership in infrastructure financing for
potentially contributed to the FDI increase. However, low-carbon energy and electricity trading. Globally,
given the law’s relatively recent implementation, sustainable investment has been a highlight and shows
investors might still be in the transition phase. Hence, positive prospects, as seen by the 165% annual growth of
the optimum outcome in investment may not be international project finance deals (in terms of value) for
reflected yet; such an outcome will only be seen when renewable energy in developing economies in 2021.
investors have fully adjusted to the new regulation.
Figure 42. Indonesia Foreign Direct Investment Flow Figure 44. Top 5 FDI Sources in Indonesia (2022)
(USD billion) FDI
Singapore China Hongkong Japan Malaysia
$13.28B $8.23B $5.51B $3.56B $3.34B
(29.1%) (18.0%) (12.1%) (7.8%) (7.3%)
Figure 43. Top FDI Sectors by Value in Indonesia and Their Value Contributions (2022)
1 Base Metals and Metal Goods Industry, excluding Machinery and Equipment 24.0%
2 Mining 11.3%
3 Chemical and Pharmaceutical Industry 9.9%
4 Transportation, Warehousing and Telecommunications 9.0%
5 Electricity, Gas and Water 8.3% 32
Source: Ministry of Investment (2023), PwC Analysis (2023), Straits Times (2022)
7. Investment
DDI remained relatively stable throughout 2022 The mobility restrictions meant that many people
compared to the years before. The trend of DDI resorted to online interactions, both for work and social
reached a plateau in 2022 following its steady increase purposes. Despite the easing of mobility restrictions,
in 2021. It reached its peak in 2022 Q4 at IDR 139.6 reliance on technology and telecommunications was
trillion with a 17.0% YoY growth rate. still strong in Indonesia in 2022. Several businesses
adopted flexible working arrangements for their
As was the case with FDI, the Job Creation Law may employees in 2022, allowing them to work from
have potentially contributed to the increase throughout anywhere with proper technology and
2021 and 2022. The Job Creation Law was developed telecommunications support. The flexible working
to attract both foreign and domestic investment by arrangements are likely to continue after the pandemic
easing business licensing procedures, relaxing ends.
investment restrictions and empowering micro, small
and medium enterprises (“MSMEs”), and eased a In addition, the transportation sector improved in 2022,
backlog in licensing applications, among many other especially for air transport passengers. This was driven
initiatives. by increased mobility in 2022 as travelling restrictions
Figure 46. Indonesia Domestic Direct Investment Flow in many destination areas were relaxed, both
(IDR trillion) internationally and domestically.
3 Mining 11.3%
4 Food Industry 9.9%
33
8. Government
Excise Customs
IDR 227 tn IDR 91 tn
(8.64%) (3.46%)
Natural Public
resources services
Over the past decade, Indonesia has consistently had the lowest IDR 269 tn IDR 83 tn
tax-to-GDP ratio among its ASEAN-5 peers (Singapore, Malaysia,
Thailand and the Philippines). Indonesia’s tax-to-GDP ratio fell from (10.23%) (3.15%)
9.8% in 2019 to 8.3% in 2020. However, in 2022 it was able to rise
above pre-pandemic levels to 10.4%.
The GoI was able to collect IDR 1,717 trillion in 2022, the highest revenue in the last four years.
Income taxes (38%) and VAT (26%) make up the majority of this achievement, followed by non-tax
revenue from natural resources (10.2%) and excise (8.7%).
The Harmonisation of Tax Regulations Law introduced new revenue potential for the
government. For example, the adjustment of VAT rate from 10% to 11% that has been effective
since April 2022. This has facilitated a 13.7% growth between 2021-2022 on top of the commodity
price hikes and Indonesia’s economic recovery during that time.
Another noteworthy achievement is that as of 30 June 2022, the voluntary disclosure programme (i.e.
Tax Amnesty Volume II) was able to rack up IDR 61 trillion in taxes from the disclosure of IDR 595
trillion worth of net wealth. Through the recently introduced tax on transactions in the digital
economy, the GoI was also able to collect IDR 10 trillion from trade through electronic services and
IDR 246 billion and IDR 210 billion from crypto transactions and fintech and peer-to-peer lending
transactions, respectively.
Sources: Ministry of Finance (2022), World Bank (accessed 2023), PwC Analysis (2023).
Notes: [1] The 2019-2022 figures are based on realised revenue, whereas the 2023 figure is based on the planned budget.
34
8. Government
8.2 The Government can leverage 2022’s excess budget deficit financing (“Sisa Lebih Perhitungan
Anggaran” - SiLPA) to support 2023’s deficit spending
Indonesia’s budget deficit has returned Figure 50. Budget Deficit and Deficit-to-GDP Ratio, 2019-2023
to below 3%. To support pandemic (IDR trillion)1
recovery efforts, Indonesia’s budget deficit
-to-GDP ratio widened from 2.2% in 2019 to
6.14% in 2020 (See Figure 44), above the
3% threshold as determined under Law No
17 2003. Since then, Indonesia has been
able to lower it to 4.57% in 2021, and
subsequently 2.38%. For the 2023 state
budget, the government has set the budget
deficit at IDR 598.2 trillion or 2.84% of the
GDP based on the Ministry of Finance’s
assumption that the economy would grow
by 5.3% in 2023.
Figure 51. Deficit Financing, Budget Deficit, and Excess 2022’s excess budget deficit financing
Budget Deficit Financing, 2019-2023 (IDR trillion)1 (“Sisa Lebih Perhitungan Anggaran” -
SiLPA) could support the government in
weathering the uncertainties of 2023.
The budget deficit in 2022 was lower than
anticipated, which was supported by the
recovery of government revenue and the
optimization of deficit financing. As a result,
Indonesia’s SiLPA for that year was
recorded at IDR 119.21 trillion. For 2023,
Indonesia is planning to issue IDR 598.2
trillion of government debt, IDR 176 trillion
of which will be used for investing in
Trans-Sumatra Toll Road, endowment
funds for Islamic boarding schools, and
disaster pooling funds (See Figure 46)
among other projects.
8.3 The 2023 spending budget has been set lower as part of fiscal
consolidation (in an attempt to maintain the deficit below 3% of Government spending
GDP) (realised), 2022, IDR trillion
Figure 53. Central Government Spending, 2019-2023 (IDR trillion)1
Social Food
protection security
IDR 161 tn IDR 94.1 tn
(7.08%) (4.14%)
Education Health
IDR 575 tn IDR 212.9 tn
(25.28%) (9.36%)
Infrastructure Environment
IDR 373 tn IDR 13.6 tn
(16.4%) (0.6%)
Table 2. Fuel Price Conditions during the 2022 Fuel Subsidy
Adjustment 2023 spending priorities:
Fuel type Solar Pertalite (RON Pertamax ● Improve Indonesia’s human
90) (RON 92) capital
● Accelerate basic infrastructure
Market price 13,9502 14,4502 17,3003 development (including for the
(IDR per L) new capital city)
● Improve the efficacy of social
Retail price 5,150 7,650 12,500 protection programmes, including
(IDR per L)
subsidy reforms
● Support the revitalisation of
Gap/subsidy 8,800 6,800 4,800
(IDR per L) value-added and export-based
(63%) (47%) (28%)
industries
● Support the adoption of green
Adjusted price 6,800 10,000 14,500
(IDR per L) energy and the energy transition
The fuel subsidy adjustment in September 2022 was one of the major fiscal decisions made
last year. This was done in response to the oil price shock following the Russian invasion of Ukraine,
where, in the absence of an adjustment, there could have been severe pressure on the state budget.
Prior to the adjustment, the government subsidy ranged from 28% to 63% of the market price,
depending on the fuel type. It is worth noting that according to the 2021 Social and Economic Survey
(i.e. Susenas 2021), less than 30% of the allocated subsidy was being enjoyed by people at the
bottom 40% household income, indicating ineffective targeting. Nevertheless, as a way to cushion the
impact for low-income households, the GoI redirected some of the saved budget spending via ad-hoc
conditional cash transfers (i.e. BLT BBM), where eligible families were entitled to IDR 600,000 each
distributed across four months.
Sources: Ministry of Finance (2022)
Notes: [1] The 2019-2022 figures are based on realised spending, whereas the 2023 figure is based on the planned budget; [2] Assuming ICP 105,
14,700 IDR/USD exchange rate; [3] RON 92-equivalent price from other retailers.
36
9. Development
9.1 Indonesia’s Human Development Index (“HDI”)1 9.2 HDI scores in East Indonesia provinces are
score has increased again after stagnating during mostly at a medium level, indicating unequal
the first year of the pandemic development
Figure 54. Indonesia HDI Scores, 2011-2022 Figure 56. Indonesia HDI by Region and Level, 2022
Expenditure per
HDI Growth
capita (%) 2 DI Yogyakarta 2
80.64 West Papua 65.89
(IDR mn per year)
11.5 72.91 0.86
East Nusa Tenggara
3 East Kalimantan 77.44 3 65.90
9.3 Indonesia’s social security system has yet to 9.4 Learning from the shortcomings of Indonesia’s
cover all of its citizens healthcare system during the COVID-19 pandemic
Figure 57. Indonesia’s average life expectancy, Figure 59. Six Pillars of Indonesia’s Healthcare
2011-2022 (years) System Transformation
Referral service
Primary service transformation transformation
(Education, primary and (Improved access to
secondary prevention, capacity and quality of
building for primary services) secondary and
tertiary services)
9.5 Indonesia is still lacking sufficient and qualified 9.6 “Merdeka Belajar” seeks to transform
teachers Indonesia’s educational system
Figure 60. Average and Expected Lengths of Merdeka Belajar was launched by the Ministry of
Schooling1 in Years, 2011-2022 Education and Cultural Affairs to transform Indonesia’s
educational system to support the improvement of its
human capital. As of now, it consists of 22 programmes
that form part of a series of continuous developments
that have been undertaken since the first policy of
revising the national exams was introduced in 2019.
9.7 On average, an Indonesian spends IDR 11.48 9.8 About 24.7% of Indonesians were living below
million per year (USD 751.54 per year) or the lower middle-income poverty line as of 2021
IDR 957,000 per month (USD 62.63 per month)1
Figure 64. Expenditure per Capita, 2011-2022, Figure 66. Poverty Levels, 2012-2021, (%)
IDR Million per Year
Between 2011 and 2022, Indonesia’s expenditure per In general, poverty is in decline in Indonesia, although
capita increased from IDR 9.65 million to IDR 11.48 Indonesia’s poverty levels are still the highest in the
million per year (19% growth). During the start of the ASEAN-5. The measures by which Indonesia
COVID-19 pandemic in 2020, the number dropped underperforms include the share of people living below
from IDR 11.3 million to IDR 11.01 million, which can the international poverty line; as of 2021, 4.4% of
be attributed to the loss or decrease of income along Indonesians were living on less than USD 2.15 a day.
with the mobility restrictions implemented to contain
the spread of the virus. However, the number has since Based on other poverty measurements, 24.7% of
rebounded; in 2022, it surpassed the pre-pandemic Indonesians live below the lower middle-income
figure poverty line (USD 3.65 a day) and 61.9% live below
the upper middle-income poverty line (USD 6.85 a
Similar to other HDI indicators, the lowest expenditure day). It is worth noting that between 2012 and 2021,
per capita is disproportionately found in provinces in people living below the lower middle-income poverty
East Indonesia such as Papua, East Nusa Tenggara line experienced the highest average annual reduction
and North Maluku. (2.6% per annum).
Figure 65. Government Cash Transfer Programmes
9.9 Gender outcomes have remained relatively stable over the past decade, except in regard to the number
of women with university-level education
2018 witnessed a tipping point where there were more women than men in the workforce with university-level
education. The number of women who at least have a senior-high school-level education has also been increasing.
Nevertheless, the gender pay gap remained relatively high at around 20%. Workforce participation among women
also remained at 50%, compared to 80% for men.
Figure 67. 2022 Gender Pay Gap Figure 69. Sectors with Highest Gender Pay
Gap in 2022
41
10. Governance
Among the six indicators, the government Source: World Governance Indicators – World Bank (updated 2022*)
effectiveness index has been consistently ranked
the highest over the past five years. The government Among the six indicators, the control of corruption
effectiveness index increased by 11.05 points between index has been consistently ranked the lowest
2017 and 2021, indicating increased public trust in the over the past five years. The control of corruption
quality of public services in the country. Further efforts index declined by 7.69 points between 2017 and 2021.
by the GoI that contributed to the increase in the A supplementary report by Transparency International
government effectiveness index since 2017 have demonstrated that Indonesia scored 34 points out of
included: 100 on the 2022 Corruption Perceptions Index (“CPI”).
● A push for stronger infrastructure development. The The score remained relatively low, partly because of
development of the new capital city in East the GoI’s decision to amend Law No. 19 of 2019 on
Kalimantan is expected to boost economic growth, the Corruption Eradication Commission, which
improve logistics networks and create local jobs; changed the jurisdiction of the institution to be under
● The pursuit of a free and active foreign policy and the executive branch thus reducing its independence.
diplomacy with many countries; and Indonesia ranked #110 out of 180 in 2022 in terms of
its effectiveness in controlling systematic corruption
Table 4. Rank of E7 Performance in the 6 WGIs within its borders.
In 2020, Indonesia's GCI performance was 55.3/100, Indonesia has been categorised as a
second to China amongst E7 countries. The 2020 “less-prepared” country for economic
special edition of the Global Competitiveness Report transformation. Transformation readiness1 is a
("GCR") elaborated on economic transformation through measurement of each country’s macroeconomic
improvements in the environment, human capital, and microeconomic productivity. Factors tested
productivity in markets and continued innovation. include business environment quality,
sophistication of business operations and
The GCR is a yearly report published by the World monetary and fiscal policy, social infrastructure
Economic Forum. The twelve pillars of competitiveness and political institutions. The tested factors and
are shown below: Indonesia’s associated transformation scores are
1. Institutions as follows:
2. Appropriate infrastructure ● Ensure public institutions embed strong
3. Stable macroeconomic framework governance principles and a long-term vision
4. Good health and primary education and build trust by serving their citizens – 58.8
5. Higher education and training ● Upgrade infrastructure to accelerate the energy
6. Efficient goods markets transition and broaden access to electricity and
7. Efficient labour markets ICT – 62.7
8. Developed financial markets ● Shift to more progressive taxation, rethinking
9. Ability to harness existing technology how corporations, wealth, and labour are taxed
10. Market size – both domestic and international nationally and in an international cooperative
11. Production of new and different goods using the framework – 53.7
most sophisticated production processes ● Update education curricula and expand
12. Innovation investment in the skills needed for the jobs and
markets of tomorrow – 49.0
The aggregated GCI score is the average score of the 12 ● Increase incentives to direct financial resources
pillars, with a higher index indicating better towards long-term investments, strengthen
competitiveness in factor-driven (first to fourth pillars), stability and expand inclusion – 59.7
efficiency-driven (fifth to tenth pillars) and ● Rethink competition and the anti-trust
innovation-driven (eleventh and twelfth pillars) countries. frameworks needed in the Fourth Industrial
Revolution, ensuring market access both locally
Figure 72. Infographic of E7 Countries’ Opinions on and internationally - 62.9
Supply Chain Evolution over the Next Five Years ● Facilitate the creation of the markets of
tomorrow, especially in areas that require
public-private collaboration – 45.0
● Incentivise and expand patient investments in
research, innovation and invention that can
create new markets of tomorrow – 45.6
● Incentivise firms to embrace diversity, equity and
inclusion to enhance creativity – 60.4
● Rethink labour laws and social protection for the
new economy and the new needs of the
workforce – N/A2
● Expand eldercare, childcare and healthcare
infrastructure, access and innovation for the
benefit of people and the economy – N/A2
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