Country note: Indonesia
In Short
By Alexander Friis Illum, Senior Analyst
We visited Jakarta in November 2024 to meet with government officials, central bankers, and local analysts. The newly elected government, led by President Prabowo, took office on October 20 with an ambitious agenda to increase economic growth to 8% per year, attract investments, and improve living standards for Indonesia’s immense population. The administration has identified nine key sectors to drive the transition away from commodity dependence and towards a more industrially focused economy. The most significant emphasis appears to be on advancing downstream industries. While the current macroeconomic backdrop is solid, risks are increasing both domestically and internationally. Domestically, our concerns are centered on the fiscal outlook, where we worry the government may compromise fiscal austerity to boost growth. Internationally, risks are linked to Donald Trump’s election as President of the United States.
Politics: Prabowo and Trump in focus
Following a decisive election victory in February, Prabowo Subianto was sworn in as President on October 20, 2024. He ran for the position alongside Gibran Rakabuming, the eldest son of former President Joko Widodo, who assumed the role of Vice President. The pre-election period was marked by controversy, as Gibran did not meet the constitutional age requirement. However, the transition to the new government proceeded without scandal.
Most headlines so far have focused on the “free meal program,” which – when fully implemented – will provide 80 million people, mostly school children, with a free daily meal. However, it seems clear that the first major political test of Prabowo’s capabilities will come when President Trump assumes office in the US on January 20 next year. From Indonesia’s perspective, the order and magnitude of potential tariffs appear to be the most important topic concerning Trump.
Chart 1: Indonesia trade partners (2022)
Source: CEPII, Global Evolution
With the US being Indonesia's second-largest export destination, global tariffs of 10% to 20% would undeniably pose a headwind for Indonesian exports and economic growth. Equally problematic would be tariffs on China of the 60% size that Trump has threatened, as they could further weaken an already slowing growth trajectory in Indonesia’s largest export market. On a positive note, trade constitutes a much smaller share of Indonesia's total economy compared to most of its Southeast Asian peers.
Chart 2: Trade as a share of GDP (2024)
Source: Haver Analytics, Global Evolution
When visiting government offices, it becomes clear that “downstreaming” is the buzzword of the moment. Prabowo aims to move Indonesia up the commodity value chain to boost long-term growth. If China faces harsh tariffs, Western countries may seek alternatives for trade and investments. Currently, Indonesia exports mainly primary goods like coal and palm oil. To capitalize on trade shifts away from China, Indonesia must expand downstream industries.
Some investors and analysts are concerned about Prabowo’s views on democracy. These concerns stem from his past as Suharto’s son-in-law and a high- ranking military officer during Suharto’s reign.
However, Prabowo seems to have moderated since then and was elected with a democratic mandate. We find it unlikely (though still a non-negligible tail risk) that he will seek changes to Indonesia’s democracy.
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