Indonesian political economy | Invest Islands
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POLITICAL ENVIRONMENT

Indonesia is a vibrant democracy that continues to strengthen its political structures and deepen the enfranchisement of the population.

Indonesian Political Situation

Indonesia has undergone a political transformation since the upheaval of 1998, which resulted in the fall of General Suharto after 30 years of authoritarian rule and a collapse of the Rupiah.

The 2014 election of Joko “Jokowi” Widodo was greeted with great optimism, representing a new breed of politician to emerge within the nascent democracy.

Jokowi’s humble background as a furniture maker and son of a wood seller means he is often regarded as a man of the people and in touch with ordinary Indonesians.

In the 2020-2024 Medium-Term National Development Plan (RPJMN), the government provides an opportunity for foreign investors to enter and participate in the sustainable infrastructure development in Indonesia.

The Indonesian Government is making great strides to ensure foreign investors can also have great opportunities to improve their investment possibilities in the country.

Jokowi: A reform-minded leader​

Jokowi, the first president outside of the political and military elite, was re-elected in 2019 by vowing to boost growth, attract investments, and improve infrastructure.

Since assuming the top post, he has undertaken several reforms to fuel growth, albeit with different degrees of success. Nonetheless, he has improved the country’s fiscal credibility, improved public infrastructure, and created a market-friendly investment environment.

Some of the new reforms that have taken place:

  • Connectivity had become the main theme for infrastructural development in Indonesia. This focus on connectivity is seen as a direct precondition and a strategic priority for economic development in a country that spans 17,000 islands. This also shows a solid commitment to boost tourism and development across the entire archipelago.
  • The Indonesian Government has introduced 13 economic policy packages, which include reducing processing time for establishing a business, issuing permits, cutting administration costs, introducing measures to support small and medium businesses, and fiscal incentives to attract investments.
  • Another significant part of Jokowi’s economic reform is the change of foreign ownership, which has helped to create more opportunities for foreign investment. With the support of Jokowi's revised foreign ownership rules, overseas investors can now buy land and develop property in Indonesia without the need for a local nominee.

Political Stability

Indonesia is the largest economy in Southeast Asia. While it has seen a slowdown in growth since 2012, mostly due to the end of the commodities export boom, during the global financial crisis, Indonesia outperformed its regional neighbours and joined China and India as the only G20 members posting growth. Indonesia’s annual budget deficit is capped at 3% of GDP, and the Government lowered its debt-to-GDP ratio from a peak of 100% shortly after the Asian financial crisis in 1999 to 34% today. It is  ranked 73rd from 190 economies in the World Bank’s latest ‘Ease of Doing Business’ index.

Indonesia Political Stability index (-2.5 weak; 2.5 strong)

For that indicator, The World Bank provides data for Indonesia from 1996 to 2019. The average value for Indonesia during that period was -1.05 points with a minimum of -2.09 points in 2003 and a maximum of -0.37 points in 2016.

Ease of Doing Business Index

Indonesia is ranked 73 among 190 economies in the ‘Ease of Doing Business’, according to the latest World Bank annual ratings. The rank of Indonesia remained unchanged at 73 in 2020 from 73 in 2019.

The Ease of Doing Business index ranks countries against each other based on how the regulatory environment is conducive to business operations.

Prosperity Index

According to the Legatum Prosperity Index 2019, Indonesia performs best on Social Capital and Economic Quality and scores lowest on Living Conditions. 

The biggest positive change, compared to last year, came in Social Capital.

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