Indonesia

Economic growth should remain constant

Economic growth should stay constant in 2025, driven by private consumption (more than 50% of GDP) and a favourable investment environment. Prabowo Subianto took office in October 2024 and wants to achieve an ambitious 8% economic growth rate during his tenure. However, the risks facing the country suggest that the target could be difficult to achieve. Indonesia’s low exposure to exports (22% of GDP) acts as a relative shield against rising trade tensions; however, the shrinking middle class, exacerbated by Covid-19, damps the prospects for accelerating private consumption growth and poses challenges to sustained economic momentum.

Against the backdrop of rising trade tensions, coupled with the decline in commodity prices, Indonesian exports could remain weak. Conversely, exports of services should benefit from the continued recovery of international tourists, particularly from China. On that score, total tourist arrivals rose 19% in 2024, reaching 86% of pre-Covid-19 levels (2019). Meanwhile, the US and China – Indonesia's main export markets – are engaged in a trade war that could harm the global economy and, consequently, demand for Indonesian exports. Moreover, the Indonesian government has introduced export bans on raw materials (nickel, bauxite, copper, etc.) to encourage domestic processing. These bans are set to continue despite international criticism, notably from the European Union, which claims that these policies violate WTO agreements. Indonesia aims to be a major player in global supply chains, particularly for electric vehicle batteries. These bans, in addition to trade tensions that are pushing companies to move their supply chains away from China, should enable a sustained flow of foreign direct investment. On the domestic front, household consumption appears to be slowing due to growing concerns about the shrinking middle class. To support households, the government raised the minimum wage by 6.5% in January 2025 and plans to implement several policies to support purchasing power and develop human capital, such as free school meals and medical examinations. Meanwhile, the plan to broadly hike VAT from 11% to 12% has been scaled back and applies only to luxury goods and services. Inflation eased in 2024 and was negative in February 2025 (the first time since March 2000) when the government temporarily discounted electricity bills. While inflation is set to accelerate as the discounted electricity tariffs end, it should remain low amid lower global food and commodity prices.

Consequently, the Bank of Indonesia (BI) shifted its focus from inflationary and depreciation pressures to supporting economic growth amid slowing household consumption. Declining inflationary pressures, lower FED fund rates, and a sizeable real interest rate prompted BI to cut rates in September 2024 and January 2025. Looking forward, BI could continue to cut rates further; however, such a move might mean being caught between slowing growth and a depreciating rupiah. Fortunately, its FX reserves are plenty enough to take part in the foreign exchange market.

Low twin deficits amid budgetary discipline

The budget deficit for 2024 reached Rp 507.8 trillion (USD 31.34 billion), or 2.29% of GDP. Indonesia has a budget deficit limit of 3% of GDP and a maximum debt-to-GDP ratio of 60%. While Prabowo Subianto has repeatedly expressed his willingness to break free of these budget limits to finance his costly campaign promises, the reappointment of Sri Mulyani Indrawati as Finance Minister heralds fiscal discipline. The government anticipates that the budget deficit will stay for all intents and purposes stable at 2.53% of GDP in 2025, but the 20.8% drop in total revenue in Jan-Feb 2025 at a time when spending declined by 7% raises questions as to whether this objective can be achieved without a drastic cut in spending. The drop in revenue was due to a delay in tax collection in January, following discussions on a general VAT increase that was eventually postponed. In addition, falling commodity prices led to a drop in corporate income tax collection. Meanwhile, President Prabowo Subianto is still pushing for costly welfare programmes. The 2025 budget has placed a priority on social welfare (food security, free school meals, medical examination etc.), infrastructure (Nusantara Capital), defence etc. Compared to regional peers, Indonesia’s tax revenue as a percentage of GDP is relatively low (around 10-12% vs. 25-35% for OECD). The government has therefore very limited resources with which to fund public services, social programmes and infrastructure. Amid lower tax revenue collection, to maintain a budget deficit below 3%, the government will also need to reduce its spending. This could lead to longer-than-expected completion times for some infrastructure projects or a decrease in the quality of the government's goods and services (e.g., with lower-quality free meals than initially planned). With Sri Mulyani Indrawati as Finance Minister, the deficit is unlikely to exceed the 3% threshold. As a result, the increasingly domestic share of public debt (over 70% of the total) is expected to remain moderate.

Recording a surplus of 1% of GDP, the current account reached its highest level in over a decade in 2022, thanks to rising commodity prices pushing up the goods balance. Since then, as commodity prices have fallen, the current account has slipped back into negative territory. In 2025, the deficit is set to remain and may even widen slightly. With commodity prices continuing to fall and given the unclear trade prospects, revenues from goods exports could decline. Meanwhile, falling commodity costs should help bring down import prices, but infrastructure projects (e.g., the construction of new capital) would lead to high imports of building materials. As a result, the balance of goods surplus should continue to decline. The balance of services should remain in deficit, but the continued recovery in tourist arrivals should help reduce it. The primary income deficit, dragged down by debt interest payments and profit repatriation, will remain the main driver of the current account deficit. The secondary income balance should remain slightly in surplus, thanks to the sustained inflow of workers' remittances. The current account deficit is more than compensated by capital inflows, notably sustained FDI inflows. Consequently, foreign exchange reserves are expected to remain adequate, covering 7.85 months of imports in January 2025.

Prabowo Subianto, a popular military leader heading the country

The February 2024 presidential election ended in an uncontested victory for Prabowo Subianto, who secured 58.6% of the vote, enabling him to avoid a run-off. Although very popular, incumbent President Jokowi of the Indonesian Democratic Party of Struggle (PDIP) was ineligible for re-election as he was completing his second consecutive five-year term. Prabowo Subianto was Minister of Defense, and his running mate for vice-presidency Gibran Rakabuming is Jokowi's eldest son. However, despite the duo’s massive lead in the presidential votes, Prabowo’s Gerindra Party secured only 13.2% of the votes in the legislative race. None of the eight parliamentary parties holds a majority, prompting the President to seek support from a broad coalition. Seven of the eight parties are part of the “Advanced Indonesia” coalition (470 seats or approximately 81% of total), with only the PDIP in opposition, being the party with the highest number of seats (110 seats or 16.7 of total).

Following his inauguration in October 2024, President Prabowo Subianto announced the largest cabinet since 1966, with 48 members. To avoid fierce opposition, even though the PDIP is not part of the coalition, Subianto appointed the former aide-de-camp to this party leader (Magawati Sukarnoputri) as minister coordinating politics and security, and the brother of another former aide-de-camp as Attorney-General. The re-appointment of 17 of Widodo's cabinet ministers reflects some continuity. The reappointment of Sri Mulyani Indrawati as Finance Minister has reassured the market (investors) as she is known for her fiscal discipline. Subianto had previously expressed his desire to exceed the budget and debt ceilings, but under Mulyani this will be highly unlikely.

Given the importance of both the US and China to Indonesia's economy, the policy of non-alignment will be maintained. Indonesia does, however, have some territorial problems with China. Although China has recognised Indonesia's sovereignty over the Natuna Islands, it claims part of the waters around them, which are home to fishery resources and an Indonesian oil rig. Also, after having been banned from entering the US for 20 years until he became Defence Minister in 2019, Prabowo may have misgivings about the West. Indonesia is actively seeking OECD membership and it became a full member of the BRICS in January 2025. As the world's most populous and largest Muslim-majority country, membership of the BRICS enables Indonesia to shape the world order as best it can by lobbying for reforms that are in line with its positions.

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Croissance du PIB (%)

Payment

Cash, cheques, and bank transfers are each popular means of payment in Indonesia. SWIFT bank transfers are becoming more popular as an instrument of payment for both international and domestic transactions due to the well-developed banking network in Indonesia.

Standby Letters of Credit constitute a reliable means of payment because a bank guarantees the debtor’s quality and repayment abilities. Furthermore, the Confirmed Documentary Letters of Credit are also considered reliable, as a certain amount of money is made available to a beneficiary through a bank.

Debt Collection

Amicable phase

The first step to recovering a debt is to negotiate the issue with the debtor to attempt to resolve the issue amicably. There is an inherent Indonesian culture and ideology (Pancasila) where amicable settlement is encouraged. Creditors usually issue a summon/warning letter to the debtor, which outlines a statement concerning the debtor’s breach of commitment. The letter also calls for a discussion to determine whether the dispute should be settled through the court system. If the amicable phrase does not result in a settlement, the parties may trigger legal action.

Legal proceedings

The Indonesian judicial system comprises several types of courts under the oversight of the Supreme Court. Most disputes appear before the courts of general jurisdiction, with the Court of First Instance being the State Court. Appeals from these courts are heard before the High Court (a district court of appeal). Appeal from the High Court, and in some instances from the State Court, may be made to the Supreme Court.

Ordinary proceedings

Ordinary legal action may commence when the parties have been unable to reach a compromise during the amicable phase. The creditor may file a claim with the District Court, who is subsequently responsible for serving the debtor with a Writ of Summons. If the debtor fails to appear at the hearing to lodge a statement of defence, the court has discretion to organize a second hearing or to release a default judgment (Verstekvonnis).

Prior to considering the debtor’s defence, as previously mentioned, the court must first verify whether the parties have tried to reach an agreement or amicable settlement through mediation). If the parties have undergone the mediation process, the panel of judges will continue the hearings and the parties’ evidence will be examined. The judge will render a decision and may award remedies in the form of compensatory or punitive damages.

District Court will usually take from six months to a year before rendering a decision in the first instance. The proceedings may take longer when a case involves a foreign party. 

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Enforcement of a Legal Decision

When all appeal venues have been exhausted, a domestic judgment becomes final and enforceable. If the debtor does not comply with the judge decision, the creditor may request the District Court to commend execution by way of attachment and sale of the debtor’s assets through public action.

Indonesia is not part to any treaty concerning reciprocal enforcement of judgments, making it highly difficult to enforce foreign judgments in Indonesia, or to enforce Indonesian court decisions abroad. Because foreign judgements cannot be enforced by Indonesian courts within the territory of Indonesia, foreign cases must therefore be re-litigated in the competent Indonesian courts. In such a case, the foreign court judgment may serve as evidence, but this is subject to certain exceptions as regulated by other Indonesian regulations.

Insolvency Proceedings

There are two main procedures for companies who are experiencing financial difficulties:

Suspension of payments proceedings

This procedure is aimed at companies that are facing temporary liquidity problems and are unable to pay their debts, but may be able to do so at some point in the future. It provides debtors with the temporary relief to reorganize and continue their business, and to ultimately satisfy their creditors’ claims. The company continues its business activities under the management of its directors, accompanied by a court-appointed administrator under the supervision of a judge. The company must submit a composition plan for the creditors’ approval and for ratification by the court. The rejection of the plan by the creditors or the court will result in the debtor’s liquidation.

Liquidation

The objective of liquidation is to impose a general attachment over the assets of bankrupt debtors for the purpose of satisfying the claims of their creditors. It can be initiated by either the debtor or its creditors before the Commercial Court. Following the submission of the petition, the court will summon the debtor and its creditors to attend a court hearing. Once bankruptcy has been declared, the directors of the debtor company lose the power to manage the company, which is transferred to the court-appointed receiver who then manage the bankruptcy estate and the settlement of the debts. The debtor’s assets will be sold by way of public auction by the appointed receiver.

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Last updated: March 2025