Listen to this article<\/p>\n
Indonesia entered 2025 under new political leadership. President Prabowo Subianto was sworn in on 20 October 2024, inheriting an economy shaped by successive shocks \u2014 the COVID-19 pandemic, prolonged supply chain disruptions and mounting stress on the multilateral trading system. While the most acute crises had receded by early 2025, their economic consequences lingered. US President Donald Trump\u2019s tariff measures in April then reignited global trade uncertainty.<\/p>\n
Across Southeast Asia, these overlapping shocks were broadly shared, but economic outcomes diverged. In the third quarter of 2025, Indonesia and Malaysia grew at around 5 per cent, Thailand\u2019s growth rate slowed to around 1.2 per cent and Vietnam surged above 8 per cent, driven by manufacturing expansion and export momentum. These outcomes reflect structural differences in how economies absorb shocks, mobilise investment and sustain growth under uncertainty.<\/p>\n
In the same quarter, Indonesia recorded an 8.9 per cent<\/a> year-on-year decline in foreign direct investment, as firms delayed projects amid regulatory uncertainty and weak demand prospects. Domestic investment increased and partly offset the fall in foreign direct investment, but much of the additional spending was concentrated in sectors<\/a> with limited productivity spillovers or was driven by policy incentives, including in base metal industries<\/a>. Vietnam provides a useful contrast. In the same quarter, it attracted US$5.6 billion<\/a> in foreign investment, compared with Indonesia\u2019s US$4.7 billion, supporting manufacturing scale-up, export growth and integration into global value chains.<\/p>\n Indonesia\u2019s investment slowdown points to deeper weaknesses in the country\u2019s growth model and fiscal framework. With household consumption accounting for more than half of GDP, the scope for demand-led acceleration is limited. Fiscal space has also narrowed. Public spending has expanded in ways that raise concerns about prioritisation and efficiency, while revenue remains weak by international standards. Large signature programs \u2014 including free school meals<\/a>, the \u2018red-and-white\u2019 people\u2019s cooperatives initiative<\/a> and an expanded housing agenda<\/a> \u2014 have been introduced alongside the cancellation<\/a> of a planned value-added tax increase and rising disaster-related expenditure<\/a>.<\/p>\n This issue is not spending per se, but misallocation. Ambitious commitments rolled out without corresponding revenue measures have strained fiscal credibility. The fiscal deficit has edged close to its statutory ceiling<\/a> of 3 per cent of GDP, limiting room for manoeuvre and increasing vulnerability to future shocks.<\/p>\n Monetary policy has offered little relief. Bank Indonesia was among the region\u2019s most aggressive central banks in 2025, cutting interest rates<\/a> early and decisively. Yet the impact on investment and consumption has been muted. Credit availability was not the binding constraint \u2014 uncertainty was<\/a>.<\/p>\n Businesses hesitated not because borrowing costs were high, but because demand prospects were unclear and policy signals inconsistent. Growing reliance on monetary and financial channels to accommodate fiscal pressures \u2014 including the reallocation of large government cash balances from the central bank to state-owned banks \u2014 has raised concerns about a gradual blurring<\/a> of fiscal and monetary boundaries. Liquidity increased, but confidence did not.<\/p>\n Against this backdrop, Prabowo\u2019s emphasis on achieving 8 per cent growth<\/a> warrants scrutiny. Ambition is not misplaced, but ambition untethered from economic constraints can be counterproductive. Growth follows sustained investment, productivity gains and institutional credibility, not targets alone. Indonesia\u2019s experience, and that of faster-growing peers, suggests that durable growth acceleration depends less on quick wins than on patience and policy consistency. Pursuing headline numbers risks encouraging short-term measures that weaken confidence, precisely when stability and predictability matter most.<\/p>\n With fiscal space constrained and monetary policy losing traction<\/a>, Indonesia has few credible options left to lift growth. Bold deregulation and structural reform<\/a> become central, not as technocratic ideals but as practical steps to address low productivity and weak competitiveness. Improving the business and investment climate through greater regulatory certainty, more consistent implementation and stronger coordination across government offers the most viable path.<\/p>\n These reforms do not require large fiscal outlays, but they do demand political discipline and institutional focus, particularly amid global uncertainty. They include simplifying import processes, improving logistics<\/a>, reducing non-tariff barriers and replacing local content requirements<\/a> with more incentive-based procedures. Prabowo encouraged these reforms<\/a> in April 2025 in response to Trump\u2019s tariffs, but execution has been piecemeal<\/a>.<\/p>\n In practical terms, this means focusing less on announcing new programs and more on improving how the state interacts with investors. Streamlining business licensing, reducing regulatory reversals and ensuring rules issued by different ministries are consistent and predictable would likely do more to lift investment than fiscal stimulus. Equally important is credible policy enforcement. Investors care not only about what regulations say, but also whether they are applied uniformly<\/a> across regions and over time. These are unglamorous reforms, but they underpin sustained growth.<\/p>\n Looking forward through 2026, the central question is not whether Indonesia can grow faster in the short term, but whether its leadership is willing to lay the foundations for durable growth. Prabowo has inherited an economy with real strengths but also clear constraints. Chasing ambitious headline targets may have political appeal, but it will not restore investor confidence or lift productivity on its own. The harder task \u2014 injecting realism into economic policy, strengthening institutions and steadily improving the investment climate \u2014 offers fewer immediate rewards but far greater long-term returns.<\/p>\n In a region where similar shocks have produced very different outcomes, Indonesia\u2019s future growth will be shaped less by external forces than by the choices its own government makes<\/a> now.<\/p>\n Arianto A Patunru is Fellow of The Indonesia Project at the Arndt-Corden Department of Economics, The Australian National University.<\/p>\n This article is part of an EAF special feature series<\/a> on 2025 in review and the year ahead.<\/p>\n EAF<\/a> | Indonesia<\/a> | Indonesia\u2019s economy needs credible policy, not quixotic targets<\/p>\n","protected":false},"excerpt":{"rendered":"Listen to this article Indonesia entered 2025 under new political leadership. 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