Indonesia

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Indonesia is the fifth largest economy in Asia in nominal GDP terms and the world’s third most populous nation behind China and India. Economic growth has been robust over the period 2015-2019 (5.0% per year on average) but insufficient to increase GDP per capita substantially, that remains much lower than that of Thailand or Malaysia. Although Indonesia has major demographic advantages compared with other Southeast Asian countries, its growth prospects are still constrained. To benefit fully from its demographic advantage, the government must develop its manufacturing industry, requiring simultaneous efforts on labour, capital and regulation.

In 2020, economic growth contracted by 2.1% due to the COVID-19 pandemic shock. However, in the medium term, economic prospects remain favourable as the Widodo’s government managed to adopt major economic reforms to stimulate medium and long-term growth and increase its attractiveness for foreign direct investment (FDI). Macroeconomic fundamentals, albeit deteriorating with the COVID-19 crisis, remain fairly good (low public debt, low fiscal deficit and low external debt to GDP ratios) but the country is still highly reliant on volatile portfolio inflows to finances its current account deficit as FDI remains structurally low. Indonesia’s competitiveness and attractiveness remain lower than in other ASEAN countries due to structural constraints. However, risks are mitigated by large foreign exchange reserves. Moreover, in the medium term, the Omnibus Law should improve the Indonesia’s position in the supply chains process, boost its exports and FDI inflows and make the country less dependent on portfolio inflows.