Worldbox Country Risk Climate May 2025
INDONESIA
Summary
NEW – Technology is an increasingly important driver of economic success, and we are now including a separate Technology sector in our quarterly country risk reports and integrating the core into our overall score.
| Overall Risk Score 33/40 (Downgrade from 31)Political risk: Stable 8/10Economic risk: Downgrade 7/10 Commercial risk: Stable 8/10 Technology risk: Stable 7/10 The risk assessment of a country is made up of four components, being Political, Economic, Commercial and Technological. Each component is scored out of 10 with 1 being the highest risk and 10 the lowest. |
ESG Risk: 6/10 (Stable)*
*Environmental, social and governance (ESG) issues are becoming increasingly important to companies, investors and consumers in Southeast Asia. That is why we are now preparing a separate ESG score and section with our quarterly country risk reports. We explain how each country rates, looking at the E, S and G individually, and outline recent developments. |
Political Risk – Stable at 8
The Republic of Indonesia was created in 1945 after a long period of Dutch colonial rule and Japanese occupation during the Second World War. Indonesia is today the world’s third largest democracy (and largest Muslim democracy). A directly elected president serves as both head of state and of government. There is a maximum two-term (five years per term) limit on the presidency. A directly elected House of Representatives (the lower house of the bicameral People’s Consultative Assembly) acts as a counterweight to the president.
While now a thriving democracy, Indonesia has experienced long periods of authoritarian rule. The mercurial and charismatic dictator Sukarno ruled the country from 1945 to 1967. General Suharto overthrew Sukarno in 1967, ruling until 1998 when he stepped down amid widespread unrest.
The current government is headed by President Prabowo Subianto who was elected in the February 2024 presidential election. Prabowo succeeded President Joko Widodo (popularly known as Jokowi), in October 2024. Prabowo is a former son-in-law of the late dictator Suharto. He was dismissed from the military in 1998 amid allegations of human rights abuses, which he has always denied.
Prabowo reappointed the highly-regarded Sri Mulyani Indrawati as finance minister, a role she has held since 2016 – two years into former president Joko Widodo’s first term – and previously from 2005 to 2010 under Susilo Bambang Yudhoyono. Since her first appointment in 2005, Indrawati has become synonymous with reforms and fiscal prudence in the eyes of investors and analysts alike, according to Nikkei Asia. The news agency adds that at a time when the government is focused on moving Indonesia up the manufacturing value chain and transitioning it to a high-income economy, her presence sends a signal that these ambitions won’t compromise the country’s hard-earned fiscal credibility.
Overall, around a third of Cabinet posts are held by incumbents from the previous administration under Joko Widodo. The inclusion of several key ministers from the previous Cabinet suggests Prabowo is consolidating his hold over Indonesia’s political and government elites.
Economic Risk – Downgrade to 7 from 8
The economy grew by 5.03% in 2024, the slowest pace in three years. And given the uncertainties facing the global economy in 2025, President Prabowo’s ambition of targeting annual growth of around 8% seems highly unlikely. Yet according to the World Bank, Indonesia needs to boost growth to a higher level to become a high-income country.
Worryingly, the size of the middle class is shrinking – the opposite of what should be happening if Indonesia was making progress to high income status. Official data shows that the middle class fell to 47.8 million people in March 2024, down from 57.3 million in 2019. The lingering economic effects of the COVID pandemic as well as rising inflation and the tax burden explain the decline.
Concerningly, a report in Deutsche Welle (DW) argues the overall global economic slowdown has sparked massive layoffs over the past two years, and Indonesian middle-class workers might see a further reduction in their incomes in 2025, which could prove a further drag on economic growth. Bhima Yudhistira, director of the Center of Economic and Law Studies (Celios), a Jakarta-based think tank, told DW that Indonesia was looking at annual GDP growth of below 5% going forward.
According to the World Bank, Indonesia now stands at a critical juncture in its economic development, with the private sector poised to assume a more pivotal role in driving growth and innovation. To transcend its middle-income status, Indonesia must accelerate annual growth to more than 6%, according to the World Bank. That would require a productivity increase of 3% – one percentage point higher than recent averages. Attaining the ambitious goal of high-income status by 2045 demands a significantly more dynamic and productive private sector, adds the World Bank.
Despite considerable progress in reforming the economy over the past 10 years, the private sector still faces significant challenges. These include regulatory unpredictability and corruption. Access to finance and regulatory compliance costs are also substantial productivity constraints. In addition, A few large firms dominate the private sector, while most enterprises remain small and less productive. The World Bank concludes that enhancing regulatory consistency and fostering access to international markets are key to unleashing the potential of the Indonesian private sector and driving sustained economic growth.
Commercial Risk – Stable at 8
Corruption remains a challenge and acts as a major deterrent to business and investment. Indonesia was ranked 99th (out of 180 countries) in Transparency International’s Corruption Perception Index (CPI) for 2024, with a CPI score of 37 – up from 115th in the previous year. In terms of the Association of Southeast Asian Nations (ASEAN), Indonesia lies behind Singapore, Malaysia and Vietnam.
Indonesia’s economic freedom score (from the Heritage Foundation) is 65.2, and it ranks 60th in the 2025 Freedom Index, moving down from 53rd place in the 2024 Index. Indonesia is ranked 10th out of 39 countries in the Asia-Pacific region. The country’s economic freedom score is higher than the world and regional averages. Indonesia’s economy is considered “moderately free”, according to the 2025 Index.
Indonesia has undertaken wide-ranging reforms to address structural weaknesses in the economy and improve competitiveness, according to the Heritage Foundation. Recent reforms have put a greater emphasis on improving regulatory efficiency, enhancing regional competitiveness, and creating a more vibrant private sector through decentralization. However, institutional shortcomings continue to undercut momentum for more dynamic economic development. In the absence of a well-functioning legal and regulatory framework, corruption remains a serious impediment to the emergence of a more dynamic private sector.
NEW
Technology Risk – Stable at 7
The Global Innovation Index (GII), from the World Intellectual Property Organization, is an important index used by countries and multinational companies to assess innovation ecosystems and aid in policymaking and investment decisions.
Indonesia ranked 54th out of 133 countries in the 2024 GII, moving up from 85th place in 2020.
Indonesia jumped 13 places from 77th to 64th out of 193 countries in the E-Government 2024 Survey released by the United Nations Department for Economic and Social Affairs in September. Indonesia has improved its information and communications technology (ICT) infrastructure and expanded digital literacy programmes to improve access to e-government services, the report said.
Indonesia’s digital economy is among the fastest growing in Southeast Asia, projected to exceed $130 billion by 2025, according to a joint report by Google, Temasek, and Bain & Company. The country’s rapid internet penetration—and a young, tech-savvy population are key drivers of this growth.
Government policies
According to the International Trade Administration of the US, the government has positioned the digital economy as a cornerstone of its broader economic development strategy. Central to this ambition is the “Making Indonesia 4.0” roadmap, which aims to position the country as a leading digital economy by 2030. This plan is underpinned by significant government initiatives, including the “100 Smart Cities” program and the “National Strategy for Artificial Intelligence (2020-2045),” both designed to enhance digital infrastructure, boost innovation, and integrate advanced technologies across various sectors.
The government’s commitment is further evidenced by the Digital Indonesia Roadmap 2021-2024, which outlines specific goals for expanding digital infrastructure, increasing the digital skills of the workforce, and encouraging the adoption of digital technologies in businesses, particularly small and medium-sized enterprises (SMEs). The roadmap also emphasizes e-commerce, fintech, and the acceleration of digital transformation in public services, intending to create a more inclusive digital economy.
Indonesia’s Ministry of Communication and Information Technology (Kominfo) plays a pivotal role in driving these strategies, with a focus on expanding internet access, developing a comprehensive 5G network, and promoting cybersecurity measures. The government also plans to establish a national data centre and strengthen regulatory frameworks to attract more investment in the digital sector.
Infrastructure
Over the past decade, Indonesia has dramatically increased its internet penetration from 34.9% to 79.5%, or around 221 million people, according to the Director of the Telecommunication and Information Accessibility Agency (BAKTI) at the Ministry of Communication and Informatics, speaking in September. Earlier, in February, the government outlined its Indonesia Digital 2045 Vision, which calls for a 30-fold improvement in internet speed.
Education and skilled staff
Basic education is almost universal in Indonesia, but the quality is often poor, with significant variation across provinces, contributing to a shortage of skilled workers, according to the OECD. It calls for the continuation of campaigns to strengthen skills training, including through incentives for employers. It adds that in primary and secondary education, harmonising curricula and increasing funding is essential. However, Indonesia still ranks as the seventh largest producer of STEM graduates globally, with 300,000 arriving on the market each year.
May Bulletin
Political Risk – Stable at 8
A January 2025 survey indicates that President Prabowo’s initial period in office – he assumed power on October 24th – has proved popular. A poll revealed that nearly 81% of Indonesians approved of the president after 100 days in office.
Lower-income respondents were particularly pleased with Prabowo’s leadership and his policies, which include a plan to provide free meals to 82.9 million people by 2029, most of them schoolchildren and pregnant women. However, financial markets continue to have doubts about how the programme, which could cost trillions of rupiah, will be funded.
In December 2024, Prabowo also suddenly cancelled a value-added tax hike, having earlier written off around US$550 million in debt for small businesses. The last-minute change on VAT has created substantial uncertainty for businesses and investors, and raised questions about the country’s fiscal management and economic strategy. The VAT hike was aimed at boosting state revenue and help fund critical investments in infrastructure and education.
There are also concerns about some of the president’s policies in other areas including foreign policy and China’s aggressive claims in the South China Sea. In November, the president visited China and both countries issued a joint statement saying that they had “reached important common understanding on joint development in areas of overlapping claims.” That appeared to be a tacit recognition by Jakarta of China’s claims and ran counter to the approach of other ASEAN nations. The Indonesian foreign ministry subsequently issued a statement saying it did not recognise China’s claims.
That and other policy U-turns – such as on VAT – have given the impression of a government making policy on the hoof. Indeed, a report in the Guardian newspaper in January quoted analysts describing Prabowo’s leadership “as at times being haphazard, contradictory and lacking clear direction”. That is unlikely to reassure the business sector and provide a positive background for investors. Indeed, the impact is already being seen – see Economic Risk section next.
Economic Risk – Downgrade to 7 from 8
The economic outlook for Indonesia appears to be deteriorating fast. This partly reflects faltering investor confidence in the economic policies of the new Prabowo administration as well as concerns over the impact of potential tariffs by the US and the increasingly uncertain global economic outlook.
Weak global commodity prices are already having an impact. Indonesia is one of the world’s biggest commodity exporters, and earnings from mineral and agricultural exports provide crucial support to the economy. Yet global commodity prices have fallen sharply this year due to fears about the effect of trade wars on global growth.
In the first two months of this year, Indonesia’s tax revenues fell by more than 30% to 187.8 trillion rupiah ($11.3 billion), according to the government. That reflected a decline in key export commodities such as coal, oil and nickel prices.
In the previous economic risk update, Worldbox Business Intelligence argued that retaining the well-respected finance minister Sri Mulyani Indrawati in her post would prove critical to maintain the confidence of foreign investors in the new administration. However, there are already rumours that Indrawati could resign over the direction of economic policy.
A steep sell-off in equities and the rupiah’s decline provide concrete evidence of declining investor confidence in the country. In March, a sharp sell-off in equities forced the Jakarta Stock Exchange to temporarily halt trading after the benchmark Jakarta Composite Index suffered its biggest intraday slump since September 2011. Meanwhile, by the end of March, the rupiah had weakened to its lowest level since the 1998 financial crisis.
President Trump’s decision to impose a 32% tariff on Indonesian exports presents another headwind. The tariffs, due to come into effect in July, could reduce potential growth by between 0.3% and 0.5% of GDP according to the government. Indonesia is offering various concessions to get the tariffs cut. These include buying more US goods, tax cuts, easier import processes and a relaxation of local content requirements.
However, Indonesia won’t be as badly hit as countries such as Vietnam. The US was Indonesia’s third-biggest export destination as of last year, receiving shipments worth $26.3 billion, according to Indonesian government data. By contrast, Vietnam exported goods worth $136.6 billion in 2024. The Indonesian economy is generally far more reliant on domestic demand than other countries in the region.
Unsurprisingly against this background, growth forecasts for 2025 are being lowered. In January, for example, Bank Indonesia (BI) downgraded its forecast for 2025 to a range of 4.7%-5.5% from 4.8%-5.6%. It cited the prospect of US tariffs disrupting trade and weakening global demand. BI would normally respond by slashing interest rates, but the falling rupiah, which will boosted imported inflation, and concern over Prabowo’s fiscal policy, could complicate matters. Given all these uncertainties we have downgraded Indonesia’s economic risk outlook to 7 from 8 out of 10.
Commercial Risk – Stable at 8
In February 2025, Fitch Ratings upheld Indonesia’s Long-Term Foreign-Currency Issuer Default Rating at ’BBB’, maintaining a Stable Outlook. It cited economic stability and the low government debt ratio. The rating is constrained by a weak government revenue intake and lagging structural features such as GDP per capita and governance indicators. Fitch also cited challenges, including a decline in import demand from China and tariff policies imposed by the US.
Meanwhile, credit risk, which has improved in recent years, could deteriorate this year along with the economic outlook. The Indonesian banking NPL ratio was around 2.21% last year, an improvement on the year earlier figure of 2.46%. However, there are reports that banks began increasing their provision costs in the fourth quarter of 2024 in expectation of a rise in NPLs.
Technology Risk – Stable at 7
In March 2025, Bloomberg reported that Oracle was in discussions with the government about establishing a cloud services centre in the Nongsa Digital Park on Batam Island. Batam is a “free trade zone” status and benefits from its proximity to Singapore and Malaysia, where Oracle already has plans for similar cloud service businesses.
Environmental, Social and Governance (ESG) – Stable at 6
The United Nations’ Sustainable Development Goals (SDGs) are recognized as a beneficial framework for responsible investment. The Sustainable Development Report from Cambridge University Press assesses the progress of all UN Member States on the SDGs. It provides a useful means of ranking Southeast Asian countries on their ESG progress.
Indonesia is ranked 78 out of 166 in the 2024 report, with a score of 69.4.
Environment: Issues facing Indonesia include deforestation, water pollution from industrial waste and sewage, and air pollution in urban areas. The expansion of agriculture, particularly clearing land for palm oil production, is the major cause of deforestation. However, the logging industry is also a significant contributor to deforestation, with illegal logging occurring in many protected areas. Mining activities, such as coal and gold mining, have also led to the destruction of large areas of forests and the pollution of waterways.
Deforestation increased in 2024 to its highest level since 2021, with forest area four times the size of Jakarta lost, according to Mongabay, an independent media outlet. Alarmingly, it added that 97% of the deforestation occurred within legal concessions, highlighting a shift from illegal to legal deforestation.
In March, the government announced it was intensifying efforts to control air pollution following a report that placed Indonesia among the top 20 countries with the highest pollution levels in the world. Officials said that sanctions would be imposed on freight truck operators whose vehicles fail emissions tests, emphasizing the significant impact of vehicle exhaust on air quality.
Social: The law provides, with some restrictions, provides for the rights of workers to join independent unions, conduct legal strikes, and bargain collectively. The law prohibits antiunion discrimination. Most workers are not covered by the minimum wage laws. However, the authorities only enforce labour regulations, including minimum wage regulations, in the formal sector, which employs around 4 in 10 workers. Those in the informal sector have few protections.
Governance: Indonesia continues to bring its legal, regulatory, and accounting systems into compliance with international norms and agreements. However, the regulations and enforcement are not yet up to international standards for shareholder protection. Indonesian businesses are required to undertake responsible business conduct (RBC) activities under Law No. 40/2007 concerning Limited Liability Companies.
May Bulletin
Environmental, Social and Governance (ESG) – Stable at 6
By the end of 2024, 94% of companies listed on the Indonesian Stock Exchange had published sustainability reports, reflecting growing regulatory pressure and other trends such as tax incentives tied to sustainability.
Latest economic data
f forecasts
* Worldbox Business Intelligence
** Official Figures
Source: Asian Development Bank, except where stated
Useful Links
https://www.adb.org/countries/indonesia/main
https://www.transparency.org/en/cpi/2021
https://www.imf.org/en/Countries/IDN
https://www.thejakartapost.com/
https://www.abc.net.au/news/topic/indonesia
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