Index trend
Previous quarterly editions
Expropriation risk: 60 60 60 59 ► Political violence risk:51 51 51 51 ►Terrorism risk:53 53 53 50 ►Exchange transfer and trade sanction risk: 44 44 44 44 ►Sovereign default risk:47 47 47 47 ►
Overall Risk Temperature: 52 (Medium) TREND ►
Special topic: Gray zone aggression
Impact of inbound gray zone attacks on the country1 = Negligible impact5 = Significant impact on economic growth and/or political stability
3
Degree to which the country relies on outbound gray zone action to achieve its strategic objectives1 = Not at all5 = Gray zone action is a core tactic
1
Jakarta’s complex and often fraught relationship with Beijing is increasingly problematic. China is Indonesia’s main trading partner, largest export market and principal source of imports. China is also second, after Singapore, in terms of foreign direct investment. Chinese investments in 2023 totaled $7.4 billion, largely directed toward the nickel extraction and processing sectors that are key to the development of the electric vehicle industry.
Parallel to this strong economic relationship are points of friction reflecting Beijing’s seeming determination to impose control over maritime areas that international law places under Indonesian sovereignty. This has resulted in a steady increase in incursions by Chinese fishing fleets, often supported by powerful coast guard vessels, with warships maintaining an “over the horizon” presence. The main area of contention is around the Natuna Islands in the South China Sea, located between the island of Borneo and peninsular Malaysia. Indonesia has adopted a graduated response to China’s claims and conduct, in seeking additional advanced weapon systems and platforms from Western suppliers.
There remains a clear threat of miscalculation by either side, with consequences that could extend far beyond any immediate zone of conflict. Apart from the immediate threat posed by an armed confrontation between the two countries’ forces, even a minor clash could trigger spontaneous and potentially deadly violence against Indonesia’s ethnic Chinese population. This community is traditionally exposed to domestic hostility and even violence when ties between Jakarta and Beijing become overtly antagonistic.
TREND ►
President Prabowo Subianto assumed power on October 20 and will begin the process of imposing his economic imprimatur. The new president faces numerous challenges that will impact on his options, ranging from high levels of debt, a decline in the country’s middle class, street-level political activism and broader geopolitical risks.
Overshadowing these issues is the threat of a power struggle between Prabowo and outgoing President Joko “Jokowi” Widodo, as Prabowo maneuvers to cement his authority and Jokowi attempts to retain his influence. This transitional period and its outcome will indicate whether and how the new administration will seek to prioritize existing and proposed economic policies. These include Prabowo’s pledge to provide school children with free meals (estimated to cost almost $8 billion in its first year), financing a multibillion-dollar new capital city under construction on the island of Borneo and managing relations with China.
On August 22, widespread protests erupted in Jakarta before spreading to a number of other major cities, ending a protracted period of relative political stability. The protests, largely led by students and supported by organized groups such as trade unions, reflected a rejection of rulings by the Constitutional Court regarding age eligibility and electoral thresholds for regional elections due to be held on November 27, which were viewed as benefiting outgoing President Widodo’s political interests. The legislation was swiftly withdrawn, but the protests serve as a warning that the country’s social fabric — characterized by a declining middle class — is under increasing economic pressure. Further political unrest is possible once points of friction emerge after the Prabowo-led administration formally assumes power in late October.
No serious acts of terrorism had been recorded in Indonesia since December 2022. Further, in June this year the leaders of the Jemaah Islamiyah’s (JI) proscribed terrorist group announced that they had dissolved their organization and ceased to operate. JI affiliates were held responsible for numerous terrorist attacks across Southeast Asia, including the 2002 Bali bombings in which more than 200 people were killed. However, the authorities remain skeptical over JI’s intentions and sincerity, while security analysts warn that the group’s apparent demise does not greatly reduce the nascent terrorist threat posed by splinter factions or as yet unknown activists. In common with many Islamic terrorist organizations, Indonesia’s extremist groups’ activities tend to fluctuate, reflecting wider local and global political and social catalysts and factors.
Foreign exchange reserves as of September reached a record $150 billion, up from $140 billion at the end of March, reflecting higher revenues from oil, gas and nickel exports as well as tax and other receipts.
According to the World Bank, Indonesia’s 2023 annual inflation rate was 3.71%, against 4.14% in 2022. As of August 2024, the annualized inflation rate was 2.12%, well within the central bank’s target and market expectations.
The incoming Prabowo administration has yet to reveal any plans or policies that radically diverge from those of its predecessor, other than a pledge to expand GDP growth to 8% annually. The new government is set to retain well-established policies linked to “economic nationalism” based on prioritizing onshore processing of the country’s natural resources while continuing to provide subsided access to fuel in order to retain the political support of Indonesia’s poor majority.
Indonesia's economy grew 5.05% in 2023, below the 5.31% expansion recorded the previous year and reflecting weaker export earnings. Household consumption, which makes up over half of Indonesia's GDP, increased 4.82% in 2023, below 2022’s 4.94%. Exports rose only 1.32% in 2023, sharply below 2022’s 16.23% as commodity prices fell after surging due to the impact of the Russia-Ukraine war and post-pandemic economic recovery.
The country’s debt-to-GDP ratio (at 39.4% in June) is well within the legally mandated 60% ceiling. Prabowo said during his election campaign that this ceiling could be lowered, without offering further details. Overall, Indonesia is forecast to record a fiscal deficit accounting for 2.7% of GDP in 2024, below 2.35% in 2023 and the 2.53% deficit projected for the IDR 3,613 trillion ($230 billion) 2025 budget.
An external review of the country’s economy is under way following the outgoing government’s decision to apply for membership of the Organization for Economic Cooperation and Development (OECD) in early 2024. This entails a technical evaluation of Indonesia’s overall governance practices by OECD members intended to assess the quality and transparency of its regulatory regime. This may prove problematic, as the average Government Effectiveness Index in OECD countries in 2022 was 1.14, significantly higher than Indonesia’s score of 0.4. Further, Indonesia also has the maximum budget deficit by OECD standards, and its tax revenue, at 12.1% of GDP, is extremely low.
