PublicDisclosureAuthorized PublicDisclosureAuthorized PublicDisclosureAuthorized PublicDisclosureAuthorized INDONESIAECONOMICPROSPECTS IEP UnleashingIndonesia’sBusinessPotential June2024 ©2024InternationalBankforReconstructionandDevelopment/TheWorldBank1818HStreetNW WashingtonDC20433 Telephone:202-473-1000Internet:www.worldbank.org ThisworkisaproductofthestaffofTheWorldBankwithexternalcontributions,andissupportedbyfundingfromtheAustralianGovernmentundertheAustralia-WorldBankIndonesiaPartnership(ABIP)program.Thefindings,interpretations,andconclusionsexpressedinthisworkdonotnecessarilyreflecttheviewsofTheWorldBank,itsBoardofExecutiveDirectors,orthegovernmentstheyrepresent,ortheAustralianGovernment. TheWorldBankdoesnotguaranteetheaccuracy,completeness,orcurrencyofthedataincludedinthisworkanddoesnotassumeresponsibilityforanyerrors,omissions,ordiscrepanciesintheinformation,orliabilitywithrespecttotheuseoforfailuretousetheinformation,methods,processes,orconclusionssetforth.Theboundaries,colors,denominations,andotherinformationshownonanymapinthisworkdonotimplyanyjudgmentonthepartofTheWorldBankconcerningthelegalstatusofanyterritoryortheendorsementoracceptanceofsuchboundaries. Nothinghereinshallconstituteorbeconstruedorconsideredtobealimitationuponorwaiveroftheprivileges andimmunitiesofTheWorldBank,allofwhicharespecificallyreserved. RightsandPermissions Thematerialinthisworkissubjecttocopyright.BecauseTheWorldBankencouragesdisseminationofitsknowledge,thisworkmaybereproduced,inwholeorinpart,fornoncommercialpurposesaslongasfullattributiontothisworkisgiven. Anyqueriesonrightsandlicenses,includingsubsidiaryrights,shouldbeaddressedtoWorldBankPublications,TheWorldBankGroup,1818HStreetNW,Washington,DC20433,USA;fax:202-522-2625;e-mail:pubrights@worldbank.org. Photocreditsfor Frontcover:©ayaankabir/vecteezy.com;©pressfoto/freepik.com;©MuhammadRizki/unsplash.com; ©Aipcreative/shutterstock;and©MUNGKHOODSTUDIO/shutterstock.com ExecutiveSummary:©MuhammadRizki/unsplash.comPartA:©pressfoto/freepik.com PartB:©Aipcreative/shutterstock;©MUNGKHOODSTUDIO/shutterstock.com;©GeraldineLewa/unsplash.com Furtherpermissionrequiredforreuse. ThereportwasdesignedandtypesetbyArsianti. TableofContents TableofContents ExecutiveSummary IndonesiaEconomicProspectsJune2024 LISTOFFIGURES,TABLES,ANDBOXESPREFACEABBREVIATIONSEXECUTIVESUMMARY IVVIVII1 I.EconomicUpdate 1 II.UnleashingIndonesia’sBusinessPotential 3 A.ECONOMICUPDATE 6 1.RecentEconomicDevelopments 6 2.ThePolicyStance 11 3.StructuralTrends 15 4.TheOutlookandRisks 20 5.PolicyPriorities 23 B.UNLEASHINGINDONESIA’SBUSINESSPOTENTIAL 27 1.Introduction 27 2.PerformanceofthePrivateSector 30 3.TacklingRegulatoryUncertainty,theNextChallenge 34 4.TakeawaysandPolicyRecommendations 40 ANNEX 42 REFERENCES 43 CLICKTHESIDE B.3.TacklingRegualatoryUncertainty, theNextChallenge B.4.TakeawaysandPolicy Recommendations BUTTONSTOGOTO III A.1.RecentEconomic Developments A.2.ThePolicyStance A.3.StructuralTrends A.4.OutlookandRisks B.2.PerformanceofthePrivateSector A.5.PolicyPriorities B.1.Introduction THESECTIONYOUWISHTOREAD. IndonesiaEconomicProspectsJune2024 UnleashingIndonesia’sBusinessPotential TableofContents LISTOFFIGURES,TABLES,ANDBOXES FIGURES ExecutiveSummary FigureA.1:GDPgrowthremainssolid,supportedbystrongprivateandpublicdemand6 FigureA.2:Capacityutilizationhasbeenincreasing6 A.1.RecentEconomic Developments FigureA.3:Headlineinflationeased,butfoodpriceinflationremainedstrong…7 FigureA.4:…partlyduetochallengesinthedomesticfoodsupplychain,particularlyinrice7 FigureA.5:Aprilsawthelargestcapitaloutflowsinthepasttwoyears9 FigureA.6:PortfoliooutflowswerelargerthanthoseobservedinASEANEMpeers,butsituationreveredin9 MayafterBIpolicyratehike A.2.ThePolicyStance FigureA.7:Indonesia’ssovereignyieldspreadagainsttheUSisnarrowerthanforEMpeers9 FigureA.8:TheRupiahdepreciatedmodestlyinrealeffectivetermsamongregionalpeers9 FigureA.9:Thecurrentaccountdeficitwidenedduetonarrowersurplusingoodstrade9 A.3.StructuralTrends FigureA.10:Indonesia’sratioofreservestoIMF’sARAmetricwasthelowestamongpeers9 FigureA.11:Bankshaveadequatebufferstowithstandpotentialadverseshocks11 FigureA.12:LendingtotheprivatesectorexpandedinMarch11 FigureA.13:Fiscalbalancepostedasmallsurplus…12 A.4.OutlookandRisks FigureA.14:…asrevenuesdeclinedwithsubsidingcommoditywindfalls12 FigureA.15:Atthesametime,expendituregrowthpickedupsignificantly13 FigureA.16:Andthegovernmentincreaseditssocialprotectionspending13 FigureA.17:Indonesia’sgeneralgovernmentcapitalstockisamongthelowestamongpeers13 A.5.PolicyPriorities FigureA.18:DemandforIndonesiangovernmentbondslessened13 FigureA.19:ThestabilityofRupiahhasbeenparallelwithchangesinnetFXreserves15 FigureA.20:SRBIyieldsrosesignificantlyfollowingtheAprilhikeinBIRates15 B.1.Introduction FigureA.21:ServicesgrowthhasbeenaccountingformorethanhalfofGDPgrowth16 FigureA.22:Post-COVID-19,themanufacturingsectorhasexperiencednotableshifts16 FigureA.23:Theservicessectorgrowthhasbeenresilient,consistentlyoutpacingmanufacturing