The Indonesian Flag

The colours derive from the banner of the Majapahit Empire of the 13th-15th centuries; red symbolizes courage, white represents purity. The Indonesia flag is similar to the flag of Monaco, which is shorter, and to the flag of Poland, which is white (top) and red (bottom)

Indonesia flag

Indonesia: At a glance

Structure of the economy

The Indonesian economy, which is the largest in Southeast Asia and the 16th largest in the world, has achieved remarkable economic growth since overcoming the Asian Financial crisis in 1997. That said, the economy has been impacted by the pandemic, where Indonesia has recently lost its prized upper middle-income status, which it held for just one year. Over time, the structure of the Indonesian economy has changed considerably, with Services (~44% of GDP) and Industry (~39% of GDP) the most dominant sectors, alongside Agriculture (~13% of GDP). Furthermore, Indonesia has a very high export beta, which accounts for 18% of its GDP. In terms of its export composition, the largest products mineral fuels and oil (~16% of total), followed by animal/vegetable dates/oils/waxes (~13% of total) and industrial metals (~7% of total). The majority of Indonesian exports flow to Asia (70% of total), with a further 13% sold to North America and 11% to Europe. China is the largest export partner (20% of total) followed by the United States (11% of total) and Japan (8% of total).

Economic Outlook

Despite the rapid economic achievements over recent decades, Indonesia faces challenges in the wake of the pandemic; the economy slipped into recession last year, where GDP contracted -2% FY 2020. That said, Indonesia has rebounded swiftly, growing at the fastest rate in 17-years, with GDP reaching 7% YoY over the course of Q2. Looking forward, while downside risks remain in light of the Delta variant, the economic rebound is likely to gain momentum via the recovery in domestic demand and positive spill over from a booming global economy. This favourable outlook is also expected by the IMF, which is forecasting GDP to expand by 4.3% in 2021 and 5.8% in 2022.

Monetary policy

Bank Indonesia (BI) has significantly loosened monetary policy following the onset of the pandemic; the policy rate has been cut by 150bps since February 2020, with the latest 25bps reduction coming in February 2022, taking the rate to 3.5%. While monetary policy was left unchanged at the August meeting, with the BI stating it remains in a “pro-growth” stance, new stimulus measures were implemented just days later. The unexpected BI announcement of a bond buying scheme, where the central bank will purchase a total of IDR 439tr ($30bn) of bonds directly from the Ministry of Finance over 2021-22, is designed to provide cheaper financing for the government’s pandemic relief efforts. This is a significant departure from the recent BI stance where it acted as a stand-by-buyer of last resort in auctions and ushers in the return of burden sharing at the central bank. The central bank continues to enjoy breathing room to further ease monetary policy while inflation remains below target; CPI at 1.5% in July remains comfortably beneath the 3% +/-1% target corridor.

Fiscal policy

Like many emerging market contemporaries, Indonesia suffered a degree of fiscal slippage following the roll out of pandemic relief programmes. That said, with debt to GDP only expected to reach ~42% this year, the fiscal position is relatively healthy by international standards. In fact, the IMF expects the fiscal slippage to clear fairly quickly, with debt to GDP forecast to fall back to 39% over the next few years. While the fiscal impulse will remain strong this year, the focus of government stimulus will broaden from short term COVID relief spending to long run infrastructure projects. Looking forward, the commitment to fiscal discipline is clear; within the budget for 2022, the government is targeting a reduction in the budget deficit from ~5.8% this year, to ~4.8% in 2022 and ~3% by 2023.

Political background

The political system in Indonesia is one of a presidential representative democratic republic; the president serves as head as of state and of government. The political backdrop in Indonesia is among the most stable in the region. Joko Widodo was re-elected as president in April 2019 for his second and final 5-year term, with his ruling coalition gaining a 70% majority. Despite criticism over his handling of the COVID crisis, opinion polls remain firmly in favor of Jokowi's leadership. One area worth watching is Jokowi’s close relationship with the Indonesian military; he has allowed the state intelligence services to have an active role in areas far outside their traditional scope of authority and has tasked the Indonesian army with a range of non-security responsibilities. In light of Indonesia’s history, further military involvement in non-security domains is a potential risk.

Bottom line: Gold medal

We are very optimistic when it comes to the outlook for Indonesia. From a bottom up standpoint, the recovery is on firm footing, reflected by favourable IMF forecasts over the next two years. Likewise, the domestic rebound continues to enjoy support from the BI; muted inflation pressure has facilitated ongoing policy easing to insulate the recovery. At the same time, the fiscal slippage is minimal by international standards and is likely to improve over the coming years. Likewise, we believe that there is robust government commitment to stabalise the fiscal slippage we have seen. Finally, the political backdrop is among the most stable in the emerging markets, which is likely to further underpin the economic rebound.

From a structural perspective, as noted in our Roadmap for Q3 and Beyond, we believe that the current backdrop is complicated for emerging markets. That said, in our view, there are selective opportunities to extract alpha from EM. Firstly, under our US-Led Growth Theme, we believe that as further fiscal stimulus enters the system, at home and abroad, the foundations for the cyclical rebound are solid. This backdrop is likely to support allocations to some emerging markets; we favor the emerging markets which have a strong beta to the demand for commodities and capital goods. Likewise, as noted under our investment theme – Sticky Inflation, Structural Headwinds – we stick to our longstanding view that recent price pressures are transitory. As such, we believe that the Fed will introduce a controlled normalisation of monetary policy under the AIT framework, which will encourage extracted in selective carry positions. As such, from a structural perspective, we believe that Indonesia is well placed to benefit from the global rebound and the likelihood of selective demand for emerging markets carry.

Gold front

1. United Nations;
2. IMF;
3. The World Bank.
Olympics data:
All other data is ESLJ, 2021.


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Views accurate as at the time of publication. Opinions expressed by the authors are their own and do not necessarily reflect those of Eurizon SLJ Capital Limited, Eurizon Capital SGR or the Intesa Sanpaolo Group.
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