INDONESIA: An Introduction

The Changing Legal and Economic Landscape in Indonesia

Indonesia's legal and economic landscape is undergoing significant transformation, driven by global economic trends, domestic policy shifts and major legislative developments. These changes have far-reaching implications for both legal practitioners and their clients across various industries. As Indonesia moves into a new political era under President Prabowo, economic policies and regulatory adjustments will play a crucial role in shaping the business environment.

General outlook

The long-term outlook for Indonesia’s economy and legal market remains optimistic. Since the COVID-19 pandemic, Indonesia’s GDP has consistently grown by around 5% annually, according to World Bank data. The government has set an ambitious target of achieving high-income country status by 2045, which aligns with broader economic development goals. Long-term projections continue to signal resilience and growth in various sectors.

However, this optimistic view is tempered by short-term economic headwinds and global uncertainties. Key concerns include inflationary pressures, supply chain disruptions and geopolitical tensions involving Indonesia’s primary trade partners, such as China, Japan, the European Union and the United States. These factors could potentially affect trade flows, investment levels and overall economic stability.

On the domestic front, the transition to the Prabowo administration, along with its ambitious policy agenda, has introduced uncertainties regarding future regulatory changes and fiscal policies. While increased government spending on social welfare programmes is expected to stimulate economic activity, concerns remain about the administration’s ability to balance fiscal responsibility with growth initiatives.

With major shifts in government spending, reforms in strategic sectors and uncertainty surrounding the government’s fiscal capacity, businesses must navigate potential risks while identifying opportunities for growth. Despite these challenges, Indonesia’s legal sector is expected to play a pivotal role in supporting businesses through this transition, ensuring regulatory compliance and facilitating economic expansion.

Budget reallocation and spending cuts

A key aspect of President Prabowo’s economic strategy involves significant increases in government spending – particularly on social welfare programmes. A major initiative under this plan is the “free nutritious meals” (makanan bergizi gratis) programme, which, according to some analysts, could cost the government an estimated USD28 billion. This ambitious program is designed to address malnutrition and poverty but requires substantial funding, necessitating a major reallocation of the state budget.

To accommodate this new spending priority, the administration issued Presidential Instruction No 1/2025 on Budget Efficiency, which mandates a USD19 billion budget cut across ministerial and state-funded programs. Among the affected areas are infrastructure projects, including several toll roads and dam developments. However, the government has assured the public that the Nusantara Capital City (IKN) project – Indonesia’s planned new capital in East Kalimantan – will remain unaffected.

These fiscal adjustments have sparked debates regarding their long-term economic impact. While greater social spending is expected to improve public welfare, concerns remain about potential reductions in infrastructure investment, fiscal deficits and government debt levels. Investors and businesses are closely monitoring these developments to assess their potential impact on economic stability and growth prospects.

Market concerns

The government’s shifting spending priorities and the scrapping of a planned value added tax (VAT) increase have raised concerns among investors about a potential economic slowdown. Critics argue that increased public spending, without corresponding revenue-raising measures, could strain Indonesia’s fiscal capacity and increase debt burdens, potentially limiting future government spending flexibility.

Certain sectors of the economy are already experiencing significant headwinds. For instance:

• the tech industry is undergoing a “VC fundraising winter”, with venture capital investments hitting a four-year low – the slowdown in startup funding could hinder innovation and growth in Indonesia’s digital economy;
• the manufacturing sector is struggling due to rising competition from foreign imports and restrictive regulations, leading to declining production and lower business confidence; and
• consumer confidence has been affected by market uncertainty, inflationary pressures and concerns over future economic policies.

These issues contributed to a significant market downturn on 6 March 2025, when the Jakarta Composite Index (JCI) plunged by 5% in a single day, prompting a temporary halt in trading on the Indonesia Stock Exchange (IDX). In response, the Indonesian Financial Services Authority (Otoritas Jasa Keuangan; OJK) introduced emergency measures, allowing listed public companies to conduct share buybacks without prior approval from shareholders – a move aimed at stabilising the financial markets.

Danantara and state-owned enterprise reform

State-owned enterprises (SOEs) remain a cornerstone of Indonesia’s economy, with their total assets surpassing USD250 billion in 2023, accounting for 55% of GDP. Recognising their importance, the government has implemented significant SOE reforms to enhance their efficiency and strategic role in economic development.

A landmark legislative change came with the passage of Law No 1 of 2025, which established Daya Anagata Nusantara (Danantara) as Indonesia’s new sovereign wealth fund. Danantara will act as a “super-holding” entity, consolidating major SOEs including:

• Pertamina (oil and gas);
• MIND ID (mining and minerals);
• PLN (electricity and power);
• Telkom Indonesia (telecommunications); and
• the three largest state-owned banks (Bank Mandiri, BNI and BRI).

With an estimated USD900 billion asset portfolio, Danantara is set to become the seventh-largest sovereign wealth fund in the world. While the fund is expected to drive economic growth and generate dividends for government investments, concerns remain regarding governance, political interference and transparency.

The recent stock market downturn may have been partially influenced by concerns about Danantara’s independence and the broader impact of SOE restructuring. Given the significant market capitalisation of SOEs, any instability in their governance could affect overall investor confidence.

What clients need to know

With a new administration, evolving policies and financial market turbulence, businesses should exercise caution in the short term. However, as government strategies become clearer, confidence is likely to increase, reinforcing Indonesia’s position as a growing market.

Reforms initiated during the Jokowi administration, such as Law No 6 of 2023 (the “Job Creation Law”) and Law No 4 of 2023 (the “Financial Sector Law”), have simplified regulations and enhanced business opportunities. The Prabowo administration has signalled its intent to maintain a pro-business stance, reassuring both foreign and domestic investors.

Impacts on the legal sector

Law firms and legal professionals must be prepared to navigate these shifts by:

• providing regular updates on regulatory changes;
• developing compliance programmes tailored to industry-specific risks;
• offering guidance on business licensing and investment regulations; and
• helping clients adapt to evolving labour laws and ESG standards.

Additionally, digitalisation of legal services (especially AI-driven solutions), rising compliance demands and an increasing focus on ESG issues will remain critical areas for firms to address to stay competitive.

While short-term economic fluctuations may create challenges, Indonesia’s long-term legal and economic trajectory remains strong, presenting significant opportunities for businesses and legal professionals alike.