Indonesia: An Overview
New Projects, a New Capital City, and Investment Opportunities in Indonesia
What is happening in Indonesia?
New President, new perspective on policy, and new international economic diplomacy. Indonesia is embracing significant changes in its outlook.
We are now witnessing a political transition under President Prabowo. One of the most notable enactments has been Presidential Instruction No 1 of 2025, aimed at budget efficiency by slashing government spending (state and local) by hundreds of trillions of rupiah, as well as ministries having their budgets reshuffled and reallocated to programmes found on top of Prabowo’s laundry list.
Prabowo, a former infantryman, also supported a new law that allows his military comrades to sit in government positions. His signature policy is the Free Nutritious Meal (Makan Bergizi Gratis) programme for schoolchildren across the country, which has led to budget reallocation from the signature policy of the previous regime, the development of Indonesia’s new capital city, Ibu Kota Nusantara (IKN).
Several programmes are rolling, while others have been scaled back. The proposed increase of Value Added Tax (VAT) from 11% to 12% was halted on 31 December 2024, a couple of hours before it was scheduled to prevail on 1 January 2025. Now, 12% VAT applies only to luxury goods.
Danantara, a juggernaut sovereign wealth fund, was established to manage strategic state-owned assets and serve as a catalyst for investment.
On the global stage, Indonesia formally became a member of BRICS on 6 January 2025. On the other hand, Indonesia is also pursuing a full membership in the OECD. These two moves reflect Indonesia’s international diplomatic legacy, “free and active”, meaning the country does not want to be overdependent and seeks to balance its partnerships between the poles of the Earth.
Despite swift changes, according to World Bank data, Indonesia’s economy grew consistently at an annual rate of 4.9% in the first quarter of 2025.This near 5% growth has been consistent since 2019, except when it plummeted during 2020 and 2021 due to COVID-19, as did the rest of the world.
Yet, Indonesia is still the same archipelago that offers vast industrial opportunities, an army of skilled workers, and land of abundant natural resources.
Emerald of the equator
The flagship project of the new capital city, Ibu Kota Nusantara (IKN), which sits right on the equator, has faced many questions and moratorium concerns from investors. However, the Indonesian government has confirmed that it is still in progress. Following the utilised budget of IDR89 trillion (approximately USD5.5 billion) from 2022 to 2024, for the second phase of development from 2025 to 2029, a budget of IDR48.8 trillion (approximately USD3 billion) has been approved.
This opens up opportunities for foreign and domestic investors. Several Public–Private Partnership (PPP) projects are planned, the hottest being roads and a multi-utility tunnel as well as housing towers. To name a few, investors from Australia, Russia, China and Singapore have already committed investments in IKN.
By 2028, it is expected that the legislative, judicial, and executive bodies will have their desks set up in the IKN.
Efficiency in every brick
Despite the need for construction projects in IKN, the public construction budget is being slashed, in contrast to the previous regime’s priority programmes. The Ministry of Public Works’ budget was slashed from IDR110.95 trillion (approximately USD6.8 billion) to IDR29.57 trillion (approximately USD1.8 billion).
This will significantly affect state-owned construction companies, as the majority of their revenues and contracts come from projects financed by the state budget. Budget efficiency is also enhanced by the restructuring of state-owned construction companies. Seven state-owned construction companies will be merged into three, a priority for the second half of 2025.
Answering the public construction budget cuts, state-owned construction companies will be forced to tap into private construction.
For private construction companies, this will lead to a revisit of PPP, as the private sector will need to deploy more investment. Extra incentives should, therefore, be given to the private sector, one of which could be extending the project management period.
The Indonesian government is now focusing on four sectors, namely water resources, roads and bridges, building construction and strategic infrastructure.
Danantara, the juggernaut
A new sovereign wealth fund, Danantara, was established in February 2025, with raison d’être to manage strategic state-owned assets, with the initial target of USD900 billion of assets. Its blueprint seems to closely mirror Singapore’s Temasek Holdings, where it will not merely act as a passive investment vehicle but as an active manager of the state-owned assets.
To support Danantara, the Indonesian government has made several deals from foreign countries and foreign banks. Qatar Investment Authority (QIA) and Danantara will jointly manage a USD4 billion fund to invest in downstream industries, healthcare, renewable energy, technology, and other strategic sectors. The UAE has also announced its intent to invest USD10 billion in Danantara with a primary project of a development of a 10-gigawatt renewable energy power plant. Another USD10 billion of funding is expected to come from foreign banks in the form of a loan facility.
As Danantara now holds the authority to approve changes in state-owned companies’ capital, authorise write-offs, and oversee dividend management, investors should therefore consider the potential impact on transaction timelines, the need for an additional layer of regulatory approval, and new dynamics in state-owned companies’ decision making.
Investors’ perspectives
With recent developments, investors are expected to adapt to the volatility of government policies. In navigating through their investments amidst the budget efficiencies, investors should also remain proactive in seeking new opportunities.
Nevertheless, these changes are epitomes of Prabowo’s commitment to boost foreign investment. That said, investors should find a balance between the policies’ optimism and prudent measures in their contractual obligations.