INDONESIA: Aiming for high income status

Indonesia: aiming for high income status

President Prabowo Subianto, who assumed office on 20 October 2024, has the objective of transforming the USD1 trillion economy into a high income one by 2045. Currently Indonesia is just in the high middle income category - see chart below. Growth would have to run at 5.3% p.a. per capita to attain that target for high income status by 2045. That is an ambitious target but Indonesia may get close to it.

Economic growth still firm

In the second quarter of 2026 GDP growth was 5.6% year-on-year. Annual growth was around 5% in each of the past four years and the IMF predicts similar rates in 2026 and 2027. Potential growth is a little under 5% p.a. on our estimates. But all these estimates are partly driven by demographics: the population is expected to continue to grow over the next 10-15 years by about 0.8% p.a., with the proportion in the 15-64 'working age' group also increasing. Bear in mind that the World Bank's Income classifications are based on income per head so GDP growth would probably need to be 6-7% p.a. to attain the 'high income status'. Note that President Subianto has wowed to boost annual growth to 8% within his five year term.

Inflation

Bank Indonesia has done a good job in controlling inflation, with headline and core inflation both in the middle of the 1.5% to 3.5% target range set by the government. The concern that there may be upward pressure on inflation from higher oil prices in the remainder of 2026 has eased following the renewed weakness in oil prices from July . However, upward pressure on inflation also comes from recent currency weakness.

Curency weakness

It is that currency weakness which is currently at the centre of economic policy uncertainty. The central bank governor resigned in July 2026 following a period of pressure on the currency. That was despite intervention to support the currency (with foreign exchange reserves dropping to a two-year low of US$145bn) and three interest rate increases.

Governance and Government finances

Underlying this weakness are concerns about governance. Indonesia’s parliament recently expanded the central bank’s mandate to include job creation and economic growth in addition to inflation control and supporting the rupiah. That is the standard mistake of overburdening a central bank with too many, typically inconsistent, objectives. President Prabowo also recently nominated his nephew to be a central bank governor - not an encouraging indicator of central bank independence. Destry Damayant, Bank Indonesia’s acting governor and a long-term employee of the central bank, , is the president’s sole nominee to become governor.

High levels of perceived corruption remain one of the main weaknesses of the economy. The Transparency International corruption perceptions score is 34 out of 100: exactly the same level as in 2014. A score below 50 indicates corruption is an impediment to growth.

Twin deficits: not a problem

 On a more positive note, the government’s fiscal position is sound, with a small deficit and low levels of debt relative to GDP (remaining around 40%). The external position is also fine, with a low current account deficit, which will continue to be supported by Indonesia’s rich natural resource endowment and its large share of global production of key commodities.

Money, Credit and the Currency

Private sector credit has declined as a share of GDP from a 2020 peak of 45%. Broad money growth is consistent with nominal growth of around 8%. The policy interest rate has been raised three times in 2026 with the aim of keeping inflation in target (in that sense it has succeeded) and providing support to the rupiah (in which sense it has failed).

After recent currency weakness the rupiah is very undervalued against the dollar on all the main PPP measures. This is, of course, no guarantee that the currency has found a floor.