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Open letter to Prabowo: Addressing Indonesia's key challenges in trade and investment
Promoting trade facilitation measures, such as streamlining customs procedures, enhancing transparency in nontariff measures and ensuring regulatory efficiency, will make Indonesia more attractive to multinational companies looking to establish supply chain operations in Southeast Asia.
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A technician performs maintenance work on an Air Force NC 212i aircraft, at state-owned aircraft maker PT Dirgantara Indonesia’s hangar in Bandung, West Java, on Sept. 27, 204. The firm has produced nine NC212i planes, with a capacity of 21 persons, for the Indonesian
Military (TNI). (Antara/Raisan Al Farisi)
D
ear President Prabowo, Indonesia has set an ambitious goal to become the fourth-largest economy in the world by 2045. To achieve this, the country aims for economic growth of 5.2 percent in 2024 and 5.3 percent in 2025, with aspirations for even higher growth in subsequent years.
However, achieving such rankings will be meaningless without significant improvements in both the economy and the quality of life for its people. Will Indonesia be able to lift 25.2 million people out of poverty and elevate itself into high-income status by then? Meeting these targets will be challenging without clear directions and consistent economic policies. We will highlight three key areas in trade and investment that require strategic attention and policy reforms.
First is how to accelerate export- and foreign direct investment (FDI)-led economic growth. Indonesia urgently needs to boost economic growth by enhancing its export performance and attracting more FDI. Unfortunately, recent data has revealed Indonesia’s limited competitiveness in export activities. From 2014 to 2024, Indonesia’s export-to-gross domestic product (GDP) ratio fluctuated between approximately 15 percent and 22 percent, a decline from the 20-26 percent range seen in the previous decade.
In contrast, Vietnam not only maintained but also increased its export-to-GDP ratio, rising from around 45 percent in 2004 to between 64 percent and 91 percent in recent years. Despite Indonesia’s vast manufacturing potential, our share in global exports, particularly high-tech and value-added exports, remains low compared to other emerging markets. To expand our global trade footprint, it is crucial to diversify export products and markets, negotiate better trade agreements and increase the value added to our exports.
Another critical factor is the FDI-to-GDP ratio, which continues to lag behind other developing countries in the region. In 2023, Indonesia’s FDI-to-GDP ratio was only 1.6 percent, significantly lower than Malaysia and the Philippines at 2.0 percent, Vietnam at 4.3 percent and Singapore at 35.0 percent. To attract more and higher-quality FDI, Indonesia needs to streamline regulations, enhance transparency and foster a more business-friendly environment.
Second is the expanding scope of operations of state-owned enterprises (SOEs) alongside rising public debt. Although the number of SOEs has decreased from 119 in 2014 to 46 in 2024 because of numerous mergers into holding companies, their operational scope has significantly broadened. Beyond traditional sectors like banking and oil-and-gas extraction, SOEs now also operate in areas such as hospitality, and they even compete with local micro, small and medium enterprises (MSMEs). Upon closer examination, the extent of state influence becomes even more pervasive when considering business-of-the-states (BOS), which refers to companies with at least 10 percent government ownership. While SOEs are present in 52 percent of all economic sectors, BOS entities extend to as many as 87 percent. A major concern is that Indonesian SOEs have an excessive number of subsidiaries with diversified business lines, often unrelated to the core activities of their parent companies.
Though SOEs have a legitimate role in the economy, particularly in managing sectors that the private sector cannot handle or finds too costly, their growing dominance could potentially stifle innovation, crowd out the private sector and distort competition. Therefore, implementing further reforms to enhance SOE efficiency, productivity and transparency is not just advisable but essential. Most importantly, we must ensure a level playing field for all players, whether state-owned or private. Additionally, the rising debt-to-GDP ratio is concerning. In 2023, debt reached 42 percent of Indonesia’s GDP, up from 26.4 percent in 2014, and is estimated to rise to 42.5 percent this year. While borrowing can support development, prudent fiscal management is crucial to avoid excessive debt burdens. Ensuring that borrowed funds are allocated effectively toward productive investments is essential for safeguarding Indonesia’s financial future.
