Indonesia assumed the ASEAN chairmanship this year hot on the heels of its successful leadership of the G20 and its summit in 2022. The theme of this year’s ASEAN Summit, ‘ASEAN matters: Epicenter of Growth’, underscores the region’s economic journey and development over the past two decades, and aims for a sustainable, stable, and inclusive future, with good and efficient bureaucracy as the backbone.

Through the research entitled ‘DBS Focus, Indonesia: Bright spot in a vibrant ASEAN-6 region’, DBS Group Research looks at Indonesia’s ability to play a central role in ASEAN based on a number of factors. Let’s take a look at the four facts below!

1. Favorable demographic factors

Indonesia, with a population of 273 million, is the most populous country in ASEAN-6, and the fourth largest in the world. This brings considerable demographic advantages, as not only is the population relatively young compared to other countries in the region, but the proportion of its working-age population is also favorable, increasing by an average of 1.8% in the past decade. The median age is also lower, at ~29 years old, and the working-age population accounts for two-thirds of the total population, and its share will remain high in the next two decades, according to Statistics Indonesia (BPS). Java is at the heart of the archipelago’s economy, with its population accounting for around 55% of the total national population and gross domestic product (GDP) accounting for more than half of the national GDP.

Alongside overall population growth, urbanization is also growing steadily, at 57% of the population, according to the World Bank. Indonesia’s economy is expected to return to the upper-middle income status in the next few years. There are plans to expand the size of the middle class, from the current one-fifth of the population to 45-50%.

While these dynamics provide a unique opportunity to boost growth via an expanding labour pool, and competitive wages, which are likely to increase per capita GDP, ensuring quality employment and adequate education/skills training will be some of the key priorities for the government for the medium term

2. Enormous natural resource potential

Indonesia has abundant natural resources, namely agricultural commodities (e.g. palm oil, rubber), crude oil, and metals/minerals, such as coal, iron ore, copper ore, nickel, natural gas, and tin ore. Half of the export basket consists of primary commodities, implying that the performance of the trade sector is relatively sensitive to global price cycles. Nonetheless, during boom times, high prices had a beneficial impact, particularly on resource-rich provinces. Although Indonesia is a traditional ore commodity exporter, over the past decade there has been a concerted effort to attract more manufacturing capabilities in downstream industries, including the production of steel, aluminum, glass, electric vehicle (EV) batteries, among others. Besides ferrous commodities, Indonesia has the third largest tropical rainforest in the world and is home to the world’s largest peatlands, which store vast amounts of carbon, mitigating the impacts of climate change, according to the World Bank

3. Strong investment push and integration

Indonesia is the tenth largest economy in the world on purchasing power parity (PPP) basis and is within the world’s top 20 in terms of nominal GDP. On a PPP basis, its share is the largest among other countries in the region. In real terms, Indonesia’s economy grew by an average of 5% yoy in the decade before the pandemic, while its growth rate slowed from 6% in the early 2010s to 5.0% between 2014-2019.

Per capita GDP has increased by nearly sevenfold - from sub-USD600 in 1990 to ~USD4,340 last year, helping to lower the proportion of the population living below the poverty line to under 10%. Beyond the national medium-term development plan for 2020-2024 (which has been partially derailed by the pandemic), there are plans to double per capita GDP within this decade, assuming a higher average growth, at 6%, between 2025-2030.

Preparations are underway to relocate the national capital from Jakarta to East Kalimantan, with the city named as Nusantara. Construction of the new capital will be completed in the next two decades. With presidential elections scheduled for 2024, the next administration is expected to carry forward the capital's infrastructure projects, meeting financing needs, in addition to relocating government and regulatory offices over the next few years.

Indonesia's overall economic, strategic and diplomatic interests reflect a preference to "maintain a balanced stance" towards geopolitics, refraining from engaging in bilateral disputes, while maintaining its own as well as ASEAN’s territorial sovereignty. On the economic front, the government is enthusiastically engaged in regional and bilateral trade/economic agreements. Besides being one of the founding members of ASEAN, Indonesia ratified the Regional Comprehensive Economic Partnership (RCEP) agreement last year and has finalised/is in the consultation stage of more than 40 multilateral/free trade agreements, according to the Asia Regional Integration Center (ARIC)

4. Progress in digitalization

The number of Internet users in Indonesia is estimated to be the fastest growing among neighboring Southeast Asian countries. Internet users account for about 80% of the population (according to DBS data), with the movement accelerated by the pandemic. Among new users, more than half are from non-metro areas, showing that digitalisation is helping to overcome the urbanization gap (e-Conomy SEA by Google, Bain & Temasek Study in 2020).

Additionally, more than 90% of new consumers plan to continue using digital services, indicating that they are loyal digital consumers. Digital user adoption in urban areas is the highest, at 89% for e-commerce, 60% for shopping, 79-80% for transportation, and food delivery, the study said in its 2022 issue.

The deepening penetration and growing interest in apps have caused the gross merchandise value (GMV) to jump 22% to USD77 billion in 2022 and is expected to double to USD130 billion by 2025, according to the study. Separately, digital payments have also reached high penetration levels, with the value of electronic transactions rising 26.1% yoy in January 2023 and digital banking transactions up 28% yoy.

Besides wider consumer push, Indonesia’s digital revolution is also flourishing. For example, the Startup Ranking survey shows that Indonesia is the only country in ASEAN to make it to the top ten in terms of the number of startups, most of which are concentrated in the Greater Jakarta area, the metropolitan region of Jakarta.

A young and digitally literate population sets a higher base for development opportunities, including better soft infrastructure, which will lead to high labour productivity, better manufacturing capabilities, financial inclusion, strengthening social infrastructure, as well as positive spillovers from new technologies, such as AI/Internet of Things, etc.

Besides these variables, there are many other supporting elements that play a role in making Indonesia the leader in the Southeast Asian region. To explore this further, DBS Bank Indonesia will present the DBS Asian Insights Forum with the theme 'Indonesia's Pivotal Role to ASEAN Economy' on March 15, 2023 which brings together practitioners and experts in economics and politics to examine Indonesia's role in ASEAN. This forum is expected to be utilized as a consideration for decision-making.

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DBS Group Research welcomes ASEAN Summit 2023, examines Indonesia’s leadership in ASEAN