Welcoming the ASEAN Summit 2023, DBS Group Research analyzes the chairmanship of Indonesia in ASEAN

Thepresidentpost.id - Jakarta, March 13th, 2023 - Indonesia has become the chairman of ASEAN for this year, right after successfully organizing the G20 Summit in 2022.

This year’s theme ‘ASEAN matters: Epicentre of Growth’ underscores the economic journey and development that this region has witnessed in the past two decades, looking to a sustainable, stable, and inclusive path ahead, accompanied by a strong and efficient institutional as well as bureaucratic backbone.

Through the research entitled 'DBS Focus, Indonesia: Bright spot in a vibrant ASEAN-6 region', DBS Group Research examines Indonesia's capabilities in its central role in ASEAN in several factors. Let's look at these four factors below!

1. Favourable demographics

Indonesia is the most populous country amongst the ASEAN-61 countries at 273mn, and fourth largest in the world. This carries considerable demographic dividends, as the population is not only relatively young compared to the region but also enjoys a favourable proportion of working age population, rising by an average of 1.8% for the past decade. Median age is low at ~29 years, and the working age population makes up two-third of the total count, with its share likely to remain in the region over the coming two decades, according to the Statistics Indonesia. The Java island is the economic heart of the archipelago, accounting for around 55% of the population and more than half of the national output.

Alongside overall population growth, urbanization has also been growing at a steady pace, standing at 57% of the population, according to the World Bank. Beyond the temporary downshift in status during the pandemic, the economy is expected to be recoup the upper middle-income status in the next couple of years. Plans are to expand the size of the middle class from the current a fifth of the population to 45-50%.

While these dynamics provide a unique window of opportunity to boost growth via an expanding labour pool, and competitive wages, likely leading to higher per capita GDP, the natural conclusion is that ensuring ample quality employment generation and appropriate education/ skill training will be few of the key priorities for the administration for the medium-term.

2. Rich in natural resources

Indonesia is endowed with abundant natural resources, spanning agricultural commodities (e.g., palm oil, rubber), crude oil and metals/minerals, for instance coal, iron ore, copper ore, nickel, natural gas, and tin. Half of the economy’s export basket comprises of primary commodities, implying relatively high sensitivity of the trade sector’s performance to the global price cycles. Nonetheless, during boom times, high prices have had a beneficial impact, particularly on resource-rich provinces.

While the country was a traditional ore commodity exporter, in the past decade there have been concerted efforts to attract more manufacturing capabilities in downstream industries, including steel production, aluminium, glass, electric vehicle (EV) batteries, amongst others. Besides ferrous commodities, the country also has the third largest tropical rainforest in the world and is home to the world’s largest tropical peatlands and mangrove forests, which store vast amounts of carbon that mitigate climate change impact, according to the World Bank.

3. Strong investment push and integration

The country is the tenth largest economy in the world on purchasing power parity (PPP) basis and is within the top 20 in the world in nominal GDP terms. On PPP basis, its share is the biggest amongst the regional peers. In real terms, the economy expanded by an average 5% yoy in the decade before the pandemic, while the pace of growth decelerated from 6% in early 2010s to the 5.0% handle between 2014-2019.

Per capita GDP has risen by close to seven times - from sub-USD600 in 1990 to ~USD4,340 last year, helping to lower the proportion of population living below the poverty line to sub-10%. Beyond the National Medium-term development plan for 2020-24 (partly derailed by the pandemic), plans are to double the GDP per capita within this decade, assuming a higher 6% average growth between 2025-2030.

Plans are afoot to relocate the National Capital City from Jakarta to Eastern Borneo, with the city named as Nusantara and due to be completed over the coming two decades. With the country heading into Presidential elections in 2024, the next administration will be expected to carry forward the capital’s infrastructure projects, meet financing needs, besides movement of key government offices and regulators over the course of the coming years.

The country’s overall economic, strategic, and diplomatic interests reflect a preference for ‘maintaining a balanced stance’ towards geopolitics, refraining from getting drawn into bilateral skirmishes, whilst defending its own as well as ASEAN region’s territorial sovereignty. In the economic sphere, governments have keenly engaged in regional and bilateral trade/economic agreements.

Besides being one of the founding members of the ASEAN bloc, Indonesia ratified the Regional Comprehensive Economic Partnership (RCEP) agreement last year and has finalised/ is in consultation phase of over 40 multilateral/ free trade agreements, according to the ARIC.

4. Digitalisation strides

Indonesia’s digital population is estimated to have witnessed the fastest rise amongst Southeast Asian neighbours. Internet users make up about 80% of the population (DBS), with the shift expedited by the pandemic. Amongst the new joinees, more than half are from non-metro areas, putting paid to the idea that digitalisation has helped surmount the urbanisation gap [e-Conomy SEA by Google,Bain & Temasek study 2020].

Additionally, over 90% of the new consumers plan to continue using these digital services, proving to be sticky digital consumers. Adoption of urban digital users is the highest at 89% for e-commerce, 60% for groceries, 79-80% for transport, and food delivery, according to the 2022 edition of the above study.

This deepening penetration and growing interest in applications has led the gross merchandise value (GMV) to jump by 22% to USD77bn in 2022 and is on course to nearly double to USD130bn by 2025, according to the same study. Separately, digital payments have also scored high penetration, with value of e-transactions up by 26.1%yoy in Jan23 and digital banking transactions up by 28% yoy.

Besides wider consumer push, Indonesia’s digital revolution is also thriving. For instance, a survey by Startup Ranking showed that this is the only country within ASEAN to make it to the top ten for the number of start-ups, majority of which are concentrated in Jabodetabek area (i.e., Jakarta-Bogor-Depok–Tangerang–Bekasi, which is the Jakarta metropolitan area).

A young and digitally aware population sets the base higher for development opportunities, including better soft infrastructure, pass through to high labour productivity, improved manufacturing capabilities, financial inclusion, strengthening social infrastructure and positive spillovers of new technologies such AI/ Internet of Things, amongst others.

In addition to the variables above, there are many other supporting factors that play a role in making Indonesia the leader in the Southeast Asian region. To explore more deeply, Bank DBS Indonesia will  hold the DBS Asian Insights Forum with the theme "Indonesia's Pivotal Role to ASEAN Economy" on 15 March 2023 which brings together various practitioners and experts in economics and politics to examine Indonesia's role in ASEAN. It is hoped that this forum can be used as material for consideration for decision making.