Indonesia’s economy in 2024 is a testament to resilience and a swift return to strength, displaying significant growth and transformation since the global COVID-19 pandemic. As one of Southeast Asia’s largest economies, Indonesia has not only recovered, but rather flourished and is ready for a promising year ahead, driven by legal reforms, technological advancements, and growing domestic demand.
The Indonesian economy’s GDP growth rate, which contracted by 2.1% in 2020 due to the pandemic, rebounded impressively with a growth rate of 3.7% in 2021, and 5.3% in 2022, and stabilized at 5% in 2023. The key to this recovery lies in the government’s proactive fiscal policies, increased investment in infrastructure, and political stability that restored consumer and business confidence. This economic revival is backed by strong performance in several key industries, including manufacturing, and digital services, which have adapted to new market conditions and digitalization.
In 2024, the manufacturing sector continues to be the backbone of Indonesia’s economy, contributing nearly 20% to the GDP. The industry has enhanced productivity and innovation, attracting foreign direct investment. Notably, the automotive and electronics industries have seen substantial growth, driven by both domestic consumption and increase in demand for exported goods. Indonesia’s digital economy, which is projected to reach USD 146 billion by 2025, has also seen rapid expansion, with e-commerce, fintech, and digital services thriving amid increasing internet penetration and consumer adoption.
Despite global economic uncertainties, Indonesia remains an attractive investment destination, supported by a young and dynamic workforce, political stability, and ongoing regulatory reforms aimed at simplifying business processes. The Omnibus Law on Job Creation, enacted in 2020, has streamlined regulations and improved the investment climate, fostering a more competitive environment. As the country moves forward, challenges such as income inequality, environmental sustainability, and infrastructure gaps need to be addressed to ensure inclusive and sustainable growth.
As Bagus Enrico and Partners (“The Firm”) enters its 15th year, the firm’s practice areas in Indonesia comprises of several specializations, however, we will focus on a select few significant sectors in each category, highlighting their development and situation in 2023 and 2024. In terms of projects and infrastructure, our attention will be directed towards the National Strategic Projects (Proyek Strategis Nasional or “PSNs”), Technology, Media, and Telecommunications (“TMT”) on Artificial Intelligence (“AI”) development, Real Estate in terms of house mortgages (Kredit Pemilikan Rumah or “KPR”) and apartment mortgages (Kredit Pemilikan Apartemen or “KPA”), Mergers and Acquisitions (“M&A”) in terms of M&A development, and Insurance development in conventional and sharia insurance. We shall elaborate on the following:
i) the current situation;
ii) issues in the sector; and
iii) suggestions that stakeholders may consider in each practice area.
Projects and Infrastructure
Although Indonesia has made tremendous success in the rapid construction of the Trans Toll Road (Jalan Tol Trans) under President Joko Widodo’s governance, in terms of infrastructure availability, Indonesia still falls behind other countries. Utilizing PSNs established by President Joko Widodo through Presidential Regulation 3/2016 regarding the Acceleration of the Implementation of National Strategic Projects (“PP 3/2016”), the government continues to boost the infrastructure development acceleration program. The Committee for Accelerating Priority Infrastructure Development (Komite Percepatan Penyediaan Infrastruktur Prioritas or “KPPIP”), is responsible for selecting and prioritizing projects based on their strategic importance and urgency. The growth of PSNs is anticipated to assist the region’s economy and development through investments in several industries. According to the Ministry of Public Works and Public Housing (“PUPR”), 13 PSNs were finished in 2023. Meanwhile, 41 PSNs are scheduled to be completed this year by 2024, or until President Joko Widodo’s government ends.
However, PSN development has also become a shelter for various environmental crimes. The main reason for this widespread violation is that the current government’s strategy is based on a need-based approach, creating new problems, i.e. land occupation and the delegitimization of land ownership.
This problem remains a homework assignment for PSNs, particularly in land acquisition and spatial planning, such as the Gilimanuk-Mengwi Toll Road PSN, which requires land acquisition support through the State Asset Management Agency (Lembaga Manajemen Aset Negara or “LMAN”) due to a change in the scheme from unsolicited to solicited, and the Fakfak Fertilizer Industrial Estate PSN, which requires accelerated release of forest areas and compensation for customary rights in the + 500-hectare area.
Furthermore, Saurlin P. Siagian, Commissioner for Research and Studies at Komnas HAM, remarked that PSNs have also become a new source of agrarian conflict as they employ a security strategy. Land overlapping problems in West Sumatra, the Rempang Eco City project, and the Jakarta-Bandung fast train demonstrate this. Unfortunately, a lot of heavy equipment was utilized to open roads around customary properties in Papua for a development project in 2023.
Therefore, if the government plans to reach its target of 41 PSNs and/or other projects and infrastructures this year, improvements need to be made. Consequently, to address current issues, it would be prudent to implement the following changes:
i) evaluating PSN programs for their harmful impacts;
ii) adjusting nomenclature and program scope related to PSNs itself; and
iii) focusing on legal frameworks such as the Draft Law (Rancangan Undang-Undang or “RUU”) on Land and RUU on Indigenous People specifically to reduce inequality and agrarian conflicts.
The firm’s experience in the Project and Infrastructure industry has spanned more than a decade, and we have learned from first-hand experience the complexities of this sector. Notably, we have advised on the development of the “Bandung Inter Urban Toll Road” and the “Batam International Airport” project, facilitating the establishment of joint ventures and financing structures essential for the project’s construction. We have also undertaken extensive projects such as establishing Public Private Partnership projects and assisting clients in navigating complex infrastructure developments successfully.
The firm’s experience in the Project and Infrastructure industry has spanned more than a decade, and we have learned from first-hand experience the complexities of this sector.
Technology, Media, and Telecom (TMT)
TMT in Indonesia is poised for significant growth and transformation in 2024, driven by advancements in AI, the Internet of Things (“IoT”), and edge computing, resulting in positive impacts on energy consumption and sustainability. One of the critical areas of focus will be the adoption of innovative technologies, such as private 5G networks, which are being used by multinational firms such as LyondellBasell and Schneider Electric to drive the implementation of smart factories. This technology will play a crucial role in the country’s efforts to achieve net zero emissions and a more sustainable environment, combined with the government’s initiatives to promote digital literacy and digital skills training. Overall, the Indonesian TMT industry is expected to continue its high development trajectory in 2024, driven by the increased demand for digital services and the government’s initiatives to enhance digital infrastructure, which enables companies to gain real-time insights and make better decisions.
As companies continue to digitize their physical environments, the requirement for connectivity and up-to-date technology will lead to an increased need for edge computing capabilities, which will be critical in supporting the use of AI platforms, in addition to human expertise in implementing the AI systems. Although AI is expected to play a significant role in customer experience, human intervention will still be necessary to ensure its success and prevent its misuse.
In Indonesia, the regulatory landscape for AI is currently characterized by a lack of a robust legal framework, with AI governance primarily relying on ethical guidelines and soft regulations. This situation poses significant challenges in ensuring the responsible development and deployment of AI, particularly in cases where errors or losses occur due to AI usage.
The applicable regulations relevant to the use of AI are Law No. 27 of 2022 on Personal Data Protection (“PDP Law”), Government Regulation No. 71 of 2019 on the Implementation of Electronic Systems and Transactions (“GR 71/2019”), Minister of Communication and Information Technology Regulation on Private Scope Electronic System Operators, Law No. 28 of 2014 on Copyright (“Copyright Law”), and Law No. 1 of 2024 on the Second Amendment to Law No. 11 of 2008 on Electronic Information and Transactions (“Law 1/2024”).
In conclusion, to manage the development of AI in Indonesia and address potential issues, we recommend:
i) the government establish a comprehensive AI governance policy;
ii) Indonesia follows the lead of the EU, the United States, China, and Brazil, in regulating AI by enacting dedicated legislation; and
iii) identifying supervision mechanisms to protect the fundamental rights of citizens.
The firm has consistently been cited as a leader in legal advisory services for the TMT sector, making us well-equipped to navigate the industry’s anticipated growth and transformation in 2024. We have provided specialized legal and regulatory advice to multinational corporations on the implementation and expansion of advanced technologies such as private 5G networks and edge computing. Notably, our work includes advising on the entry of cryptocurrency into Indonesia and offering regulatory guidance on data protection issues for global financial services firms. Our expertise in this sector ensures we can support the adoption of new technologies critical for achieving net zero emissions and promoting digital literacy, as well as enhancing digital infrastructure to enable better decision-making and sustainability efforts.
The firm has consistently been cited as a leader in legal advisory services for the TMT sector, making us well-equipped to navigate the industry’s anticipated growth and transformation in 2024.
Real Estate
The property industry is the main pillar of Indonesia’s economy, serving as the most robust economic sector throughout the COVID-19 pandemic, despite the IMF and World Bank’s prediction of a global slowdown. This is because Indonesia’s property market is still relatively conventional and has not used real estate investment trusts (“REITs”), leaving it disconnected from the global property market. Furthermore, Indonesia’s property company contacts with foreign countries remain restricted, so the financial crisis of overseas property corporations has had no significant impact on the domestic market in Indonesia. The industry presents several opportunities for people in a variety of fields, decreasing poverty, and creating new jobs.
We predict that the property outlook in Indonesia in 2024 will be influenced by domestic economic conditions and the related authorities’ policies. Firstly, the Government and Bank Indonesia have implemented policies such as the fiscal incentive of Government-borne Value Added Tax (Pajak Pertambahan Nilai Ditanggung Pemerintah or “PPN-DTP”) and loan-to-value (“LTV”) relaxation. The PPN-DTP incentive aims to boost national economic growth and increase property demand by the public, which is regulated through the Ministry of Finance Regulation Number 7 of 2024 (“MoFR 7/2023”). Furthermore, the PPN-DTP fiscal incentive and LTV relaxation policies have proven effective in enhancing property sector performance. This is reflected in the sector’s economic growth performance, particularly in the construction and household consumption of housing and buildings.
Secondly, the increase in demand from end-users, particularly in land-based housing projects, is also a supporting factor for the property sector’s growth this year. Standard & Poor’s predicts housing sales will grow by 5-10%, despite rising demand and a backlog of unfulfilled housing needs for 12.7 million units.
Lastly, the impact of real estate in Indonesia on KPR and KPA interest rates shows a continuous decline, which can open opportunities for property credit growth. However, we view that this decline in interest rates can also increase credit risk, thus it is necessary for the government and banks to monitor it closely to prevent financial crises.
Nonetheless, the property sector continues to encounter obstacles such as a lack of affordable and accessible land, the limited availability of cheap funding, a restricted number of developers qualified to work with the government and banks that provide loans, high interest rates, and economic instability. Therefore, to maximize opportunities in the sector, along with collaboration and coordination between the government, industry, and stakeholders, we recommend:
i) optimizing PPN-DTP fiscal incentives;
ii) collaboration and innovation between the government and relevant stakeholders; and
iii) emphasis on infrastructure development, improving regulations, and public awareness of property investment.
The firm’s extensive and widely recognized expertise in the real estate sector encompasses advisory roles on significant transactions and regulatory compliance, contributing to the sector’s stability and growth. Notably, we have guided clients through the intricacies of tax planning and loan policies, bolstering national economic growth and property demand. Our involvement has been pivotal in navigating the sector’s challenges, ensuring robust legal support for enhancing property sector performance and fostering economic development.
The firm’s extensive and widely recognized expertise in the real estate sector encompasses advisory roles on significant transactions and regulatory compliance, contributing to the sector’s stability and growth.
Corporate Mergers and Acquisitions
Throughout 2023, M&A activity in Indonesia has remained strong and is predicted to continue on this trajectory. Alongside this stability and growth, we are witnessing a shift in sector dominance, a reflection of the influence of global economic conditions on business sustainability and technology.
The advancement of financial technology (“Fintech”), insurance technology (“Insurtech”), and the expansion of digital banking have impacted M&A transactions, as seen throughout 2023. Indonesia’s M&A stability and growth throughout 2023 also experienced sector dominance due to the influence of global economic conditions on business sustainability and technological advancements.
M&A in Indonesia is witnessing increasing competition in various sectors, forcing companies to improve their scale and competitiveness to remain relevant and competitive. M&A has become an effective strategy to achieve this goal, allowing companies to integrate better resources and technologies and improve operational and financial capabilities. In addition, changing consumer trends may encourage M&As to increase market expansion and penetration.
In recent, a merger plan between PT Bank MNC Internasional Tbk. (“BAPB”) and PT Bank National Nobu Tbk. (“NOBU”) has been implemented since early 2023, although it is yet to be completed. The merger between BAPB and NOBU intends to form a group of banks with core capital II, along with increased operational and financial capabilities in meeting changing consumer needs. Furthermore, a merger plan has been formed between Bank Muamalat and Bank BTN Syariah, to increase operational scale and competitiveness in Indonesia’s Islamic banking industry. The Minister of State-Owned Enterprises, Mr Erick Thohir, has emphasized the importance of merging Bank Muamalat with Bank BTN Syariah to improve access to Islamic finance for the wider community. Despite this, the banks’ merger remains in the negotiation stage with further delays in obtaining data from the Public Accounting Firm.
Outside the banking sector, XL Axiata and Smartfren are predicted to merge, which would promote healthier competition in the telecommunications sector. Additionally, news reports covered a possible merger between PT GOTO Gojek Tokopedia Tbk (“GOTO”) and Grab Holdings Ltd (“Grab”), however, the Management of GOTO denied this. A hypothetical merger between GOTO and Grab may cause monopoly competition problems in Indonesia leaving consumers and driver-partners with limited options for application-based transportation services. Therefore, we believe getting regulatory approval may be challenging, as, combined, GOTO and Grab would control a significant market share in the industry.
In conclusion, M&As in Indonesia face several challenges namely regulatory uncertainty in some sectors, and relatively high asset values compared to other countries, further increasing M&A-related costs. Additionally, the recent elections in Indonesia may lead to policy changes creating uncertainty and volatility for investors.
The firm has played a pivotal role in numerous high-profile transactions across various sectors, leveraging our expertise to navigate the complexities of M&A. Our team has successfully advised on transactions involving financial technology, digital banking, and telecommunications, sectors that have seen significant M&A activity influenced by global economic conditions. Our comprehensive legal and business-oriented advice ensures our clients achieve their strategic objectives while enhancing their operational and financial capabilities in an increasingly competitive market.
The firm has played a pivotal role in numerous high-profile transactions across various sectors, leveraging our expertise to navigate the complexities of M&A.
Insurance
The insurance industry in Indonesia still faces challenges as demonstrated by its slow growth which can be attributed to low use and public trust in insurance products, cumbersome claims processes, unaffordable premiums, limited public access, and defaults.
The industry’s growth can be observed through the increasing insurance inclusion rate, which represents the percentage of the population utilizing insurance products. According to the National Literacy and Inclusion Survey (Survei Nasional Literasi dan Inklusi or “SNLIK”), Indonesia’s insurance inclusion rate has risen from 13.15% in 2019 to 16.63% in 2022. However, there is still a substantial gap between the insurance inclusion rate and the insurance literacy rate. Based on SNLIK, the insurance literacy rate was 19.40% in 2019 and has increased to 31.72% in 2022, indicating that more individuals have a better understanding of insurance types and products.
However, equitable access to general insurance remains a challenge, particularly in East Kalimantan (1,4%) and Bali (1,7%) while Jakarta recorded the highest percentage of premium income (63%).
Furthermore, despite a majority Muslim population, Sharia insurance products are still unknown to the public. For instance, Aceh has significant potential for Sharia insurance, however, the premium income in Aceh remains relatively low. Issues such as low penetration and density, cyber risks, and a lack of awareness about insurance and its benefits further restrict the industry.
Consequently, in support of the expansion of the insurance industry, the Indonesia Financial Services Authority (Otoritas Jasa Keuangan or “OJK”) in collaboration with insurance associations, published the Roadmap for the Development and Strengthening for the Indonesia Insurance Industry 2023-2027, which has been harmonized with Law No. 4/2023 (“P2SK Law”). This roadmap aims to create a sound, efficient insurance industry that upholds high integrity, strengthens consumers and public protection, and supports national economic growth.
In addition to effective coordination between the government, industry, and stakeholders, to reform and increase public trust in the national insurance sector, we suggest the government:
i) strengthen the resilience and competitiveness of the insurance industry;
ii) implementation of a Policy Guarantee Program (Program Penjamin Polis or “PPP”) as mandated by the P2SK Law;
iii) development of supervisory technology (“Suptech”) and regulatory technology (“Regtech”); and
iv) strengthening regulation, supervision, and licensing.
The firm has consistently leveraged its extensive experience in the sector to support and advise on significant transactions and regulatory compliance. The firm has provided comprehensive legal services in the acquisition of majority shares in various local insurance companies, ensuring compliance with Indonesian regulations and fostering smooth transaction processes. Additionally, we have offered expert advice on Islamic finance structures, demonstrating our ability to navigate complex regulatory landscapes. Our involvement in these high-stake transactions underscores our commitment to enhancing the resilience and competitiveness of the Indonesian insurance market.
The firm has consistently leveraged its extensive experience in the sector to support and advise on significant transactions and regulatory compliance.
To learn more about the legal landscape of key industries in Indonesia, please visit our website at www.bepartners.co.id. You can also reach out to us directly via email at [email protected]. Our team is here to assist you with our comprehensive legal services and strategic insights.
