INDONESIA ECONOMIC PROSPECTS IEP People-First Housing: A Roadmap from Homes to Jobs to Prosperity in Indonesia June 2025 © 2025 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions, and is supported by funding from the Australian Government under the Australia-World Bank Indonesia Partnership (ABIP) program. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent, or the Australian Government. 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Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@ worldbank.org. Photo credits: Front cover and inside chapters: © World Bank and © Arief Komarudin/unsplash.com The report was designed and typeset by Arsianti. Indonesia Economic Prospects June 2025 Ta b l e of C o n te n ts Contents Table of Summary Executive LIST OF FIGURES AND TABLES IV Developments PREFACE VI A.1. Recent Economic ABBREVIATIONS AND ACRONYMS VII EXECUTIVE SUMMARY 1 A.2. The Policy I. Economic Update 1 Stance II. A Roadmap from Homes to Jobs to Prosperity in Indonesia 2 A.3. Outlook and Risks A. ECONOMIC UPDATE 5 1. Recent Economic Developments 5 A.4. Policy Priorities 2. The Policy Stance 13 3. Outlook and Risks 16 4. Policy Priorities 17 Indonesia 2045 to a Golden B.1. A Path B. A ROADMAP FROM HOMES TO JOBS TO PROSPERITY IN 24 INDONESIA B.2. Pillar 1. Housing & Infrastructure Investments 1. A Path to a Golden Indonesia 2045: Meeting President Prabowo’s 24 Housing and Employment Goals 2. Pillar 1. Housing and Infrastructure Investments 28 3. Pillar 2. Policy and Institutional Reforms 33 Institutional Reforms B.3. Pillar 2. Policy & 4. Conclusion 36 REFERENCES 37 B.4. Conclusion CLICK THE SIDE BUTTONS TO GO TO THE SECTION YOU WISH iii TO READ. Indonesia People-First Economic Housing: Prospects A Roadmap June from Homes 2025 to Jobs to Prosperity in Indonesia LIST OF FIGURES AND TABLES Contents Table of FIGURES Summary Executive Figure A.1: Growth moderated due to declining domestic demand despite a temporary improvement 6 in net exports. Figure A.2: Services and agriculture are driving growth while manufacturing industry is slowing down. 6 Figure A.3: Inflation is picking up after the removal of electricity tariff discounts, but it remains 6 Developments A.1. Recent Economic relatively subdued with abated food prices. Figure A.4: Business perception of access to credit and liquidity deteriorated. 8 Figure A.5: Consumer confidence has declined, especially regarding future economic conditions. 8 Figure A.6: Household savings, especially low- and middle-income groups, are softening… 9 A.2. The Policy Figure A.7: …with savings preferences shifting toward safe-haven assets like gold and property. 9 Stance Figure A.8: Middle-class consumption growth has been subdued. 9 Figure A.9: Indonesia’s labor force is heavily concentrated in low-productivity sectors. 9 Figure A.10: Exports to the US and China accelerated in March, ahead of the US tariffs. 10 A.3. Outlook and Risks Figure A.11: Imports initially slowed, but they surged in April across categories. 10 Figure A.12: Asian EMDE saw capital outflows as global investors turned to safe-haven assets. 11 Figure A.13: Foreign investment into debt securities partially offset equity selloff in Q1-25. 11 A.4. Policy Figure A.14: The banking sector’s asset quality and buffers are healthy... 12 Priorities Figure A.15: …but lending to the private sector has been decelerating. 12 Figure A.16: Credit growth has been slower than its long-term trend pointing to moderating 12 economic activity. Indonesia 2045 to a Golden B.1. A Path Figure A.17: The monthly fiscal balance is slightly weaker compared to recent years. 14 Figure A.18: This is partly caused by a decline in both tax and non-tax revenues. 14 Figure A.19: Contraction in material and other spending as well as transfers led to the decline in 14 government expenditure. B.2. Pillar 1. Housing Figure A.20: Interest-to-revenue ratio is rising and sensitive to exchange rate and interest rate shocks. 14 & Infrastructure Investments Figure A.21: Interbank lending rate recently exceeded BI Rate, suggesting tighter liquidity. 15 Figure A.22: The Rupiah has underperformed its EMDE peers year-to-May. 15 Figure A.23: Indonesia’s direct exposure to US markets is considerably lower than that of regional 18 peers. Figure A.24: Textiles, apparel, and footwear have the highest exposure to US markets. 18 Institutional Reforms B.3. Pillar 2. Policy & Figure A.25: Exports of natural rubber, plywood, tin and others were exempted from higher tariffs. 18 Figure A.26: NTMs are often cumulatively applied and impose significant costs. 19 Figure A.27: NTM reforms could have significant benefits for growth, exports, and investment. 19 Figure B.1: Backlog of New and Better Housing. 26 Figure B.2: Substandard Housing in Urban and Rural Areas. 26 Figure B.3: Mortgage Debt to GDP Ratio. 28 B.4. Conclusion iv Indonesia Economic Prospects June 2025 Figure B.4: Illustration for Leveraging Blended Financing for Large-Scale Integrated Infrastructure 31 Contents Table of Projects. Figure B.5: Land Required to Close the Quantitative Housing Gap. 31 Figure B.6: Payment-to-Income Profile for Three Interest-Rate Scenarios. 34 Summary Executive Figure B.7: Potential Repositioning of Public Housing Finance Institutions. 35 TABLES Developments A.1. Recent Economic Table ES. 1: Static Simulation of 3 Million Housing Program: Before (2023) and After Comparison. 3 Table A.1: Selected Macroeconomic Indicators. 21 Table A.2: Comparing Sovereign Wealth Funds across the Globe. 22 Table B.1: Cities Drive Economic Growth. 25 A.2. The Policy Stance Table B.2: Static Simulation of 3 Million Housing Program: Before (2023) and After Comparison. 36 A.3. Outlook and Risks A.4. Policy Priorities Indonesia 2045 to a Golden B.1. A Path B.2. Pillar 1. Housing & Infrastructure Investments Institutional Reforms B.3. Pillar 2. Policy & B.4. Conclusion v Indonesia People-First Economic Housing: Prospects A Roadmap June from Homes 2025 to Jobs to Prosperity in Indonesia Preface Contents Table of Summary Executive The Indonesia Economic Prospects (IEP) is a bi-annual World Bank report that assesses recent macroeconomic developments, the outlook, and risks, as well as specific development challenges for the Indonesian economy. The IEP aims to inform the public policy debate and serves a broad audience including the general public, government, private Developments A.1. Recent Economic sector, civil society organizations, and other domestic and international stakeholders. The IEP is a product of the World Bank Jakarta office and receives strategic guidance from an editorial board chaired by Carolyn Turk, Country Director for Indonesia and Timor-Leste. The report is prepared by the Macroeconomics, Trade and Investment (MTI) Global Practice team, under the guidance of Lars Christian Moller (Practice Manager), Bjorn A.2. The Policy Philipp (Practice Manager) and Habib Rab (Lead Economist). The report is led by Wael Mansour (Senior Economist) and Stance Luis Miguel Triveno Chan Jan (Senior Urban Development Specialist) . Deviana Djalil provided administrative support and coordinated the organization of the report launch event. The dissemination was organized by Gb Surya Ningnagara and Maulyati N. Slamet under the guidance of Lestari Boediono A.3. Outlook and Risks Qureshi. The report was designed and typeset by Arsianti. Part A was prepared by Wael Mansour, Csilla Lakatos, Dwi Endah Abriningrum, Indira Maulani Hapsari, Mehwish Ashraf, Ratih Dwi Rahmadanti, and Rully Prassetya. Inputs were provided by Shreya Chatterjee and Abror Tegar Pradana (Labor Markets), Ou Nie and Neni Lestari (financial sector), William Hutchins Seitz, Samuel Nursamsu (Poverty Analysis) and A.4. Policy Priorities Kunal Pawa, Immanuel Frank Steinhilper, and Henri Fortin (section on Danantara). Part A benefitted from the comments of Habib Rab and was peer reviewed by Gitanjali Kumar. Part B was prepared by Luis Miguel Triveno Chan Jan and Jessica Grayson Gosling Goldsmith, with contributions from Indonesia 2045 to a Golden Csilla Lakatos, Rully Prassetya, and Dwi Endah Abriningrum (Economic Impact), William Hutchins Seitz, and Samuel B.1. A Path Nursamsu (Housing Quality, Affordability, and Impact on Migration), Griya Rufianne, Kumala Sari, and Evellyn Tan (Next-Generation Settlement and Neighborhood Transformation), Evi Hermirasari, Anangga Wirasatya, and Pratiwi Prameswari (Transformation of Urban Areas: Housing and Growth), Hans Joachim Duebel and Harish Khare (Housing Finance and Program Static Simulation), Dao Harrison, Britt Gwinner, and Arthur Acolin (Housing Finance Reforms), and Yuko Arai, Priska Marianne, Nina Nurrahmawati, and Banu Karim Sjadzali (Land Demand for Housing). Part B benefited B.2. Pillar 1. Housing & Infrastructure from comments of Wael Mansour and was peer reviewed by Andre A. Bald. Investments This report is available for download in English and Indonesian via: www.worldbank.org/iep Previous report editions: • December 2024: Funding Indonesia’s Vision 2045 • June 2024: Unleashing Indonesia’s Business Potential Institutional Reforms B.3. Pillar 2. Policy & • December 2023: Climate Action for Development To receive the IEP and related publications by email, please contact ddjalil@worldbank.org. For questions and comments, please contact wmansour@worldbank.org and ltriveno@worldbank.org. For information about the World Bank and its activities in Indonesia, please visit: B.4. Conclusion www.worldbank.org/id instagram.com/worldbank @BankDunia #IEPBankDunia www.linkedin.com/company/the-world-bank   BankDunia vi Indonesia Economic Prospects June 2025 Abbreviations and Contents Table of Acronyms Summary Executive ADIA Abu Dhabi Investment Authority IDR Indonesia Rupiah APBD Anggaran Pendapatan dan Belanja Developments IEP Indonesia Economic Prospects A.1. Recent Economic Daerah IMF International Monetary Fund AI Artificial Intelligence INA Indonesia Investment Authority BI Bank Indonesia Jabodetabek Jakarta Bogor Depok Tangerang BPS Badan Pusat Statistik Bekasi (Jakarta Metropolitan Area) BPJS Badan Penyelenggara Jaminan Sosial A.2. The Policy JKP Job Loss Guarantee Program BP TAPERA Badan Pengelola Tabungan Perumahan Stance JKN Jaminan Kesehatan Nasional Rakyat KOTAKU Kota Tanpa Kumuh BSPS Bantuan Stimulan Perumahan KUR Kredit Usaha Rakyat Swadaya LAR Loan-at-Risk A.3. Outlook BTN Bank Tabungan Negara LCR Liquidity Coverage Ratio and Risks BULOG Badan Urusan Logistik LDR Loan-to-Deposit Ratio BUMD Badan Usaha Milik Daerah LMAN Lembaga Manajemen Aset Negara BUMN Badan Usaha Milik Negara LMIC Lower-Middle Income Countries CAD Current Account Deficit LNG Liquified Natural Gas A.4. Policy Priorities CAR Capital Adequacy Ratio LPG Liquefied Petroleum Gas CDS Credit Default Swap LVC Land Value Capture CIO Chief Investment Officer MBG Makan Bergizi Gratis CPI Consumer Price Index MBR Masyarakat Berpenghasilan Indonesia 2045 to a Golden CPO Crude Palm Oil B.1. A Path Rendah CSH Contract Savings for Housing MIS Management Information CTAS Core Tax Administration System System DAU Dana Alokasi Umum NAHP National Affordable Housing DAK Dana Alokasi Khusus Program B.2. Pillar 1. Housing EAP East Asia Pacific NPL Non-Performing Loan & Infrastructure Investments EMCI Emerging Market Currency Index NSFR Net Stable Funding Ratio EMDEs Emerging Market and Developing NTMs Non-Tariff Measures Economies OECD Organization for Economic Co- FDI Foreign Direct Investment Operation and Development FFR Federal Fund Rate OJK Otoritas Jasa Keuangan FLPP Fasilitas Likuiditas Pembiayaan OPEC+ Organization of the Petroleum Perumahan Institutional Reforms Exporting Countries and 10 Additional B.3. Pillar 2. Policy & FX Foreign Exchange Non-OPEC Countries FSAP Financial Sector Assessment Perda Peraturan Daerah Program PLM Penyangga Likuiditas Makroprudensial GDP Gross Domestic Product PRONA Proyek Operasi Nasional Agraria GEP Global Economic Prospects PSR Program Sejuta Rumah GOI Government of Indonesia RDTR Rencana Detail Tata Ruang GRM Grievance Redress Mechanism RISHA Rumah Instan Sederhana Sehat B.4. Conclusion HREIS Housing and Real Estate Information ROA Return-on-Assets System ROE Return-on-Equity ICT Information, Communication, and RPLN Rasio Pendanaan Luar Negeri Technology RPPI Residential Property Price Index v ii Indonesia People-First Economic Housing: Prospects A Roadmap June from Homes 2025 to Jobs to Prosperity in Indonesia RP3KP Rencana Pembangunan dan SMF Secondary Mortgage Facility Pengembangan Perumahan dan SNI Standar Nasional Indonesia Contents Table of Kawasan Permukiman SOEs State-Owned Enterprises RRR Reserve Requirement Ratio SRBI Sekuritas Rupiah Bank Indonesia RTRW Rencana Tata Ruang Wilayah SWFs Sovereign Wealth Funds RumahQu Housing Queue UMIC Upper-Middle Income Countries Summary Executive RUSPIN Rumah Unggul Sistem Panel US United States Insan USD United States Dollar Satker Satuan Kerja UST United States Treasury SIAP Sistem Informasi dan VAT Value-Added Tax Developments A.1. Recent Economic Perencanaan Terpadu YOY Year-on-Year A.2. The Policy Stance A.3. Outlook and Risks A.4. Policy Priorities Indonesia 2045 to a Golden B.1. A Path B.2. Pillar 1. Housing & Infrastructure Investments Institutional Reforms B.3. Pillar 2. Policy & B.4. Conclusion v iii Executive Summary Indonesia People-First Economic Housing: Prospects A Roadmap June from Homes 2025 to Jobs to Prosperity in Indonesia E xe cut i ve Su m m a r y Contents Table of Summary Executive I. Economic Update Indonesia’s economy remains resilient amid and integrate Indonesia’s tax administration. Other Developments A.1. Recent Economic worsening global conditions. GDP grew at 4.9 percent factors include larger-than-expected tax rebates, as year-on-year (yoy) in Q1-2025, slightly lower than well as forgone revenues from SOE dividends, reversal previous post-pandemic quarters. Domestic demand of the VAT rate hike, lower commodity prices, and was impacted by reduced government consumption softer domestic demand. To address revenue shortfalls and lower investment. Budget efficiency measures led to and create fiscal space for priority programs, budget A.2. The Policy a contraction in public consumption, while investment efficiency and reallocation measures (of 1.3 percent of Stance in construction and manufacturing sectors dipped due GDP) were implemented. Cuts were made in ministries to investors’ concerns over domestic and global policy involved in public investment and to sub-national uncertainty. Meanwhile, declining commodity prices transfers for infrastructure projects, raising potential A.3. Outlook worsened Indonesia’s terms-of-trade. The supply side long-term growth tradeoffs. By May, those measures and Risks showed notable contributions from agriculture and had largely balanced the budget. services sectors. Favorable climate conditions led to a significant rebound in food and crop production, Monetary policy is easing to support growth after which helped contain food prices and maintain the Rupiah stabilized following BI intervention. A.4. Policy Priorities headline inflation at the lower end of Bank Indonesia’s Global financial volatility has affected FDI and the (BI) target range [2.5±1 percent]. equity market, causing capital outflows and pressuring the Rupiah, which hit a historical low in April. This Businesses and households are adjusting to prompted BI to intervene, and the currency recovered Indonesia 2045 to a Golden B.1. A Path economic uncertainty but weak consumption by 2.2 percent month-on-month in May. FX reserves of middle class households has been persistent dropped as a result but remained adequate, covering since the pandemic. Businesses are facing liquidity 6.2 months of imports and debt repayments. Despite challenges, and manufacturers are reducing inventory this, monetary policy eased gradually amid low and hiring to sustain operations. Household savings inflation conditions with BI lowering the policy rate B.2. Pillar 1. Housing are decreasing, particularly for low and middle-income twice this year by 25 bps each. BI also eased some & Infrastructure Investments families, with consumers turning to safe-haven assets macroprudential measures and injected liquidity like gold and property. Lagging consumption of the through open market operations. middle class has been persistent since the pandemic. From 2019 to 2024, inflation-adjusted consumption of In the medium-term, Indonesia’s economy will middle-class households grew by only 1.3 percent per continue to grow despite downside risks that year compared to 2-3 percent for both the poorest require prudent macro management. Global policy Institutional Reforms B.3. Pillar 2. Policy & and richest groups. While the poor have benefitted uncertainty is expected to impact global demand, from social assistance, the lack of quality jobs is limiting including that of Indonesia’s main trading partners. income growth for middle-class workers. Despite rising Nevertheless, Indonesia’s medium-term growth is job creation and labor force participation, 52 percent expected to remain resilient, with projections averaging of new jobs created last year were in low value-added 4.8 percent annually over 2025-2027. Growth will be sectors. driven by private consumption, which will benefit from low inflation and social assistance programs, as well B.4. Conclusion Fiscal policy has adjusted to create space for priority as investment which is expected to pick up with the programs and consumption stimulus packages government’s housing program and projects from amid revenue shortfalls. Tax and non-tax revenues Danantara, the new sovereign wealth fund and super- declined due to temporary factors like technical holding company for State Owned Enterprises. Prudent glitches associated with the implementation of the fiscal policy is anticipated to keep the deficit around 2.7 Core Tax, a comprehensive digital system to modernize percent of GDP, with spending expected to gradually 1 Indonesia Economic Prospects June 2025 increase by 2027 due to rollout of priority programs Four policy priorities emerge though in times Contents and rising interest payments. The GOI plans to finance of rising uncertainty. First, deregulate trade and Table of this by taxing digital transactions, raising mineral investment by removing unnecessary non-tariff and coal royalties, improving tax administration, and measures (NTMs), streamlining import approvals, using big data for better tax enforcement. Meanwhile, inspections, and certifications, relaxing burdensome Summary Executive external financing needs will gradually rise due to a local content requirements, and improving the national widening current account deficit and increasing public logistics ecosystem. Targeted NTM reforms could debt amortization. boost total exports by 10 percent and investment by 27 percent over the medium-term. Second, sustain strong policy communication, where the authorities have a Developments The GOI structural reform agenda could accelerate A.1. Recent Economic growth further. In response to rising global policy strong track record. Clear policy communication and uncertainty, the GOI devised a program of deregulation timely macro-fiscal data publication reduce market including reforms to the business environment uncertainty. Third, protect capital spending. Cross- and licensing, investment liberalization, trade and country analysis reveals that a US$1 cut in public A.2. The Policy logistics reforms, and digital services. These reforms investment could lower GDP by US$1.3 in the long-term, Stance complement other reforms currently in play, like those highlighting the need for ringfencing infrastructure and related to financial sector deepening, and accompany human capital investment to attract private investors. the demand stimulus that the GOI is targeting through Fourth, ensure the success of Danantara with a clear its priority programs. If implemented, these reforms strategy, effective governance, transparency, and A.3. Outlook and Risks could gradually expand the economy’s capacity, adherence to international best practice. unlock further FDI, boost investment returns, and ensure productivity gains. The report simulates that this will translate into better jobs creation and raise A.4. Policy GDP growth to 5.3-5.5 percent in 2026-2027. Priorities II. A Roadmap from Homes to Jobs to Prosperity in Indonesia Indonesia 2045 to a Golden B.1. A Path President Prabowo has articulated bold objectives the Indonesian workforce. For example, families living for Indonesia’s future. Central to these plans are in homes with dirt floors are more exposed to illness, investments in housing and infrastructure, and a target extreme weather, and other hazards, lowering both to deliver 3 million housing units annually. Achieving their health and educational outcomes. Approximately B.2. Pillar 1. Housing the annual housing target will be critical to Indonesia’s 45 percent of Indonesians live in homes with lead paint. & Infrastructure Investments long-term prosperity, as well as for the health and Lead exposure is a serious health concern, especially economic growth of its population. The objective for children, and can cause developmental delays, will only be attainable through a series of specific, learning disabilities, and stunting. targeted reforms, investments, and policies designed to maximize the impact of every dollar spent. This report identifies the necessary steps to reach the target of providing 3 million housing units Institutional Reforms B.3. Pillar 2. Policy & Housing construction is an engine of growth for each year. In short, to meet the housing target and Indonesia’s economy and a source of prosperity supercharge current efforts, the government needs to for its people. It contributes 10 percent to Indonesia’s act as both a housing provider and a housing facilitator: GDP, providing 7 percent of total employment and instituting housing regulation reforms, accelerating augmenting national tax revenues by 8 percent. public funded housing programs, and creating an Safe housing complements President Prabowo’s enabling environment that attracts private investment commitment to childhood and family health by in Indonesia. Directly, US$3.8 billion in annual public B.4. Conclusion lowering disease rates and mitigating climate and investments can create an estimated 2.3 million jobs hazard risks. It boosts the construction and banking and mobilize US$2.8 billion in private capital. Reforms sectors while also improving educational opportunities can create an enabling environment for housing for students, thereby strengthening the potential of investments and indirectly help multiply this impact. 2 Indonesia People-First Economic Housing: Prospects A Roadmap June from Homes 2025 to Jobs to Prosperity in Indonesia The report proposes a two-pillar strategy. The reflecting the higher productivity and concentration first pillar focuses on housing and infrastructure of economic opportunities in cities. Between 2001 Contents Table of investments, while the second pillar elaborates on and 2017, the urbanization process was accompanied the policy and institutional reforms needed to secure by a reduction in poverty by 23 percentage points. financing and sustainability of the 3 Million Housing Furthermore, investments in denser, resilient housing Summary Executive Program. construction, expanded public transportation, and other infrastructure can lower housing costs and The first strategy provides options to deliver protect people and their assets. better housing, new housing, and the supporting infrastructure needed to ensure resilience and The second strategy focuses on securing the Developments A.1. Recent Economic livability. It builds on Indonesia’s longstanding record financing required to meet the needed rate of of success in housing and settlement upgrading by housing expansion by increasing families’ savings pursuing a local, next-generation settlement and and access to private capital through targeted neighborhood transformation to create 750,000 policies and reforms. With the right support, many A.2. The Policy jobs and deliver 1 million homes with US$1 billion families can afford to improve or buy their own home. Stance of government investments. To reach the targeted economic growth rate of 8 percent will require This report offers a practical, step-by-step blueprint housing production in urban centers to lead the for maximizing every dollar spent, attracting the way with a different approach, given their limited required billions in private capital, and accelerating A.3. Outlook and Risks land and higher housing costs. Urbanization can lift housing efforts in every community across millions out of poverty through increased employment Indonesia. With the right investments and reforms, it opportunities and higher wages. For example, is possible to build safer homes, a stronger economy, workers in Indonesia’s urban areas earn on average and a “Golden Future” for all Indonesians. 40–50 percent more than comparable rural workers, A.4. Policy Priorities Table ES.1: Static Simulation of 3 Million Housing Program: Before (2023) and After Comparison. Indicator Before After Indonesia 2045 to a Golden B.1. A Path Private Capital Mobilization (US$ Million) 560 2,777 Jobs Created 868,151 2,336,616 Better Housing / Total Housing Volume Share 39% 71% Better Housing / Total Housing Budget Share 9% 28% New Housing / Total Housing Volume Share 61% 29% B.2. Pillar 1. Housing & Infrastructure Investments New Housing / Total Housing Budget Share 91% 72% Government Budget (Rp Trillion) 35.54 62.79 Government Budget (US$ Billion) 2.15 3.81 Total Number of Units Supported/Achieved 386,222 1,200,000 Note: Government programs support 36.2 percent (2015-2024) of the housing solutions delivered in the country. Source: Ministry of Housing and Settlements (2025); Performance Reports of Directorate of Implementation of Institutional Reforms B.3. Pillar 2. Policy & Housing Finance and Directorate General of Infrastructure Financing, Ministry of Public Works and Housing (2023); World Bank Staff calculation. B.4. Conclusion 3 A. Economic Update Indonesia People-First Economic Housing: Prospects A Roadmap June from Homes 2025 to Jobs to Prosperity in Indonesia A. Economic Update Contents Table of Summary Executive 1. Recent Economic Developments Developments A.1. Recent Economic Global economic conditions have deteriorated with government’s budget efficiency measures led to a global policy uncertainty on the rise. contraction in public consumption, while investment in construction and manufacturing sectors dipped due With rising uncertainty, global growth is projected to investors’ concerns over domestic and global policy to slow. Global policy uncertainty, geopolitical risks, uncertainty. Meanwhile, net exports contributed a A.2. The Policy and rising trade barriers are projected to reduce global notable 17 percent to GDP growth.1 This improvement Stance growth to 2.3-2.4 percent in 2025-26 from previous is temporal as exports were frontloaded early in the estimates of 2.7 percent (World Bank GEP June 2025). year in anticipation of the global tariff hikes. Rising Developing East Asia and the Pacific (EAP) continues to exports outweighed lower imports of foodstuffs, as A.3. Outlook outpace global growth but faces challenges from lower domestic agriculture production picked up, as well as and Risks private consumption and a subdued outlook in China. lower imports of consumer goods. While exports in manufacturing and services have supported growth, private investment remains weak On the supply side, services and agriculture are across much of the region. Growth in EAP is projected driving growth while manufacturing industry A.4. Policy Priorities to slightly moderate to 4.5 percent this year due to is slowing down. Trade, hospitality, transport, economic policy uncertainty and weaker external communications, and financial services accounted for demand. These trends are likely to hinder progress for 45 percent of Q1-25 growth (Figure A.2). Meanwhile, emerging markets and developing economies (EMDEs) agriculture production rebounded across various Indonesia 2045 to a Golden B.1. A Path in closing per capita income gaps with advanced categories. Food and plantation crops grew by 43 economies and reducing extreme poverty. and 22 percent yoy, respectively, while livestock grew by 9 percent. Authorities reported 14 million tons Indonesia’s domestic demand is moderating with of rice production in Q1-25 (up 26 percent yoy), the softening consumption and investment, whilst highest in the last seven years. This covers nearly B.2. Pillar 1. Housing agriculture is rebounding strongly and offsetting half of the national rice needs in 2025. As a result of & Infrastructure Investments part of the slowdown in industry. these harvests, production capacity utilization in the economy increased marginally to 73.3 percent in Q1- GDP growth recorded 4.9 percent year-on-year 25, up from 72.9 percent in Q4-24. Conversely, capacity (yoy) in Q1-25, slightly lower than previous post- utilization in mining and manufacturing declined. This pandemic quarterly growth rates (Figure A.1). While is attributed to lower commodity prices, reduced private consumption was supported by stronger international demand, and rising inputs costs. Institutional Reforms B.3. Pillar 2. Policy & purchasing power in rural areas due to rising agricultural output, domestic demand was impacted by reduced government consumption and lower investment. The B.4. Conclusion 1 The contribution of statistical discrepancies to growth in Q1-25 is currently at 17 percent, which is significantly higher than the historical average of 5.5 percent per quarter since the end of the pandemic. Statistical discrepancies arise from the differences between the GDP calculated using the expenditure approach versus the production approach. It is important to note that statistical discrepancies do not account for changes in the overall GDP figures nor do they reflect the final demand within the economy. 5 Indonesia Economic Prospects June 2025 Figure A.1: Growth moderated due to declining Figure A.2: Services and agriculture are driving Contents Table of domestic demand despite a temporary improvement in growth while manufacturing industry is slowing net exports. down. (percentage points contribution to yoy growth) (percentage points contribution to yoy growth) 6 6 Summary Executive 4.87 4.87 5 5 4 4 3 3 Developments A.1. Recent Economic 2 2 1 1 0 0 -1 A.2. The Policy -1 Mar-23 Sep-23 Mar-24 Sep-24 Mar-25 Mar-23 Sep-23 Mar-24 Sep-24 Mar-25 Stance Stat. discrepancy Net exports Tax-subsidies Other services Financial services Transport & communication Investment Government consumption Trade, hotels & restaurants Construction Private consumption GDP Manufacturing Mining & quarrying Agriculture GDP A.3. Outlook and Risks Source: CEIC, BPS, World Bank staff calculations. Source: CEIC, BPS, World Bank staff calculations. Inflation remains subdued as food prices abated. Figure A.3: Inflation is picking up after the removal Food prices, the largest component of the consumer of electricity tariff discounts, but it remains A.4. Policy relatively subdued with abated food prices. Priorities price index, fell by 1.2 percent yoy in May as ample harvest and grain supplies eased the price of foodstuffs (percentage points contribution to yoy growth) like chicken, eggs, and horticulture products (Figure 6.0 Volatile Food A.3). Moreover, for the first time in decades Indonesia Administered Indonesia 2045 stopped importing rice, suppressing as a result the Volatile Core Items to a Golden B.1. A Path Core excl. Volatile Core Items price of rice in domestic markets. However, housing 4.0 Headline utilities’ prices surged by 1.5 percent yoy due to the removal of electricity tariff discounts2 and higher 1.60 clean water tariffs, pushing headline inflation to 1.6 2.0 percent, within Bank Indonesia’s (BI) target range of B.2. Pillar 1. Housing & Infrastructure Investments [2.5±1 percent]. Average headline inflation remains subdued at 1.0 percent year-to-May. Core inflation also 0.0 remained relatively stable at 2.4 percent yoy, showing a slight increase since the end of 2024 due to rising -2.0 gold prices.3 When excluding volatile components, Jul-23 Jul-24 Jan-23 Nov-23 Jan-24 Jan-25 Sep-23 Sep-24 Nov-24 Mar-23 Mar-24 Mar-25 May-23 May-24 May-25 core inflation stands at 2.0 percent yoy, indicating a Institutional Reforms softening domestic demand and a potentially slower B.3. Pillar 2. Policy & closure of the output gap. Source: CEIC, BPS, WB staff calculations. Note: Volatile core items include gold, cooking oil, and grounded coffee. B.4. Conclusion 2 As part of a social assistance package, the government introduced electricity tariffs discounts for January and February 2025. 3 The core inflation index computed by Indonesia’s statistical agency (BPS) incorporates volatile items like gold and coffee beans. The World Bank staff have estimated a revised core inflation indicator excluding volatile components using approximations of the weights of these volatile items in the household consumption basket. 6 Indonesia People-First Economic Housing: Prospects A Roadmap June from Homes 2025 to Jobs to Prosperity in Indonesia Businesses and households are adjusting to economic Middle-class consumption growth in Indonesia has uncertainty by changing investment, consumption, been subdued since the pandemic. From 2019 to Contents Table of and savings decisions, but weak consumption of 2024, the poorest 40 percent saw consumption rise by middle class households has been persistent since 2-3 percent annually after accounting for inflation, and the pandemic. the richest 10 percent experienced a 3 percent annual Summary Executive increase. However, the aspiring middle class—those Businesses are experiencing liquidity constraints within the 40th-90th percentile of the consumption and adjusting to slower economic activity. A distribution—only saw about 1.3 percent growth per survey conducted by BI revealed fewer businesses year since 2019. These outcomes reflect a structural reporting improved liquidity conditions compared to constraint in the economy. While the poor have Developments A.1. Recent Economic those reporting a deterioration in liquidity conditions. benefited from various social assistance programs to Additionally, more businesses perceived access to support their consumption, the lag in middle class credit as more challenging in Q1-25 compared to Q4- consumption reflects the economy’s constraint in 24 (Figure A.4). In April, the manufacturing purchasing creating middle class paying jobs and stagnating A.2. The Policy managers’ index (PMI) entered the contraction real wages. This is related to the overall decline in Stance zone and fell below that of peer countries, ending productivity in the economy. five consecutive months of expansion.4 This decline can also be attributed to weaker demand driven by Despite overall resilience, Indonesia’s labor market is tariff uncertainties, sluggish domestic consumer struggling to create middle class jobs, is experiencing A.3. Outlook and Risks expectations, and constrained public spending. layoffs in labor intensive sectors, and remains Furthermore, manufacturers have reduced inventory concentrated in low productivity employment. levels as well as hiring to maintain margins and fulfill production orders. The labor market remained strong overall with increasing labor force participation and notable job A.4. Policy Priorities Rising uncertainty is also affecting household creation. Between February 2024 and February 2025, consumption and investment preferences. 3.59 million additional jobs were recorded, driving an Consumer confidence has declined, especially increase in the labor force participation rate by 0.8 Indonesia 2045 regarding future economic conditions (Figure A.5). percentage points (ppts) (from 69.8 to 70.6 percent).7 to a Golden B.1. A Path Moreover, household savings fell across all income Employment growth was approximately 2.5 percent yoy, groups, mainly affecting low- and middle-income slightly above the labor force expansion of 2.4 percent families (Figure A.6). This is partially associated with yoy. The gender gap in labor market participation recent layoffs in labor-intensive sectors, which mostly also improved. Female labor force participation rate affect those income groups, as well as to stagnating increased by 1.3 ppts (now at 56.7 percent), compared B.2. Pillar 1. Housing & Infrastructure real wages. As a result, consumption credit growth to 0.3 ppts rise for male labor force participation rate Investments dropped to a two-year low with reduced consumer (now at 84.3 percent). credit demand across the board.5 Rising uncertainty also shifted household investment preferences. By The unemployment rate is relatively low, but the Q1-25, the uncertainty index hit a five-year high.6 rates in some demographic groups are significantly Global uncertainty pushed gold prices up as central higher. In February 2025, the unemployment rate banks increased purchases. Despite significant price remained relatively stable around 4.8 percent (only Institutional Reforms B.3. Pillar 2. Policy & increase, domestic consumers followed suit and 0.06 ppts lower than in February 2024). Although the moved from equities to gold, jewelry, and property, unemployment rate for the labor force aged 15-24 while preference for savings and deposits accounts decreased to 16.2 percent, it continues to be higher dropped (Figure A.7). Home and apartment ownership relative to other age groups. Furthermore, 8 percent of credit also increased by 80 percent, reflecting a shift in vocational high school graduates were unemployed, consumer preference towards safe-haven assets. higher than other educational levels. B.4. Conclusion 4 Peer countries comparators are China, India, the Philippines, Malaysia, Thailand, and Viet Nam. The average PMI for these comparator countries has remained in expansion territory (above 50) contrary to Indonesia. In May, the PMI remained in the contraction zone and below its peer countries. 5 Credit cards were down by 65 percent, multipurpose credit by 27 percent, non-collateral credit by 43 percent, and motor vehicle credit contracted (all yoy in Q1-25). Source: Banking Survey, Bank Indonesia. 6 The Haver Analytics World Uncertainty Index (WUI) is a measure of global economic and policy uncertainty, calculated by counting the frequency of the word “uncertainty” (and its variants) in the Economist Intelligence Unit (EIU) country reports. This index is then normalized and rescaled (by multiplying by 1,000,000), with higher values indicating greater uncertainty. 7 The source of the data is the Labor Surveys (Sakernas) February 2024 and 2025, Central Statistics Agency of Indonesia (BPS). 7 Indonesia Economic Prospects June 2025 Job quality remains a concern with the low-paying Indonesia’s labor force is heavily concentrated in sectors accounting for the highest number of jobs low-productivity sectors. As of 2024, 69 percent Contents Table of created, around 0.98 million in wholesale and retail of workers are employed in activities that produce trade and 0.89 million in agriculture (combined they less than IDR 8 million per month in value added account for 52 percent of all jobs crated throughout per worker. Another 21 percent work in mid-low Summary Executive the year). Furthermore, almost 60 percent of workers productivity sectors generating between IDR 17–19 are in informal jobs that lack job security.8 The nominal million per month (Figure A.9). In contrast, high- wage grew by a mere 1.8 percent yoy in February 2025 productivity sectors generating more than IDR 24 (almost at par with inflation), compared to 3.3 percent million per worker per month employ just 10 percent in February 2024. Moreover, according to the Ministry of the workforce. Extractives such as oil and gas, coal, Developments A.1. Recent Economic of Manpower, job losses, most likely in the formal and minerals, accounted for the highest-productivity sector, increased from 3,325 in January to 18,610 in tier (IDR 108 million per worker per month) and 10.4 February 2025. This is double the number for the percent of GDP, but only one percent of the labor force. same period last year. Job losses were concentrated in As a result, a large share of the income they produce A.2. The Policy Central Java, DKI Jakarta, and Riau, regions known for flows to corporate owners (including state-owned Stance their manufacturing industries. Most job losses were enterprises and investors) or to the government, in textiles, footwear, and electronics industries, with at rather than directly to the average Indonesian worker. least 10 manufacturing firms shutting down in Q1-25 The country’s reliance on extractive industries and based on data from the Ministry of Industry. commodities has produced growth that is high in A.3. Outlook and Risks capital income but low in job creation and income growth. Figure A.4: Business perception of access to credit and Figure A.5: Consumer confidence has declined, A.4. Policy Priorities liquidity deteriorated. especially regarding future economic conditions. (net balance of business reporting better liquidity condition, (index, 3mma) percent of respondent (LHS); net balance of business reporting easier access to credit, percent of respondent Indonesia 2045 to a Golden (RHS)) B.1. A Path 60 8 140 Business's access to credit, RHS 7 50 6 130 B.2. Pillar 1. Housing 130.2 & Infrastructure 40 Investments 5 30 4 120 120.1 3 20 Business's 2 110 CCI 10 liquidity 110.1 1 CCI: Current condition CCI: Future expectation Institutional Reforms B.3. Pillar 2. Policy & 0 0 100 Jun-23 Sep-23 Dec-23 Jun-24 Sep-24 Dec-24 Mar-23 Mar-24 Mar-25 Jul-23 Jul-24 Jan-23 Jan-24 Jan-25 Sep-23 Nov-23 Sep-24 Nov-24 Mar-23 Mar-24 Mar-25 May-23 May-24 May-25 Source: Bank Indonesia. Source: Bank Indonesia, WB staff calculations. Note: An index value greater than 100 indicates more optimistic responses than pessimistic ones. B.4. Conclusion 8 Indonesia’s statistics agency (BPS) provides a broad definition for informal workers. They are workers who are self-employed, employer with unpaid/ temporary worker(s), casual workers, and unpaid family workers 8 Indonesia People-First Economic Housing: Prospects A Roadmap June from Homes 2025 to Jobs to Prosperity in Indonesia Figure A.6: Household savings, especially low- and Figure A.7: …with savings preferences shifting Contents Table of middle-income groups, are softening… toward safe-haven assets like gold and property. (saving rate by income level, percent, 3mma) (percent of excess income) 20 100% Summary Executive 19 80% 18 60% 27.2 36.5 17 16 40% Developments A.1. Recent Economic 15 20% 48.0 42.9 14 0% 13 12 A.2. The Policy Jul-23 Jul-24 Jan-23 Nov-23 Jan-24 Jan-25 Sep-23 Sep-24 Nov-24 Mar-23 Mar-24 Mar-25 May-23 May-24 May-25 Saving & deposit accounts Gold & jewelry Stance Equity & mutual funds Properties Total savings 1-2 mn 3-4 mn >5 mn Others Source: Bank Indonesia. Source: Bank Indonesia. A.3. Outlook and Risks Figure A.8: Middle-class consumption growth has been Figure A.9: Indonesia’s labor force is heavily subdued. concentrated in low-productivity sectors. (average growth by percentile vs. official income classes 2019-2024) A.4. Policy Priorities 4.5% 35% Poor Aspiring Middle Vulnerable middle class class Agriculture 4.0% 30% Trade, hotel Share of total employment Indonesia 2045 3.5% to a Golden 25% & B.1. A Path 3.0% restaurant 20% 2.5% Services 15% 2.0% Manufacturing 1.5% 10% Construction Transportation & B.2. Pillar 1. Housing communication Mining and & Infrastructure Investments 1.0% 5% quarrying Electricty, gas Financial services 0.5% 0% & water 0 50 100 0.0% Monthly output per worker (Juta Rupiah) 1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97 Source: World Bank staff. Source: World Bank staff. Institutional Reforms B.3. Pillar 2. Policy & Export frontloading in anticipation of global trade iron and steel) also decreased due to substantial tariffs has almost balanced the current account, challenges anticipated in global manufacturing and however the effect is temporal as Indonesia’s terms- industrial activity. As one-third of Indonesia’s non-oil of-trade continue to deteriorate. and gas exports consist of coal, crude palm oil, iron and steel, their declining prices led to a deterioration Indonesia’s terms-of-trade deteriorated due to in the country’s terms-of-trade. weaker commodity prices. Global commodity B.4. Conclusion prices dropped sharply in April as trade policy Nevertheless, a temporary surge in exports has uncertainty intensified. Compounded by weakening almost balanced the current account in Q1-25. With global demand, oil prices fell significantly following a exports to China and the US surging in anticipation substantial hike in oil production by OPEC+ nations. of trade tariffs (Figure A.10), the goods trade surplus Coal and palm oil prices followed were also notably expanded to 0.9 percent of GDP in Q1-25 (up 0.3 ppts lower than last year’s levels. Metal prices (including yoy). Metal and steel products exports saw the largest 9 Indonesia Economic Prospects June 2025 growth with nickel up by 64 percent yoy. Meanwhile, repatriation led to a slight widening deficit in the import growth slowed as domestic demand weakened, income account (up 0.02 ppts yoy). Overall, the current Contents Table of with the deceleration in consumer and intermediate account deficit (CAD) narrowed though by around 0.2 goods imports offsetting the rise in capital goods ppts to 0.01 percent of GDP in Q1-25. After the tariff’s (Figure A.11). Higher outbound travel coupled with announcement, the trend started reversing as exports, Summary Executive lower incoming tourism contributed to the widening led by apparel and footwear, decelerated in April services deficit (up 0.1 ppt yoy); and higher portfolio (down 10.8 percent m-o-m), reducing the goods trade investment payments coupled with company profit surplus to 0.01 percent of GDP as of April. Figure A.10: Exports to the US and China accelerated in Figure A.11: Imports initially slowed, but they surged Developments A.1. Recent Economic March, ahead of the US tariffs. in April across categories. (percent yoy growth) (percent yoy growth) 40 40 USA 30 Capital goods Intermediate A.2. The Policy 20 goods Stance 20 0 10 -20 0 A.3. Outlook China -10 and Risks -40 Consumer Japan India -20 goods -60 -30 Jul-24 Jun-24 Aug-24 Sep-24 Nov-24 Dec-24 Jan-25 Oct-24 Apr-24 Mar-25 Apr-25 Feb-25 May-24 Jul-23 Jul-24 Jan-24 Jan-25 Apr-23 Oct-23 Apr-24 Oct-24 Apr-25 A.4. Policy Priorities Source: BPS, CEIC, World Bank staff calculations. Source: BPS, CEIC, World Bank staff calculations. Global financial conditions have tightened during dropped by 40 percent yoy in Q1-25 to US$3.7 billion Indonesia 2045 to a Golden the first half of 2025, resulting in capital outflows (0.3 percent of GDP). The largest drop was observed B.1. A Path and exerting pressure on the Rupiah. for FDI in the construction sector and financial services. The narrowing Indonesia-US interest rate gap Tightening global financial conditions led to high coupled with rising uncertainty in the global economy currency volatility in Asian EMDEs. Global uncertainty have fueled capital outflows. Non-resident investors B.2. Pillar 1. Housing has heightened financial market volatility, leading to a withdrew USD 1.9 billion from the equity market during & Infrastructure Investments global stock market decline. Global financial markets Q1-25, while domestic investors invested US$0.4 now expect fewer Federal Fund Rate (FFR) cuts as US billion in equities abroad and US$4.3 billion in other consumer inflation expectations rose.9 Furthermore, types of investment.10 Gold, overseas real estate, and the yields on the 30-year United States Treasury cryptocurrencies, among others, are reported to gain (UST) recently increased to 5 percent, approaching popularity among Indonesian investors. Those outflows the highest level since 2006. With the broad-based were partially offset by US$3.3 billion in foreign capital Institutional Reforms B.3. Pillar 2. Policy & weakening of the US Dollar, global investors have inflows into sovereign and corporate bonds, as well as turned to other safe-haven assets such as gold, the BI securities (SRBI) (Figure A.13). However, maturing Swiss Franc, and the Japanese Yen. Across Asian EMDEs, SRBI, worth IDR289 trillion (1.3 percent of GDP), by including Indonesia, financial conditions also tightened mid-2025 warrants monitoring due to potential risk for as equity prices declined sharply amid capital outflows further outflows, especially if foreign investors remain (Figure A.12). unfavorable about the Indonesian equity market. B.4. Conclusion Volatility negatively impacted Foreign Direct Investment (FDI) and the equity markets in Indonesia, offset partially by foreign investments in sovereign and corporate bonds. Despite being the largest source of external financing, FDI in Indonesia 9 The market initially expected five policy rate cuts, but is now anticipating only two cuts following the announced 90-day tariff pause. Official Balance of Payment (BOP) data showed that “other investments” category recorded a net outflow of US$4.3 billion as residents’ investments 10 abroad picked up. 10 Indonesia People-First Economic Housing: Prospects A Roadmap June from Homes 2025 to Jobs to Prosperity in Indonesia Figure A.12: Asian EMDE saw capital outflows as global Figure A.13: Foreign investment into debt securities investors turned to safe-haven assets. partially offset equity selloff in Q1-25. Contents Table of (percent of annual GDP) (USD billion) 2.5 16 Foreign flows to BI securities 2.0 Malaysia Foreign flows to corp bonds Summary Executive 12 1.5 Foreign flows to govt bonds Philippines 1.0 8 Foreign flows to equity 0.5 4 Developments 0.0 A.1. Recent Economic 0 -0.5 Indonesia Thailand -4 -1.0 -1.5 -8 Aug-23 Nov-23 Aug-24 Nov-24 May-23 Feb-24 May-24 Feb-25 May-25 Jun-23 Sep-23 Dec-23 Jun-24 Sep-24 Dec-24 Mar-23 Mar-24 Mar-25 A.2. The Policy Stance Source: IIF, BI, IDX, World Bank staff calculations. Source: BI, CEIC, World Bank staff calculations. Banking sector prudential indicators are sound and April, at the lower bound of BI’s revised 2025 target of A.3. Outlook have helped manage global policy uncertainty. [8-11] percent12 (Figure A.15). Furthermore, Indonesia’s and Risks credit-to-GDP gap remains negative and has been The banking sector’s asset quality is healthy, with widening since the second half of 2024, indicating that sufficient buffers to withstand potential adverse credit growth is growing below its long-term trend shocks. As of February 2025, the non-performing (Figure A.16). This signals subdued credit demand and A.4. Policy Priorities loans (NPL) ratio is at a low 2.2 percent. The capital moderating economic activity. Investment loan growth adequacy ratio (CAR) stands at 26.9 percent and continues to outpace consumption and working exceeds the regulatory minimum of 10.5 percent, while capital loans significantly in response to BI’s liquidity provisioning levels are at 183 percent of NPLs, ensuring incentives. Credit to mining, utilities, and the transport Indonesia 2045 to a Golden B.1. A Path substantial loss-absorption capacity (Figure A.14). The sectors contributed 40 percent to the overall credit system-wide loan at risk (LAR) ratio continues to trend growth. Nevertheless, overall private sector credit down, reaching only 9.3 percent by the end of 2024, remains low at 35.4 percent of GDP (end of 2024), markedly lower than the pandemic period levels of compared to the EAP countries average of 124 percent over 20 percent. Results from bank solvency stress of GDP. Low levels of credit persist despite a strong B.2. Pillar 1. Housing & Infrastructure tests conducted in the recent joint IMF-WB Financial banking sector with substantial capital and liquidity, Investments Sector Assessment Program (FSAP) indicate that the but limited incentives to pursue riskier economic overall banking sector is resilient to various shocks, segments, prioritizing stability instead. although there remain tail risks for smaller banks. Three commercial state-owned banks were included System-wide funding and market liquidity remain as part of Danantara’s holdings, giving rise to potential adequate, despite lending growth outpacing interconnectedness and governance risks.11 Such risks deposit growth. As of February 2025, the liquidity Institutional Reforms B.3. Pillar 2. Policy & are mitigated though by partial state ownership and coverage ratio (LCR) and net stable funding ratio strong balance sheets. (NSFR)13 were 210 and 128 percent respectively, both exceeding the 100 percent regulatory minimum. The The banking sector remains highly profitable despite loan-to-deposit ratio (LDR), a key indicator of banking recent deceleration in private sector lending. As of sector liquidity, rose to 88 percent. The increase reflects February 2025, return-on-assets (ROA) and return-on- a tightening in liquidity as the gap between lending equity (ROE) were at a strong 2.4 and 13.3 percent, and deposits growth widened. Indeed, lending growth B.4. Conclusion respectively. Both indicators showed a slight decline outpaced deposits growth by 2 to 1. Meanwhile, in recent months though, as lending to the private households’ drawdown on savings rose as real wages sector decelerated and reached 8.9 percent yoy in plateaued, causing overall household deposits in the 11 Interconnectedness and contagion risks can arise from both direct, i.e. interbank exposures, and indirect linkages, i.e. exposure to common assets, information spillover or investor perception, among financial institutions. Being included as part of the same holding structure with common management and governance presumably increases such risks. 12 In May 2025, BI revised down its credit growth target from [11-13] percent to [8-11] percent in light of a slowdown in economic activity. 13 These indicators are used to measure bank liquidity conditions in times of stress. 11 Indonesia Economic Prospects June 2025 banking sector to stagnate (for IDR deposits) or even Figure A.14: The banking sector’s asset quality and slightly decline (for FX deposits). This has not affected buffers are healthy... Contents Table of the bank’s deposit base or lending capacity so far, (percent) as deposits by the public sector and non-financial 30% 240% corporates continue to increase. If the deposit base shrinks or the LDR increases further, funding liquidity Summary Executive 20% 210% risks may need careful monitoring. According to NPL (LHS) international standards, an LDR between 75 and 90 CAR (LHS) percent is normal while a ratio over 100 percent is 10% Tier-1 Capital (LHS) 180% sometimes linked to liquidity strains during financial Developments Provision to NPL (RHS) A.1. Recent Economic crises. 0% 150% Jul-23 Jul-24 Jan-23 Jan-24 Sep-23 Nov-23 Sep-24 Nov-24 Jan-25 Mar-23 Mar-24 Mar-25 May-23 May-24 Borrowing costs and domestic funding conditions are relatively stable, although structural factors increase funding costs compared to peers. A.2. The Policy Source: The Financial Services Authority (OJK). Stance Corporate bond issuance activities remain robust in 2025. Corporate borrowing costs are stable, as the 10- Figure A.15: …but lending to the private sector has year AA corporate bond14 yield stood at 8.2 percent as been decelerating. of March 2025. From a market structure perspective, (percent) A.3. Outlook the capital market still lacks depth with limited and Risks 18% secondary trading compared to global and regional 16% peers. Although the government securities market 14% is relatively well-developed, the corporate bond and 12% equity markets segments remain shallow, offering A.4. Policy Priorities 10% limited choices for investors. The low demand from 8% local long-term investors and a weak domestic investor 6% Total Loan base, including relatively small institutional investors, 4% Working Capital Investment constrain market development and contributes to Indonesia 2045 2% Consumption to a Golden B.1. A Path higher cost of borrowing relative to peers. 0% Jul-23 Jul-24 Jan-23 Jan-24 Jan-25 Sep-23 Nov-23 Sep-24 Nov-24 Mar-23 Mar-24 May-23 May-24 Mar-25 Elevated global uncertainty could tighten financing conditions or increase financial sector Source: The Financial Services Authority (OJK). vulnerabilities through various channels. This B.2. Pillar 1. Housing & Infrastructure includes bank credit exposure to export-oriented Figure A.16: Credit growth has been slower than its Investments firms, weaker bank profitability due to slowing long-term trend pointing to moderating economic domestic demand and reduced investment, currency activity. volatility, and capital outflows driven by risk aversion (percent of GDP) and negative global investor sentiments. Indonesia’s 15 50 close trade and FDI ties with China, which is affected by global trade policies, accentuate these impacts. 40 Institutional Reforms B.3. Pillar 2. Policy & 10 Additionally, underdeveloped FX hedging instruments 30 and Indonesia’s status as a commodity exporter could 5 increase risks on the financial sector due to banks’ 20 exposure to commodity traders and clearing services 0 10 for commodity trading. A drop in commodity prices -5 0 and a slowing global demand could therefore lead to a 2010-Q4 2011-Q2 2011-Q4 2012-Q2 2012-Q4 2013-Q2 2013-Q4 2014-Q2 2014-Q4 2015-Q2 2015-Q4 2016-Q2 2016-Q4 2017-Q2 2017-Q4 2018-Q2 2018-Q4 2019-Q2 2019-Q4 2020-Q2 2020-Q4 2021-Q2 2021-Q4 2022-Q2 2022-Q4 2023-Q2 2023-Q4 2024-Q2 2024-Q4 decline in FX earnings and bank deposit growth. While B.4. Conclusion April saw significant equity outflows, strong financial sector buffers have helped manage so far global policy Credit-to-GDP gaps (LHS) Credit-to-GDP ratio (RHS) uncertainty. Credit-to-GDP trend (RHS) Source: Bank for International Settlement. Note: Credit refers to credit to private non-financial sector. 14 An AA corporate bond is a type of debt security issued by a corporation that has received a high credit rating, just below the top AAA rating, indicating a low risk of default and strong capacity to meet financial commitments. This is a national rating scale though, which assesses the 12 creditworthiness relative to other domestic issuers. These ratings are not comparable to international ratings scales. Indonesia People-First Economic Housing: Prospects A Roadmap June from Homes 2025 to Jobs to Prosperity in Indonesia 2. The Policy Stance Contents Table of Indonesia’s fiscal policy stance has been influenced Amid revenue shortfalls, the GOI initiated a budget by temporary and structural factors affecting efficiency and reallocation program to support revenues, prompting budget efficiency measures priority spending. This program, equivalent to 1.3 Summary Executive and increased financing requirements. percent of GDP, aims to offset a projected revenue shortfall (0.6 percent) and finance targeted spending Indonesia’s fiscal position weakened slightly in (0.6 percent). This led to a 0.2 and 0.3 percent the first five months of 2025 (5M25) because of a decline in material and other spending by the central revenue shortfall. By May 2025, the budget recorded government in 5M25 (Figure A.19) and 0.1 percent of Developments A.1. Recent Economic a small deficit of IDR 21 trillion (0.1 percent of GDP) GDP decline in transfers to subnational governments. (Figure A.17). This compares to an average surplus of The new administration’s Free Nutritious Meal (MBG) 0.5 percent observed in May over the past three years. program, part of its eight Quick Win Programs, was The deficit is primarily due to a larger drop in revenue launched on January 6 and is centrally managed.21 A.2. The Policy collection than in expenditure. Revenue collection by It is set to receive a budget increase of 0.2 percent, Stance May 2025 was 4.1 percent of GDP, 1.3 percentage point bringing its total allocation to 0.5 percent of GDP. The lower than the previous three years, while expenditure government also allocated 0.8 percent of GDP for the is around 0.7 percentage point lower. new village cooperative program. This is comparable to the amount allocated for energy subsidies (0.8 A.3. Outlook and Risks Several factors have impacted revenue collection. percent of GDP) and the combined budget of social Tax revenues declined by 0.6 percent of GDP in 5M25 assistance programs22 (0.6 percent of GDP). Two fiscal compared to the same period last year (Figure A.18). stimulus packages worth 0.3 percent of GDP were also Temporary factors included technical problems in the introduced: one to support household purchasing implementation of the new Core Tax Administration power, labor-intensive, electric vehicle, and housing A.4. Policy Priorities System (CTAS)15 that resulted in extended payment sectors ahead of the scaled-down VAT hike, and the deadlines; and a new tariff rate system for personal other to boost household consumption ahead of the income tax withholding that resulted in overpayment school holidays.23 Indonesia 2045 in 2024 and to larger refunds in early 2025.16 Other to a Golden B.1. A Path factors include: (i) lower commodity prices and lower Budget efficiency initiatives were designed to domestic demand that impacted both tax and non-tax create fiscal space for priority programs, though revenues17; (ii) forgone revenues from the adjustment may have longer-term growth tradeoffs. In February, to the planned VAT rate increase18; and (iii) the forgone significant budget cuts were announced to public revenue from SOE dividends that will now be collected investment ministries, with reductions of 55 percent for B.2. Pillar 1. Housing & Infrastructure by Danantara19 (estimated at around 0.4 percent of Public Works, 44 percent for Transportation, and 35 Investments GDP yearly). To mitigate some of these effects, the GOI percent for Agriculture, totaling 0.3 percent of GDP.24 raised the mining royalty rate in April 2025.20 Additionally, 0.2 percent of GDP was cut from the Health 15 CTAS integrates all business processes of tax administration from taxpayer registration, reporting of tax returns, payments and audits. 16 The new Average Effective Tax Rate (TER) system, implemented in 2024 for monthly employee income tax (PPh 21) withholding, simplifies tax calculations by applying a fixed effective rate to gross income based on the employee’s marital status and number of dependents (i.e., PTKP category). In Institutional Reforms B.3. Pillar 2. Policy & 2024, this led to over withholding—amounting to IDR 16.5 trillion (0.07 percent of GDP)—causing an increase in tax refunds in early 2025. 17 Moderating domestic demand has partially contributed to a decline in non-oil and gas income tax and VAT, which were lower by 0.6pp and 0.5pp respectively compared to April last year. Oil price in early June 2025 was about US$65 per barrel, compared to the 2025 Budget assumption of US$82. 18 The Tax Harmonization Law of 2021 raised the VAT rate by 1 percentage point in April 2022 and had scheduled another increase of 1 ppt no later than January 2025. The objective was to gradually raise VAT rate from 10 to 12 percent. On December 31, 2024, the GOI limited the second increase to luxury goods only (PPnBM), keeping the VAT exemption list unchanged. 19 On February 24, 2025, the GOI launched Danantara, a super holding company for SOEs. It will manage SOE dividends and invest them in national strategic projects. The fiscal balance is likely to be negatively affected by Danantara’s creation. 20 In April 2025, the GOI raised royalty tariffs for Nickel, Copper, Metal minerals, Peat, Asphalt, Gold, through PP 18/2025 and 19/2025. B.4. Conclusion 21 The GOI’s new National Nutrition Agency, Badan Gizi Nasional, oversees the program with 13,000 community kitchens serving students. This diverges from the past practice of relying on local government systems for non-cash food assistance which facilitated program socialization, monitoring, evaluation, and coordination with local agencies including the delivery institutions. 22 These programs are health insurance premium assistance (JKN), food aid, the Indonesia Smart Card, and the Family Hope Program. 23 The GOI granted food assistance, electricity discount and tax expenditures for electric vehicle and housing sector in the first package announced on December 16, 2024. For firms in labor-intensive sectors, the GOI provided tax expenditure for personal income tax up to IDR10mn salary per month, interest subsidy for machinery revitalization, and subsidies for employment injury insurance premium. The second package, announced on May 27, 2025, includes transportation and toll tariff discounts, and expanded social assistance such as food aid and cash transfers. It also provides wage subsidies for low-income workers and non-permanent teachers (on honorarium), along with extended insurance premium discounts for labor-intensive sectors. 24 The budget cuts/efficiency allocations data is based on the revised budget allocation outlined in Minister of Finance letter No. S-75/MK.02/2025 dated February 13, 2025, as reported on Parliament website. 13 Indonesia Economic Prospects June 2025 and Education ministries as well as from the ministries of its financing needs by end-May, compared to 16 of defense and national policy combined. Transfers to percent last year. Most of this additional financing was Contents Table of sub-national governments for infrastructure projects sourced from commercial banks. Government bond were also cut by 0.1 percent of GDP.25 While some of yields and spreads with US bonds have remained the budget efficiency cuts appear to be redistributed steady, despite a temporary uptick during recent Summary Executive to some ministries and agencies, no information is global fluctuations.26 Similarly, the Credit Default Swap available yet on final allocations. Allocating the limited (CDS) spread experienced a brief increase, mirroring budget to areas with high fiscal multiplier effects is trends in other emerging markets. Indonesia’s debt crucial for growth (see section on policy priorities). stock is stable at around 40 percent of GDP, though the interest-to-revenue ratio is rising, and remains sensitive Developments A.1. Recent Economic The GOI has sought higher net financing in a stable to exchange rate and interest rate fluctuations (Figure bond market despite global volatility. The deficit A.20).27 in 5M25 has prompted the GOI to secure 53 percent Figure A.17: The monthly fiscal balance is slightly Figure A.18: This is partly caused by a decline in A.2. The Policy weaker compared to recent years. both tax and non-tax revenues. Stance (percent of GDP) (percent of GDP) 1.5 4.5 3.9 May-24 May-25 A.3. Outlook 1.0 4.0 and Risks 0.5 3.5 3.3 0.0 3.0 -0.5 2.5 A.4. Policy -1.0 2.0 Priorities -1.5 1.5 1.1 -2.0 1.0 0.8 2022 2023 -2.5 2024 2025 0.5 Indonesia 2045 to a Golden -3.0 0.0 B.1. A Path Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Tax Non-tax Source: CEIC, Ministry of Finance, World Bank staff calculation. Source: Ministry of Finance, World Bank staff calculation. Figure A.19: Contraction in material and other spending Figure A.20: Interest-to-revenue ratio is rising and B.2. Pillar 1. Housing as well as transfers led to the decline in government sensitive to exchange rate and interest rate shocks. & Infrastructure expenditure. (percent) Investments (percent of GDP) Baseline Personnel Material Capital Interest 6.0 30% ER shock Subsidies Social Others Transfers -2 pp shock on GDP growth 24 1% of GDP Expenditure shock 5.0 22 1pp shock in new debt interest rate Institutional Reforms B.3. Pillar 2. Policy & Combined shocks 4.0 20 18 3.0 16 2.0 14 12 1.0 10 0.0 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 B.4. Conclusion May 2024 May 2025 Source: CEIC, Ministry of Finance, World Bank staff calculation. Source: Ministry of Finance, World Bank staff calculation. 25 Specific Allocation Funds (DAK) for physical projects and General Allocation Funds (DAU) for public works were cut by 0.08 and 0.06 percent of GDP, respectively. 26 The 10-year government bonds yield is relatively stable at around 7 percent on average in 2025. 27 The interest to revenue ratio increased to 17 percent in 2024, continuing the increasing trend in 2023. It is also relatively higher than the regional peers’ average of 9 percent. 14 Indonesia People-First Economic Housing: Prospects A Roadmap June from Homes 2025 to Jobs to Prosperity in Indonesia BI intervention in the FX market has helped to financial system. Consequently, the outstanding SRBI stabilize the Rupiah, while gradually easing stock has declined, from 4.2 percent to 3.8 percent of Contents Table of monetary policy in support of economic growth. GDP year-to-May. In addition, BI increased its holdings of government bonds through purchases both in the Monetary policy has eased gradually over the first primary market (0.1 percent of GDP) and secondary Summary Executive half of 2025. With low inflation, BI cut the policy rate market (0.3 percent of GDP) year-to-May.29 As a result, twice this year (January and May) by 25 bps each to BI’s share of government bond ownership rose from 5.5 percent. To boost economic growth, BI eased two 26.7 to 27.8 percent. macroprudential measures in 2025. First, it lowered the Reserve Requirement Ratio (RRR) for housing BI also intervened in the FX market to stabilize the Developments A.1. Recent Economic loans from 9 percent to 4 percent, freeing up IDR 86 Rupiah. In early April, the Rupiah depreciated by 4.9 trillion in bank liquidity (equivalent to 1 percent of percent, and briefly reached a historic low of 16,943 credit to the private sector). This change took effect in against the US$ as capital outflows intensified. This April. Second, BI will raise the foreign borrowing limit prompted BI to intervene in the FX market in support of A.2. The Policy for banks from 30 to 35 percent of total capital and the Rupiah, which strengthened by 2.2 percent in May Stance reduce the macroprudential liquidity buffer by 100 bps (m-o-m). As a result, FX reserves fell by US$4.6 billion to enhance banks’ access to external funding.28 These between March and April but remained adequate and measures will be effective in June. covered 6.2 months of imports and debt repayments. The Rupiah still underperformed emerging market A.3. Outlook and Risks The easing monetary stance was supported with currencies in 2025 as the JP Morgan Emerging Market liquidity injections through open market operation Currency Index (EMCI) appreciated by 5.3 percent (OMO). Tighter liquidity in the banking sector has (Figure A.22). To boost FX reserves, authorities pushed the overnight interbank lending rate (IndONIA) now require 100 percent of natural resource export above the BI Rate since late April (Figure A.21), while proceeds to stay onshore for a year starting in March. A.4. Policy Priorities broad money growth (M2) gradually decelerated This replaces the previous rule of 30 percent for three over the year. BI allowed redemptions of SRBI (BI’s months (see IEP December 2023). This regulation may monetary instrument) to consistently outpace new limit exporters’ working capital, though deductions Indonesia 2045 issuances, resulting in net injection in liquidity into the and BI’s investment flexibility may offer partial relief. to a Golden B.1. A Path Figure A.21: Interbank lending rate recently exceeded BI Figure A.22: The Rupiah has underperformed its Rate, suggesting tighter liquidity. EMDE peers year-to-May. (percent) (index, Jan 1, 2025 = 100) B.2. Pillar 1. Housing 7.0 110 & Infrastructure Investments 108 106 JP Morgan 6.5 Appreciation 104 EMCI Money market - interbank rate 102 6.0 Jan 2025 = 100 100 Institutional Reforms B.3. Pillar 2. Policy & 98 USD/IDR Depreciation 5.5 BI Rate 96 Eid Tighter holiday bank 94 liquidity Jul-24 Jun-24 Nov-24 Dec-24 Jan-25 Aug-24 Sep-24 Oct-24 Apr-25 Feb-25 Mar-25 May-25 5.0 Jan-25 Feb-25 Mar-25 Apr-25 May-25 Source: BI, World Bank staff calculations. Source: BI, JP Morgan, World Bank staff calculations. B.4. Conclusion 28 Foreign borrowing limit for banks is designated by RPLN or Rasio Pendanaan Luar Negeri. Macroprudential liquidity buffer is designated by PLM or Penyangga Likuiditas Makroprudensial. 29 BI’s purchases of government bonds are intended to maintain the target yield of sovereign bonds, subsequently influencing the overall borrowing costs. During unfavorable global conditions, BI also often serves as a residual financier in the domestic market. 15 Indonesia Economic Prospects June 2025 3. Outlook and Risks Contents Table of The economy is projected to recover with growth GOI’s housing program). If implemented, these reforms accelerating if reforms are swiftly enacted, but will gradually expand the economy’s capacity, unlock both global and domestic risks are high and require further FDI, boosts investment returns, and ensure Summary Executive prudent macro management and effective policy productivity gains. This will translate into better jobs communication. creation and raise GDP growth to 4.9 percent in 2025, and to 5.3-5.5 percent in 2026-2027. Global policy uncertainty is expected to remain Developments high, affecting the outlook. Various factors such as The fiscal policy stance is expected to remain A.1. Recent Economic global trade fragmentation, geopolitical risks, and prudent and within fiscal rules. The fiscal deficit is fluctuating commodity prices are anticipated to keep projected to average 2.7 percent of GDP over 2025- global growth subdued, including that of Indonesia’s 27, below the 3 percent of GDP deficit rule.32 Spending main trading partners. Within this context, Indonesia’s is anticipated to reach 15.1 percent of GDP by 2027 A.2. The Policy growth is expected to increase gradually over 2025- due to priority programs and rising interest payments Stance 27, averaging 4.8 percent annually (Table A.1). Despite (Table A.1). Public spending will shift more towards concerns about Indonesia’s shrinking middle class and social assistance as priority programs and consumption reduced purchasing power due to a lack of good jobs, stimulus programs are rolled over. However, it is private consumption is projected to grow, supported forecasted that public investment will return to its A.3. Outlook and Risks by low inflation and social assistance programs. originally low pre-pandemic levels to cover basic Investment is expected to rise as the GOI launches its and service delivery infrastructure. Indeed, spending housing program and Danantara, the new sovereign on basic infrastructure, including maintenance, will wealth fund, starts rolling out projects. Various energy be necessary to support growth alongside flagship A.4. Policy and infrastructure projects are set to accelerate projects. Public financial management and operational Priorities implementation in the medium term, partially constraints may slow down the disbursement of offsetting slow growth from net exports due to global complex priority programs.33 On the other hand, new trade shifts and low commodity prices. Commodity- revenue strategies and improved tax enforcement, if Indonesia 2045 based manufacturing, agribusiness, construction, implemented, will partially finance this spending.34 Tax to a Golden B.1. A Path and services will drive the supply-side, reflecting revenues are projected to be lower than government government priorities. Inflation, after easing in 2025, target due to forgone revenues from the VAT rate hike is forecasted to gradually increase to 2.6 percent but adjustment, which are estimated at 0.3 percent of GDP. remain anchored within BI’s target range. Non-tax revenues are expected to decline due to lower commodity windfalls and SOE dividends reallocating B.2. Pillar 1. Housing & Infrastructure The GOI structural reform agenda could accelerate to Danantara. Meanwhile, elevated borrowing costs Investments growth further and help Indonesia navigate the coupled with rising budget deficit are forecast to raise downfalls from global uncertainty. In response to interest payments to 2.4 percent of GDP, or 19 percent rising global policy uncertainty, the GOI has devised a of total revenues, and raise gross financing needs to an program of deregulation including reforms to business average of 4.8 percent of GDP over 2025-27. environment and licensing, investment liberalization, trade and logistics reforms, and digital services (see External financing needs will increase due to a Institutional Reforms B.3. Pillar 2. Policy & reform priorities section).30 These reforms complement widening current account deficit and rising public other reforms currently in play, like those in financial debt amortization. The outlook assumes moderating sector deepening,31 and accompany the demand terms-of-trade, global trade shifts, and China’s stimulus drive that the GOI is targeting through its slowdown will hamper export growth, while recovering priority programs (see Part B for a discussion on the domestic demand will boost imports. As a result, the B.4. Conclusion 30 A deregulation task force, comprising public sector and business association leaders, has been nominated on April 28, 2025, to lead this reform agenda. The formal launch of the task is awaiting the signature of the related presidential decree. 31 Through the implementation of the Financial Sector Omnibus Law. 32 The GOI, in its macroeconomic framework and key elements of fiscal policy 2026 document, projects fiscal deficit of around 2.5 percent of GDP in 2026, broadly unchanged from 2025. 33 These are likely to include MBG, education, health, and village cooperative programs in the near term while focusing on food and energy security over the medium term. 34 The GOI plans to tax digital transactions, further raise mineral and coal royalty rates, and leverage big data. This will be bolstered by the smooth implementation of CTAS eventually. 16 Indonesia People-First Economic Housing: Prospects A Roadmap June from Homes 2025 to Jobs to Prosperity in Indonesia CAD is projected to widen gradually and reach 1.7 and create uncertainty. This may slow down the percent of GDP by 2027 (Table A.1). Although larger implementation of investment plans and government Contents Table of CAD, rising public debt amortization, and maturing programs. Though sovereign borrowing costs have SRBIs will increase external financing needs, they will come down, spreads on local borrowing remain high, remain below pre-pandemic levels. FDI is expected as do interest payments to revenues. A big boost Summary Executive to rise gradually to 1.5 percent of GDP by 2027 and in investment without an acceleration in structural remain the largest source of external financing. These reforms could lead to declining returns to investment, inflows are expected to mostly target government a deterioration in the quality of jobs, and a slowdown priority sectors like industrial downstreaming, housing, in growth. Geopolitical shocks, including potential energy, as well as services sectors. Portfolio flows will shifts in global trade, could further worsen terms-of- Developments A.1. Recent Economic remain volatile but might improve slightly as global trade, spur inflation, and squeeze fiscal space. Global monetary conditions ease over time. uncertainty and a reversal of planned global monetary easing could also impact portfolio flows, put pressure The outlook is subject to significant downside on the Rupiah, and raise the costs of borrowing for A.2. The Policy risks. Whilst the GOI has set out clear priorities, this both public and private sectors. On the upside, Stance involves major institutional changes (e.g., government stronger growth in major trading partners or higher reorganization, large budget adjustments, commodity prices could boost exports, expand fiscal establishment of Danantara, and transfer of SOE space, and enhance growth. ownership to the new SWF), which are disruptive A.3. Outlook and Risks 4. Policy Priorities Indonesia’s trade and deregulation reform drive a services trade deficit of US$1.5 billion with the US, A.4. Policy Priorities could help manage global uncertainty and spur primarily driven by demand for US education and investment, growth, and jobs. financial services, charges for the use of intellectual property, and telecommunications services. Indonesia 2045 As of April 2025, Indonesia’s exports to the United to a Golden B.1. A Path States have been subject to an additional import Despite modest aggregate exposure, several labor- duty of 10 percent, same as other trading partners. intensive sectors with high US market exposure Compared to the previously applied average tariff could be adversely impacted. These include textiles rate of 3.6 percent faced by Indonesia’s exports to and apparel, footwear, food products and electrical the US, this constitutes an almost fourfold increase. equipment (Figure A.24). Notably, over half of B.2. Pillar 1. Housing & Infrastructure As a result, for instance, palm oil - Indonesia’s largest Indonesia’s exports of feather and down articles, Investments export commodity to the US at US$1.5 billion in 2024 furskins, fish fillets, furniture, and leather goods are - previously exported duty-free now faces a 10 percent destined for the United States. Conversely, key export tariff. Similarly, tariffs on sweaters and pullovers have commodities - coal, palm oil, iron and steel – which risen from 32 to 42 percent, and tariffs on sports collectively account for close to half of Indonesia’s footwear have increased from 20 to 30 percent. total exports, have limited reliance on US markets. Additionally, an estimated US$1.5 billion or 5.4 percent Institutional Reforms B.3. Pillar 2. Policy & Indonesia’s direct exposure to US markets is of exports to the US - natural rubber, plywood, tin, limited. In 2024, Indonesia’s merchandise exports copper, wood and nickel products – were exempted to the US reached US$28.1 billion, accounting for from higher tariffs (Figure A.25). 10 percent of total exports and about 2 percent of GDP. This exposure is considerably lower than that The GOI is considering several deregulation of regional peers such as Cambodia and Viet Nam, reforms. Reforms could target the relaxation of local whose exports to the US represent 29 and 26 percent content requirements in the ICT sector along with B.4. Conclusion of GDP, respectively (Figure A.23). With US exports to the evaluation of import license procedures and Indonesia of US$10.2 billion, the goods trade surplus accelerated halal certification. Other reforms aim to with the US amounted to US$17.9 billion in 2024. It is simplify tax and customs procedures to reduce trade worth considering, however, that Indonesia recorded costs; lower import income taxes from 2.5 percent 17 Indonesia Economic Prospects June 2025 to 0.5 percent; reducing tariffs on US goods to 0–5 an estimated average tariff equivalent of 30 percent, percent; adjust CPO export taxes; fast-track anti- significantly higher than average import tariffs at 2 Contents Table of dumping and safeguard measures; and remove import percent. Multiple burdensome NTMs - import approvals, quotas and technical regulations. Additional trade pre-shipment inspections, port of entry restrictions, facilitation measures could include simplifying import mandatory certification with national standards (SNI) Summary Executive licensing via digital systems and shift to post-border - are often applied cumulatively, further compounding control through the National Logistics Ecosystem. In compliance costs for businesses (Figure A.26). Reforms addition to the establishment of a Deregulation Task to tackle these costly NTMs could boost total exports Force to coordinate these reforms, a Task Force for Job by 10 percent and investment by 27 percent over the Opportunities and Layoff Mitigation aims to address medium-to-long term (Figure A.27). The greatest gains Developments A.1. Recent Economic the increase in layoffs and develop strategies to could be realized through reforms of import approvals mitigate adverse impacts. and mandatory certification with SNI, especially in high value-added advanced manufacturing industries, Addressing these trade barriers could play a critical including computers, electronics and optical products, A.2. The Policy role in boosting Indonesia’s long-term growth transport equipment, electrical equipment, and basic Stance and economic transformation. Targeted reforms to pharmaceutical products. reduce the costs of imported manufacturing inputs, enhance firms’ access to new and existing markets all Figure A.23: Indonesia’s direct exposure to US the while addressing remaining domestic bottlenecks markets is considerably lower than that of regional A.3. Outlook peers. and Risks to trade and firm growth will be key to realizing the (exports as percent of GDP) potential of trade. Trade policy reforms aimed at streamlining and eliminating unnecessary non-tariff 90 US China ASEAN measures (NTMs), removing barriers to services trade, 80 EU Others deepening and expanding trade agreements, and A.4. Policy Priorities 70 improving logistics and trade facilitation performance 60 are needed to create the enabling trade policy 50 40 framework in Indonesia (World Bank 2022). All in all, 30 Indonesia 2045 an open, stable, transparent, and predictable trade to a Golden B.1. A Path 20 policy framework will be key to position Indonesia for 10 the ongoing reconfiguration of the international trade 0 and investment system. Thailand Cambodia Myanmar Vietnam Malaysia China Indonesia Philippines Laos Targeted NTMs reforms could generate significant B.2. Pillar 1. Housing & Infrastructure economy-wide benefits, of up to 5 percent of GDP Investments Source: World Bank. over the medium-to-long term. NTMs amount to Figure A.24: Textiles, apparel, and footwear have the Figure A.25: Exports of natural rubber, plywood, tin highest exposure to US markets. and others were exempted from higher tariffs. (exports to the US, percent of sector’s total) (exports to the US, US$ million) Institutional Reforms B.3. Pillar 2. Policy & 30 Mineral 700 products 600 25 500 400 % of total exports 20 300 200 Base metals Live animals; 100 15 Machinery animal 0 Animal or and products B.4. Conclusion Plywood sheets w/or w/o additives Tin (o/than alloy), specified natural Pine wood sawn or smoked sheets Natural rubber n/o 6mm thick Lubricating oils, 10 vegetable oils appliances chipped, over 6 Textiles and Technically unwrought apparel rubber mm thick Food, Plastics and 5 beverages rubber Articles of and tobacco Footwear wood 0 0 10 20 30 40 Exports to the US (% of sectors' total) Source: USITC, World Bank. Source: World Bank. 18 Indonesia People-First Economic Housing: Prospects A Roadmap June from Homes 2025 to Jobs to Prosperity in Indonesia Figure A.26: NTMs are often cumulatively applied and Figure A.27: NTM reforms could have significant Contents Table of impose significant costs. benefits for growth, exports, and investment. (percent tariff equivalent) (percent relative to base) Electrical equipment Import approvals Investment Exports GDP Summary Executive Crops nec Certification with SNI All Four Reforms Petroleum, coal products Pre-shipment Metal products inspections Port of entry Certification with SNI Basic pharmaceutical products Developments restrictions A.1. Recent Economic Machinery and equipment Import approvals Mineral products Computers and electronics Port of entry restrictions Transport equipment A.2. The Policy Stance 0 10 20 30 40 50 60 70 80 90 100 110 120 130 0 10 20 30 Source: World Bank. Source: World Bank. A.3. Outlook and Risks Effective policy communication and protecting term by US$0.863. This result is within the range for capital spending reduces business and consumers EMDEs’ multiplier (US$0.5-1.0) (Geli and Moura, 2023; concern and boosts economic activity. IMF, 2014; Izquierdo et al., 2019). Moreover, using cross-country data, World Bank (2024) find that cuts A.4. Policy Priorities Communication and improving the quality of public in public investment tend to have a more pronounced spending are important to manage uncertainty. negative impact on output in the long run: a US$1 cut Large budget adjustments, institutional reorganization in public investment leads to a US$1.3 drop in output. at ministerial and SOE levels, tax policy reversals and Meanwhile, the fall due to public consumption cuts is Indonesia 2045 to a Golden B.1. A Path tax collection disruptions have heightened uncertainty. not statistically different from zero. Such outcome re- Compounded by global trade disruptions, this further enforces the need to ringfence public investment and increased concerns for investors, businesses, and cut non-productive public consumption for improved consumers, affecting economic activity. These concerns budget efficiency. eased as authorities sustained communication on B.2. Pillar 1. Housing policy directions, reform plans, and support packages, Danantara could have a transformative role in & Infrastructure Investments and doubled down on economic data publication like Indonesia’s development, but success is dependent budget realization numbers, leading indicators, and on clear strategy, effective governance, transparency, other high frequency data. Clear communication and and adherence to international standards. data transparency – important hallmarks of economic management in Indonesia – are crucial in managing Sovereign Wealth Funds (SWFs) can be pivotal tools shocks and reducing uncertainty. Furthermore, efficiency for transforming volatile revenues into strategic Institutional Reforms B.3. Pillar 2. Policy & measures impacting infrastructure and human capital assets. Typically funded by natural resource wealth ministries raised service delivery concerns. Redirecting or fiscal surpluses, SWFs can help achieve national efficiency savings to infrastructure and human capital objectives and manage state-owned enterprises (SOEs). formation programs remains key to achieving higher Singapore’s Temasek and Malaysia’s Khazanah are growth and the Golden Indonesia 2045 Vision. notable examples of SWFs that combine commercial and strategic goals through SOE management, strong Public investment significantly boosts Indonesia’s governance frameworks and clear mandates. In B.4. Conclusion economic output, emphasizing the importance of contrast, Norway’s Government Pension Fund Global enhancing its spending envelope in future budget and the Abu Dhabi Investment Authority prioritize allocations. A Bank staff simulation, using Input- maximizing long-term returns mostly abroad, from Output table, shows that a US$1 increase in public natural resources (see Table A.2 for examples). investment raises Indonesia’s output in the short- 19 Indonesia Economic Prospects June 2025 Indonesia’s Danantara blends traditional SWF Transparency and accountability are crucial for functions with an expansive domestic development Danantara’s credibility. Although Indonesia adheres Contents Table of mandate. Established under the revised SOE Law in to fiscal deficit rules, the creation of Danantara raises 2025, Danantara manages US$900 billion in assets concerns around contingent liabilities, given the scale (about 64 percent of GDP) making it one of the world’s of government-guaranteed SOE debt and potential Summary Executive largest SWFs. It supervises both Investment and future borrowing by Danantara itself. The SOE Law now Operating Holdings, is guided by an advisory board provides legal protections to SOE boards of directors that includes global experts and aligns its initiatives (BODs) to encourage risk-taking, but this must be with international standards.35 Danantara aims to paired with strong oversight mechanisms to prevent leverage SOE assets36 through investment in key misconduct. Developments A.1. Recent Economic sectors like mineral processing, energy, oil refineries, and food security. Danantara’s success depends on adherence to global governance and accountability standards Danantara’s hybrid model brings with it complex despite some risks. The consolidation of SOEs risk A.2. The Policy fiscal and governance risks that must be carefully crowding out private sector investment, especially in Stance managed. Danantara’s creation may initially reduce commercially viable sectors. Monopoly rights granted short-term state revenues, with dividend income under the new SOE Law for industries deemed vital shifted from the budget to Danantara, potentially to the state may erode competition and investor increasing the fiscal deficit by 0.2 percent of GDP. Over confidence. Furthermore, Danantara inherits a broad A.3. Outlook and Risks time, improved SOE governance and better investment array of existing governance challenges from the SOEs outcomes could raise dividends and tax receipts, while it now manages. To fulfill its mandate, Danantara must reducing the need for capital injections. However, adopt global best practices, such as the Santiago this is uncertain, and fiscal burden could increase if Principles and OECD SOE Governance Guidelines,37 Danantara’s investments underperform. to ensure sound management, promote competitive A.4. Policy Priorities markets, and avoid becoming a fiscal and institutional liability. Indonesia 2045 to a Golden B.1. A Path B.2. Pillar 1. Housing & Infrastructure Investments Institutional Reforms B.3. Pillar 2. Policy & 35 Danantara is managed by Chief Executive Officer Rosan Roeslani (Minister of Investment and Downstreaming), with Pandu Sjahrir (ex-Vice President- B.4. Conclusion Director, PT. TBS Energy Utama – a mining company) serving as Chief Investment Officer and Dony Oskaria (Deputy Minister of SOE) as Chief Operating Officer. Moreover, both Ministers of SOE and Finance are part of the Supervisory Board. 36 Danantara is expected to oversee 847 SOEs (including subsidiaries), conducting comprehensive due diligence and implementing restructuring measures like mergers and closures. 37 The internationally accepted best-practice guidelines for SWFs. There are 24 principles including: sound legal framework, clearly defined objectives, consistent with macroeconomic policy framework, good coordination with fiscal and monetary authorities, clear rules on funding and withdrawal, transparent and sound governance, independent operation, clear accountability and oversight, independent audit, subject to code of conduct, robust risk management, sound internal controls, regular disclose of information, promotes fair and transparent markets, and sound selection process of BODs. 20 Indonesia People-First Economic Housing: Prospects A Roadmap June from Homes 2025 to Jobs to Prosperity in Indonesia Table A.1: Selected Macroeconomic Indicators. Contents Table of 2022 2023 2024 2025 2026 2027 Actual WB projection Real GDP growth and inflation, percent change Real GDP 5.3 5.0 5.0 4.7 4.8 5.0 Summary Executive Real GDP Range – GOI reforms move forward [4.7-4.9] [4.8-5.3] [5.0-5.5] Consumer Price Inflation (average, %) 4.1 3.7 2.3 1.7 2.6 2.6 Consumer Price Inflation (end of period, %) 5.5 2.6 1.6 2.5 2.4 2.6 Developments Private Consumption 5.0 4.9 5.1 4.9 4.9 4.9 A.1. Recent Economic Government Consumption -4.4 3.0 6.6 -2.1 0.3 0.9 Gross Fixed Investment 3.9 3.8 4.6 6.1 6.2 6.3 Exports 16.2 1.3 6.5 4.8 5.1 5.5 Imports 15.0 -1.6 7.9 4.5 5.0 5.1 A.2. The Policy Fiscal accounts, central government, percent of GDP Stance Revenues 13.5 13.3 12.8 11.9 12.3 12.4 of which Tax Revenue 10.4 10.3 10.1 9.9 10.3 10.5 Expenditures 15.8 14.9 15.1 14.5 15.0 15.1 A.3. Outlook and Risks Primary Balance -0.4 0.5 -0.1 -0.4 -0.4 -0.3 Fiscal Balance -2.4 -1.6 -2.3 -2.7 -2.7 -2.7 Central Government Debt 39.5 39.0 39.2 40.1 40.8 41.4 Balance of Payments, percent of GDP unless indicated otherwise A.4. Policy Priorities Current Account Balance 1.0 -0.1 -0.6 -1.3 -1.6 -1.7 Exports, Goods and Services 23.9 21.2 21.7 22.6 22.5 22.6 Imports, Goods and Services 20.7 19.2 19.9 21.5 21.4 21.3 Indonesia 2045 Net Foreign Direct Investment 1.4 1.1 1.0 1.2 1.3 1.5 to a Golden B.1. A Path Gross Reserves (months of imports of goods and 6.0 6.7 6.6 6.1 6.0 6.0 services) Memorandum items Nominal GDP (IDR trillion) 19,588 20,892 22,139 23,112 24,376 25,693 B.2. Pillar 1. Housing Real GDP Per Capita (IDR thousand) 41,952 43,599 45,320 46,966 48,751 50,726 & Infrastructure Investments Institutional Reforms B.3. Pillar 2. Policy & B.4. Conclusion 21 Indonesia Economic Prospects June 2025 Table A.2: Comparing Sovereign Wealth Funds across the globe. Contents Table of Norway’s Turkiye Wealth Abu Dhabi Investment Indonesia Investment Indonesia’s Danantara Government Pension Temasek Holdings Fund Authority (ADIA) Authority Fund Global (GPFG) Stable source of Development fund Development fund Development fund and SOE Development and savings Summary Executive Objectives revenues, and savings Development fund. (initial) and savings (but not necessarily holdings. fund. for future generations. fund (current). government projects). At initiation: consolidation of SOEs assets, with capital Funding set at a minimum of IDR Sources 1,000 trillion (USD 60.8 Developments A.1. Recent billion, 4.5 percent of GDP). Economic Self-financing through Capital injections from Transfers from SOEs, In the future: Revenues from dividends from portfolio the State budget (USD debt issuances, and Oil related fiscal mainly from commodities particularly oil companies, divestments, 2 billion) and transfer securitization of public revenues. SOE dividends and gas. and fund investment of two SOE shares assets. earnings. (USD 3 billion). A.2. The Policy As Danantara is ADIA's revenues come independent of central from petroleum income, Stance government, SOE dividends Includes though the specifics are not Liabilities include GPFG provides a will be shifted from State obligations from defined. There is no publicly corporate tax, predictable revenue Operates independently Fiscal Budget to Danantara. transferred SOEs, disclosed rule on how dividends owed to stream to the budget but backed by Relations On the other hand, there debt issuances, much is transferred back the government, and of around 6 percent of government guarantee. will be no regular capital and financing of to the central government, debts from bond non-oil GDP. A.3. Outlook injections to SOEs except strategic projects. but ADIA must provide issuance. and Risks for special assignments funds for withdrawal by the (projects/subsidies). government as needed. Focuses on strategic sectors such as Focused on Aims to support national GPFG portfolio is infrastructure, commercially viable, A.4. Policy Priorities projects focusing on invested abroad with Focused on long-term, energy, technology, Initially conservative, high-impact projects mineral downstream specific allocation high-risk investments and financial investing in sovereign debt in sectors such as sector, petrochemicals, oil of 60% equities, with a concentration in Investment services. Supports of major currencies, but transportation, energy, refineries, food security and 35-40% fixed income Asian equities. Initially Policy domestic economic gradually diversified into healthcare, and digital renewable energy. It will and up to 5% on centered on local development and international assets with a infrastructure through also form a joint venture property, with real industries but later selective foreign focus on long-term returns. co-investment with Indonesia 2045 with private firms, both return averaging 3.6% expanded globally. to a Golden investments. both SOEs and private B.1. A Path domestically and globally. annually since 1998. Includes firms. participation in Islamic finance. Norges Bank manages INA reports directly the fund for the to the President, while Ministry of Finance. Temasek is a private its decision-making B.2. Pillar 1. Housing The Executive Board, investment company The Board of Directors is Managed as Fully owned by the Abu process remains & Infrastructure led by the central that manages its Investments composed primarily of a joint-stock Dhabi government. independent of bank governor and own assets. Though private sector professionals, company in the However, it conducts shareholder interests. deputy governor, fully owned by except for the head of private company its investment program INA uses a two-tier includes five external Singapore’s Ministry Danantara (Minister of status, directly independently without board system: a members. Public of Finance, on behalf Investment), and the CIO linked to the Prime reference to the Supervisory Board, oversight is provided of the government, Governance (Vice Minister of SOEs). Minister. The Board government or other which includes by Parliament, it operates structure The Managing Directors of Directors are institutions that invest the Finance and the Ministry of independently. are not affiliated with private sector funds on behalf of the SOE Ministers and Finance, the Central The Board includes political parties. They are all professionals government. Roles and professionals, and a Bank, Norges political elites, but appointed by the President appointed by the responsibilities are legally Board of Directors, Institutional Reforms B.3. Pillar 2. Policy & Bank Investment neither the president for a 5-year term. The Prime Minister and separated among the consisting of Management, the nor the government- advisory board includes they oversee the owner, governing entity, professionals from Supervisory Council, as shareholders- global experts. operations. and management. leading institutions and the External can influence its and corporations Auditor, each with investment decisions. with diverse skills and specific roles and backgrounds. reporting duties. Source: Author’s compilation based on official reports, websites and analysis. B.4. Conclusion 22 B. A Roadmap from Homes to Jobs to Prosperity in Indonesia Indonesia Economic Prospects June 2025 Contents Table of B. A Roadmap from Homes to Jobs to Prosperity in Indonesia Summary Executive Developments A.1. Recent Economic 1. A Path to a Golden Indonesia 2045: Meeting President Prabowo’s Housing and Employment Goals A.2. The Policy President Prabowo has outlined ambitious The right to housing is anchored in Indonesia’s Stance initiatives for the nation’s future, aiming to fulfill history. In its 1945 Constitution, the Republic of a constitutional promise of housing for all while Indonesia declared: “Every person shall have the right pursuing the vision of “Golden Indonesia 2045.” to live well, materially and spiritually, and to settle in a The President’s social justice agenda prioritizes people house with a good and healthy environment.” The 1950 A.3. Outlook and Risks and leverages Indonesia’s vast resources,38 seeking Congress on Healthy Housing for People formalized to establish a more equitable society, raise economic housing as the state’s responsibility and established growth to 8 percent, and deliver 3 million homes each public housing in Indonesia, likely introducing year. These goals are interconnected. The following Perumahan Rakyat (people’s housing) into the lexicon. A.4. Policy report presents short-term opportunities to accelerate Although the promise of housing for everyone has Priorities housing delivery and presents long-term strategies for remained elusive in a nation whose population has achieving more equitable and sustainable economic more than quadrupled since its independence, the growth. With the right interventions and investments, success of the administration’s housing program could Indonesia 2045 accompanied by an appetite for reform, the target of make this founding vision of Indonesia a reality. to a Golden B.1. A Path 3 million homes can be achieved. The recommended approaches are designed to leverage resources so that Indonesia has a strong capacity to deliver housing Indonesia can provide housing that is affordable, safe, and infrastructure at scale. The country boasts some and decent—for everyone. of the best and largest home improvement efforts in the world (e.g., BSPS – Bantuan Stimulan Perumahan B.2. Pillar 1. Housing & Infrastructure Housing, which contributes 10 percent of GDP39 Swadaya, or Home improvement through Self-Help Investments and 7 percent of total employment, is an engine Housing), one of the most effective slum upgrading of economic growth and a source of prosperity programs in history (KOTAKU – Kota Tanpa Kumuh, for its people.40 Every Rp 1 trillion invested in the or City without Slums), the world’s biggest property housing sector can raise 6,000 people out of poverty titling program (PRONA – Proyek Operasi Nasional and increase growth in 185 other sectors, including Agraria or Agrarian National Program), and world- education and healthcare.41 Further, the housing class capacity for post-disaster housing and settlement Institutional Reforms B.3. Pillar 2. Policy & sector augments national tax revenues by 8 percent.42 reconstruction. During 2015-2024, the One Million For most Indonesians, housing represents their largest Homes Development Program (PSR – Program Sejuta expense and, sometimes, their only asset. Adequate Rumah) added more than 10 million housing units, housing offers numerous ancillary benefits: it elevates prioritizing 75 percent for low-income residents.43 educational attainment, work opportunities, health, and well-being of its residents. B.4. Conclusion 38 President Prabowo’s social justice agenda and natural resource initiatives are outlined in Asta Cita, which is grounded in the principles of Pancasila (belief in one God, just and civilized humanity, national unity, democracy guided by wisdom and representation, and social justice for all Indonesian people). 39 When infrastructure is included, housing contributes 13 percent of GDP. For comparison, tourism contributes 4.8 percent, mining 10.5 percent agriculture 12.5 percent, wholesale and retail 12.9 percent. 40 World Bank original calculations for this report. 41 As reported in PT SMF and DTS Indonesia (2023) and supported by Cattaneo et al. (2007). 42 World Bank original calculations for this report. 43 2016–2024 data was obtained from “1 Million Homes Program,” Ministry of Public Works and Housing, Directorate General of Housing and Directorate of Public and Commercial Housing, accessed April 22, 2025, https://programsatujutarumah.pu.go.id/. 2015 data was obtained from Ministry of Public Works and Housing, Profile and Assessment of Housing and Settlement Conditions in Indonesia (Jakarta: MPWH, n.d.). 24 Indonesia People-First Economic Housing: Prospects A Roadmap June from Homes 2025 to Jobs to Prosperity in Indonesia As an established partner with Indonesia, the World 2.7 percent.45 This is comparable to China’s 2.8 percent Bank has supported each of these programs. Jointly and the average across East Asia and the Pacific of 3.1 Contents Table of through the National Affordable Housing Program percent.46 On average, urban workers in Indonesia earn (NAHP), more than 1 million homes have improved in 40 to 50 percent more than their rural counterparts, quality and disaster resiliency countrywide with BSPS highlighting urbanization as a social escalator that lifts Summary Executive (2017–2023).44 The National Slum Upgrading Project millions out of poverty. Large cities and metropolitan (NSUP) supported KOTAKU, which leveraged US$1.4 areas are essential to reaching economic growth billion in public financing, enhancing infrastructure for targets (Table B.1). more than 2 million housing units (2016–2023). Through participatory mapping and land administration Indonesia’s major cities—including large urban Developments A.1. Recent Economic reforms, the One Map Project supported PRONA by centers and metropolitan areas—require more surveying and mapping 8.36 million land parcels to affordable housing. In the Jabodetabek metropolitan enhance tenure security and registered over 4.2 million area, and Jakarta City in particular, approximately land rights in rural areas (2018–2024), accelerating one-quarter of the population lives in overcrowded A.2. The Policy the local economy by enabling credit access. The homes.47 Talented Indonesians seeking opportunity Stance Central Sulawesi Rehabilitation and Reconstruction in a metropolitan area would need to dedicate 10 Project improved conditions in 3,880 homes (plus 17 additional percentage points (ppts) of their budget to schools and one university) and delivered 10,000 water move to the Jabodetabek metropolitan area and 20 connections and settlement infrastructure in 30 areas additional ppts to move to Jakarta City. Defying global A.3. Outlook and Risks (2019–2024). trends, Indonesians are moving out of high-income areas due to a lack of affordable housing. The success of these initiatives hold promise for similar efforts to be scaled and support President But with the right mix of investments and reforms, Prabowo’s housing and employment objectives. Indonesian cities can build affordable homes and A.4. Policy Priorities The following recommendations optimize budgetary open their doors to attract the next generation resources and mobilize more private capital. Indonesia of talent—both national and foreign. Housing and can make timely, cost-effective, and strategic infrastructure are magnets for talent and drivers of Indonesia 2045 investments to achieve its ambitious targets. social mobility. By investing in these sectors, Indonesia to a Golden B.1. A Path can capitalize on an opportunity to encourage 1.1 The Opportunity entrepreneurship and creative industries that boost the economy. In Indonesia, cities host 76 percent of Large cities and metropolitan areas drive growth the middle class; meeting the demand for affordable and offer better jobs and higher earnings. Indonesia’s housing will be crucial to support the social mobility of B.2. Pillar 1. Housing & Infrastructure urbanization growth return on GDP has improved in the 115 million individuals in the aspiring middle class. Investments the last decade (2013–2023) and currently stands at Table B.1: Cities Drive Economic Growth. Classification Population Size Cities With Average GRDP Growth Share Of Total (High Rate > National GDP Growth (2023) Growth Rate) Institutional Reforms B.3. Pillar 2. Policy & Small <50,000 0 0% Medium 50,000-100,000 1 2% Large 100,000-1,000,000 33 70% Metropolitan 1,000,000-5,000,000 13 28% Megapolitan >5,000,000 0 0% *Total cities with average Gross Regional Domestic Product (GRDP) growth rate > national GDP growth (2023) is 47 out of 94 cities (DKI B.4. Conclusion Jakarta Province considered as one city). Source: BPS (2022-2023); Susenas (2020); World Development Indicators (2023). World Bank staff calculations. 44 BSPS, as the Government program, started in 2006. 45 Urbanization growth return on GDP refers to the average increase in GDP associated with each percentage point increase in urban population share. 46 World Bank staff calculations using World Development Indicators, and United Nations, World Urbanization Prospects: The 2018 Revision. 47 World Bank original calculations for this report with data from Susenas (2023). 25 Indonesia Economic Prospects June 2025 1.2 People-First Housing financing for new homes comprises 88.6 percent of the government’s housing budget,48 compared to Contents Table of Maximizing housing investments means better 11.4 percent dedicated to improving housing through homes, not just new homes. Currently, five times as BSPS. The government allocates an average of Rp 25 many Indonesian households require better housing million (US$1,500) per unit to improve existing housing Summary Executive than new housing (26.9 million households compared and more than Rp 100 million (US$6,000) on average to 5.4 million), as shown in Figure B.1. However, to construct a new unit.49 Figure B.1: Backlog of New and Better Housing. Developments A.1. Recent New Housing (17%) Economic Better Housing (83%) 83% Better Housing 17% New Housing Urban Areas Urban Areas Urban Areas 34% 11% 13% 58% Urban Areas 42% Rural Areas (3.6 million) (4.2 million) A.2. The Policy (11.1 million) Stance IN URBAN AREAS: 45% Better Housing 13% New Housing Rural Areas 35% IN RURAL AREAS: A.3. Outlook and Risks (11.3 million) Rural Areas Rural Areas 38% Better Housing 3% 4% 4% New Housing (0. 9 million) (1. 2 million) A.4. Policy Priorities Source: Ministry of Public Works and Housing, HREIS (2023). Housing and infrastructure investments can Figure B.2: Substandard Housing in Urban and complement President Prabowo’s commitment to Rural Areas. (in millions) family health. As the government seeks to improve Indonesia 2045 to a Golden B.1. A Path Rural Urban the health of children and families through the Free Nutritious Meal program, a complementary effort Inadequate Density 1.69 -1.69 3.03 is improving housing quality and safety through a combination of targeted housing supports and infrastructure investments. While nine percent of B.2. Pillar 1. Housing Inadequate Drinking Water -4.35 4.35 1.70 & Infrastructure Indonesians live in poverty,50 one in three Indonesian Investments households live in substandard conditions (Figure B.2).51 This has secondary impacts on community Inadequate Construction -4.68 4.68 7.06 health. For example, families living in homes with dirt floors are more exposed to illness, extreme weather, and other hazards, lowering both their health and Inadequate Sanitation -6.13 6.13 6.75 educational outcomes. Approximately 45 percent Institutional Reforms B.3. Pillar 2. Policy & of Indonesians live in homes with lead paint. Lead Source: Ministry of Public Works, HREIS (2023). 48 World Bank original calculations for this report with data from Government of Indonesia, Housing Budget, 2015–2024; Ministry of Housing and Settlements, 2025; and Performance Reports of Directorate of Implementation of Housing Finance and DG Infrastructure Financing, Ministry of Public Works and Housing. 49 Estimates for improving housing are based on BSPS and new housing through FLPP (Fasilitas Likuiditas Pembiayaan Perumahan, or Housing B.4. Conclusion Financing Liquidity Facility), which is now channeled through BP TAPERA (Badan Pengelola Tabungan Perumahan Rakyat, or Public Housing Savings Management Agency). FLPP constitutes most of Indonesia’s new housing allocations (a number that has tripled since 2015), subsidizing 1.2 million first- time mortgages for low-income families. New housing has also been supported by other public programs, such as Vertical Housing and Subsidi Selisih Bunga (SSB, or Interest-Rate Subsidy), and, to a lesser extent, Special Housing Infrastructure and Services, Bantuan Pembiayaan Perumahan Berbasis Tabungan (BP2BT, or down payment assistance based on savings), Subsidi Bantuan Uang Muka (SBUM, or down payment assistance), and TAPERA. Data is sourced from the Ministry of Housing and Settlements. Data for SBUM in 2024 was not available in April 2025. 50 According to BPS, Indonesia Poverty Profile in March 2023, poverty line was Rp 550,458/capita/month. 51 Defined according to the Ministry of Public Works, HREIS, BPS: lacking at least one of the following: sufficient living space of at least 7.2 square meters per person, access to improved drinking water, access to improved sanitation, and durability (roofs from concrete, tiles, zinc, or wood/shingles; walls from brick walls, plaster/bamboo weave/wire, or wood/boards; and floors from marble/granite, ceramic, parquet/vinyl/carpet, tiles/terrazzo, wood/boards, or cement/red brick). 26 Indonesia People-First Economic Housing: Prospects A Roadmap June from Homes 2025 to Jobs to Prosperity in Indonesia exposure is a serious health concern, especially for would need to spend at least 75 percent more on children, and can cause developmental delays, learning housing than currently allotted and increase the Contents Table of disabilities, and stunting. Poor housing conditions lead efficiency of existing programs by 60 percent to reach to larger problems, as well: In Jakarta City, home to 4 its housing target.54 The recommended pillars below percent of the national population, it is suspected that address the possible funding sources while improving Summary Executive many landed homes without access to the public water the efficiency of every government dollar spent. system are relying on wells, which is contributing to the sinking of the lowland coastal city. Indonesia has the building blocks to promote family savings and develop sources of capital for Indonesia must stay one step ahead of housing mortgages. With the right reforms, there is a clear Developments A.1. Recent Economic needs, particularly given high disaster risk. In the opportunity to release the potential of the country’s past seven years, disasters have impacted more than housing sector. To make this capital available, Indonesia 7.1 million Indonesian homes, 86.3 percent due to must develop its capital markets to better support flooding.52 Instead of waiting for disasters to strike mortgage lending.55 Emerging market economies have A.2. The Policy and “Build Back Better” after devastating loss of life used various approaches to catalyze the mortgage Stance and financial investments, the recommended actions market. Several governments have successfully used below encourage a “Build Better Before” approach. provident funds as a source of capital for mortgages (as in Brazil, Philippines, and Mexico) or stimulated Bridging the housing gap means ensuring access to voluntary contractual savings with premiums A.3. Outlook and Risks the right housing solution, in the right place, at the (Kazakhstan). Other governments have stepped in to right price. While building new units represents part jumpstart the bond market by establishing liquidity of this strategy, it cannot be the only approach. Not facilities or securitization platforms and, in some cases, everyone needs a new home—most Indonesians need offering government guarantees for mortgage bonds a better home. Nor is homeownership a requirement: (Egypt, Malaysia, Thailand). Indonesia needs to strike a A.4. Policy Priorities rental options can also contribute to a diverse set of balance between costs and stability, particularly in low- housing solutions. Putting people first means enabling income housing finance. all Indonesians—including low-income families and Indonesia 2045 the aspiring middle class—to access safe, affordable To achieve its vision, Indonesia can strategically to a Golden B.1. A Path housing and the opportunity to build a better future. attract private capital. Indonesia’s housing-sector Leaving no one behind, this administration can forge budget represents a relatively modest 0.18 percent of a path to shared prosperity by beginning with where GDP (the OECD average is 0.46 percent).56 The nation’s people start their days—at home. mortgage debt is 5.1 percent of its GDP, a share that has grown over the last decade but remains low (Figure B.2. Pillar 1. Housing & Infrastructure 1.3 Unified Pathways for a Prosperous B.3). Typically, a mortgage-debt-to-GDP ratio in the Investments Indonesia double digits indicates lenders are effectively serving diverse households through collateralized lending. Meeting the target of 3 million housing solutions Crucially, the housing sectors of OECD countries rely annually requires at least US$3.8 billion in direct heavily on diversified private finance, with mortgage public investments every year.53 There are three lending averaging around 50 percent of GDP. In contrast, a handful of Indonesia’s largest banks offer Institutional Reforms B.3. Pillar 2. Policy & possible sources to close this financing gap: the government, direct savings from families, and indirect most mortgages. However, Indonesia is developing savings from capital markets. For instance, a simulation two key conditions for a strong mortgage market: a conducted for this report shows that the government stable macroeconomic environment with price stability and clearly defined property rights. 52 Badan Nasional Penanggulangan Bencana (BNPB), Data Informasi Bencana Indonesia (DIBI) B.4. Conclusion 53 To put this in perspective, all outstanding corporate bonds in local currency together totaled Rp 461 trillion (US$28 billion) in Q1 of 2024, while the sovereign wealth fund was launched with Rp 300 trillion (US$18 billion) of assets under management (with the goal of reaching US$900 billion). 54 A business-as-usual scenario would require triple the budget used to achieve the 1 Million Homes target, to achieve the 3 Million Homes target. A lower budget increase would require efficiency gains in the utilization of public funding. 55 In well-developed mortgage markets, diversified pools of investors buy long-term fixed-income securities backed by residential mortgages. In the European Union, for instance, investors hold more than €3.3 trillion (US$2.9 trillion) in mortgage-backed covered bonds (European Covered Bond Fact Book, 2024). The development of a capital market with investor demand for long-term paper (with 5-year maturity or more) relies on a stable economic and policy environment. Government guarantees and long-term bond purchases can kickstart the process. 56 World Bank original calculations for this report with data from OECD, “PH3.1 Total government spending on housing allowances in selected OECD countries,” 2022, https://www.oecd.org/content/oecd/en/data/datasets/oecd-affordable-housing-database.html. 27 Indonesia People-First Economic Housing: Prospects A Roadmap June from Homes 2025 to Jobs to Prosperity in Indonesia Figure B.3: Mortgage Debt to GDP Ratio. technologies to meet the needs of its people and counter geophysical and climate hazards. Delivering Contents Table of 50% 44.4% 45.4% housing solutions at scale requires strong institutions 45% 40% and sustained investment in supporting infrastructure 35% and services, such as water, sanitation, solid waste 29.5% Summary Executive 30% management, transport, and connectivity to reduce 25% the country’s 77,000 hectares of slums.57 Therefore, 20% 12.3% 15.2% the government must play a dual role: regulating 15% and establishing standards while also investing in 10% 5.1% infrastructure and services to close existing gaps, Developments 4.1% A.1. Recent Economic 5% 0% thereby creating markets and attracting private capital investments. Indonesia holds untapped housing potential. A.2. The Policy The government can leverage existing programs, Source: Mortgage Loans (as percent of GDP), Helgi Library (2023); Stance World Economic Outlook Singapore Datasets, IMF (2023). strengthen land management systems, and mobilize private capital through a comprehensive package of Reforms must address not only financing, but also policy reforms. By applying innovative solutions and promote resilient construction standards, advanced advancing targeted reforms to build trust among local A.3. Outlook technologies, and supporting infrastructure to and Risks and international investors, Indonesia is well-positioned ensure long-term sustainability. Indonesia needs to to transform its housing sector into a driver of inclusive standardize housing data further to track compliance economic growth. The following strategy identifies two with resilience standards for all government-supported pillars to optimize funding and accelerate the delivery units while continuing to adapt construction of resilient, affordable housing for all Indonesians. A.4. Policy Priorities 2. Pillar 1. Housing and Infrastructure Investments Indonesia 2045 2.1 Next-Generation Settlement and The expected return on investments from the to a Golden B.1. A Path Neighborhood Transformation outlined strategy is high. For US$1 billion in public investment, we expect 750,000 direct and indirect jobs, Indonesia’s landmark successes with BSPS and and up to 1 million homes with access to improved KOTAKU demonstrate that there is a path toward housing and settlement infrastructure. B.2. Pillar 1. Housing housing everyone, particularly by jointly addressing & Infrastructure Proposed strategy Investments poor settlement areas and home improvement. As two-thirds of the urban housing gap is concentrated in 74 cities and 42 urbanized districts, this approach would Build an integrated BSPS-KOTAKU collaboration amplify investments in housing, basic services, and platform to address the qualitative housing backlog infrastructure. Transforming homes and neighborhoods and reduce slums nationwide. Combining BSPS and would also involve property regularization and private KOTAKU to comprehensively address the qualitative backlog and substandard housing conditions through Institutional Reforms B.3. Pillar 2. Policy & investment. The lowest-cost intervention would provide access to basic services and infrastructure at home renovation and settlement infrastructure an estimated Rp 25 million per unit. On the higher end, improvement holds opportunities to apply innovative combining BSPS with neighborhood improvement approaches and deliver quick results. The self-help efforts would cost an estimated Rp 30 million per unit. approach of BSPS has proven to create jobs that are This intervention could be supplemented with housing placed locally while simultaneously moving the building microfinance loans. Pursuing a strategy of property material industry to each area. This strategy needs regulatory reforms, policy updates, and modifications B.4. Conclusion regularization would maximize increases in property values and encourage home investments. to regulatory and planning documents to bring poor settlement conditions in line with housing standards and enhance policy effectiveness. To operationalize this 57 National Medium Term Development Plan 2025-2029. 28 Indonesia People-First Economic Housing: Prospects A Roadmap June from Homes 2025 to Jobs to Prosperity in Indonesia initiative, the government would need to reform the It is essential to strengthen the capacity of the regulations that support implementation mechanisms Ministry of Housing and Settlements to manage Contents Table of to integrate BSPS and KOTAKU, adding clear eligibility integrated housing, settlement development criteria, defining the role of local governments, and programs, and land provision. Clear institutional enabling private sector participation.58 arrangements, responsibilities, and coordination Summary Executive mechanisms among ministries and relevant Linking BSPS with housing microfinance would stakeholders responsible for housing, settlement enhance financial access for low-income households infrastructure, and land provision are needed. For and drive economic opportunities through instance, coordination between the Ministry of Public incremental housing improvements. However, a Works and the local governments for settlement Developments A.1. Recent Economic supportive regulatory framework would be required to infrastructure such as water, sanitation, solid waste enable microfinance institutions and similar entities to management, roads, and drainage. Additionally, offer non-productive housing loans tailored to the needs Indonesia must enhance the capacity of local of informal and underserved segments. In parallel, the governments to align spatial planning (RDTR/RTRW), A.2. The Policy broader ecosystem for housing microfinance, including land readiness, and community engagement with the Stance alternative credit scoring mechanisms and contractual national housing and settlement infrastructure strategy savings schemes, could be strengthened through through training, technical assistance, and knowledge closer collaboration between the Financial Services sharing. Authority (OJK), Ministry of Finance, and Ministry of A.3. Outlook and Risks Housing and Settlements. Indonesia needs to continue developing regulations to integrate disaster risk reduction into spatial Enable, incentivize, and encourage local planning alongside unified operational frameworks governments to replicate the integrated housing for resettlement, land provision, reconstruction and settlement upgrading programs (BSPS and financing, and technology deployment in the A.4. Policy Priorities KOTAKU) with their own resources.59 Building on aftermath of disasters. This regulatory gap often existing momentum, local ownership can be further leads to delays, fragmented implementation, and encouraged and scaled. DAK Integrasi, which combines missed opportunities. For example, following the 2018 Indonesia 2045 home improvement and slum upgrading, including Central Sulawesi disaster, over 110,000 homes were to a Golden B.1. A Path water and sanitation services, provides an exemplary damaged or destroyed, and more than 172,000 people integrated model to build capacity at the local level. were displaced. Yet, due to unresolved land issues and outdated land use plans, permanent housing The BSPS-KOTAKU collaboration will create a construction was delayed by over a year, leaving platform accessible for multi-sector agencies, thousands in temporary shelters well into late 2019.60 B.2. Pillar 1. Housing & Infrastructure stakeholders, and international development Institutionalizing procedures, such as pre-approved Investments partners to strengthen coordination, improve land arrangements, interagency coordination housing standards, and enhance settlement protocols, and expedited financing mechanisms, can infrastructure. To support this, integrating the enable faster and more adaptive recovery. These databases and improving housing and settlement guidelines should clearly define responsibilities for planning documents such as Rencana Pembangunan land readiness, reconstruction approvals, and the dan Pengembangan Perumahan dan Kawasan deployment of disaster-resilient technologies. This Institutional Reforms B.3. Pillar 2. Policy & Permukiman (RP3KP) and Slum Improvement Action is a crucial step to protect all Indonesians, especially Plans (SIAP) at the city level and Community Settlement the most vulnerable, who bear a disproportionate Plans at the community level would be required to burden when disasters occur. A unified, national ensure data consistency across levels and improve housing dataset can support disaster risk planning evidence-based planning. Furthermore, optimizing and management by tracking renovations, home the Management Information Systems (MIS) and improvements, and poor-quality housing, which Grievance Redress Mechanisms (GRM) would improve are often informal. This effort would need to be B.4. Conclusion program effectiveness and impact. accompanied by regularization initiatives. 58 This requires reviewing and aligning the assessment criteria under Ministerial Regulations No. 14/2018 and No. 2/2016 with national laws on housing and local government (UU No. 1/2011 and UU No. 23/2014), to support integrated housing and slum upgrading programs. Spatial planning instruments—such as RTRW and RDTR—should also be embedded as key references in planning and targeting interventions. Ministerial Regulation (Permen) PUPR No. 14/2018 on Slum Area Prevention and Improvement; Permen PUPR No. 2/2016 on Slum Housing Quality Improvement; Law No. 1/2011 on Housing and Settlement; Law No. 23/2014 on Local Government. 59 More than 30 local governments have replicated BSPS and KOTAKU model using their local budgets. 60 World Bank. Environmental and Social Review Summary: Central Sulawesi Rehabilitation and Reconstruction Project. Washington, DC: The World Bank, May 18, 2019. 29 Indonesia Economic Prospects June 2025 2.2 Transformation of Urban Areas: New Proposed strategy Contents Housing and Growth Table of Transit- and housing-oriented development In Indonesia, achieving an 8 percent economic can make urban areas robust economic centers growth rate will depend on, among other things, where residents can conveniently access work, Summary Executive the housing sector’s performance in its urban school, recreation, and commerce (Figure B.4). centers. Large cities serve as the main engines of Delivering affordable, resilient, urban housing relies economic growth (Table B.1). However, land is limited, on an integrated, scalable approach built on two and increasingly high housing costs continue to deter core components: 1) linking land and public asset management with institutional mechanisms and Developments skilled workers from settling in urban areas. Nearly A.1. Recent Economic 80 percent of Indonesia’s new housing backlog is financial tools in a comprehensive framework, and concentrated in urban areas, with the most significant 2) enabling and tracking compliance with resilient gap in metropolitan areas like Jabodetabek and standards through data-driven and innovative emerging metro areas like Bandung, Makassar, and construction technologies. A.2. The Policy Surabaya.61 Commercial housing is double the cost Stance of subsidized housing in the Medan metropolitan Public land assets—typically owned by the local area and four to five times higher than the subsidized government65—can be identified, recorded, and housing price in the metropolitan areas of Bandung, managed more systematically, helping to locate Surabaya, and Jabodetabek.62 available land for residential development. Indonesia A.3. Outlook and Risks can improve land and housing delivery by measuring Local governments have embraced national the number of buildable housing units using detailed government initiatives and can partner in the next spatial plans, estimating the land required to meet the generation of infrastructure projects. For example, housing backlog, and identifying suitable locations.66 Such an assessment at the city and metropolitan A.4. Policy DKI Jakarta has set an example by providing public Priorities housing (and other public facilities) using land value level, combined with an adequate inventory of public capture schemes (LVC) in various locations in Jakarta, assets—and a strategy for managing them—could such as Pulo Gebang – East Jakarta, Daan Mogot – reveal untapped business opportunities and guide Indonesia 2045 West Jakarta, and Muara Baru – North Jakarta.63 local government decisions. Improved public asset to a Golden B.1. A Path management, including land banking, can enable Simultaneously, crucial infrastructure investments the acquisition and consolidation of land in strategic can attract private financing for housing and locations for housing-oriented development and revitalize cities. For instance, the government has transit-linked infrastructure. The potential for leveraging invested US$5.5 billion in transport infrastructure.64 underutilized public assets is high. For instance, there B.2. Pillar 1. Housing & Infrastructure To fully realize its benefits, Indonesia could focus on are 144 hectares and 2,585 hectares of available public Investments large-scale housing development around transport land in Jakarta and Yogyakarta, respectively.67 hubs by engaging local governments and leveraging private sector investment. These initiatives have a high expected return on Institutional Reforms investment: Private capital of US$3+ mobilized for B.3. Pillar 2. Policy & every US$1 of public contribution in land or strategic infrastructure investment. B.4. Conclusion 61 According to World Bank original calculations with data derived from HREIS (2023). 62 According to World Bank original calculations (2024), using the maximum subsidized housing prices as stipulated in the Minister of Public Works and Housing Decree Number 689/KPTS/M/2023. 63 DKI Jakarta Provincial Public Housing and Settlement Areas Agency. 64 Seven mass public transit in five metropolitan areas within period of 2015 – 2024, which include Light Rail Transit (LRT) in Palembang, Mass Rapid Transit (MRT) Phase 1 in Jakarta, LRT Phase 1 in Jakarta, LRT in Jabodebek, Railway system in Makassar, Bus Rapid Transit (BRT) in Bandung metropolitan area, and BRT in Medan metropolitan area, according to data by Bappenas, 2025. 65 Central Government asset, managed by Ministry of Finance, LMAN (Lembaga Manajemen Aset Negara), technical line ministries, and Land Bank (Bank Tanah) may also be optimized. 66 Based on a World Bank study, “Assessing Land for Housing in Indonesia,“ 2025. 67 Based on data from Ministry of Public Works, “Profile and Assessment of Housing and Settlement Conditions in Indonesia,“ n.d. 30 Indonesia People-First Economic Housing: Prospects A Roadmap June from Homes 2025 to Jobs to Prosperity in Indonesia Figure B.4: Illustration for Leveraging Blended Financing for Large-Scale Integrated Infrastructure Projects. Contents Table of Summary Executive Developments A.1. Recent Economic A.2. The Policy Stance Source: World Bank original illustration (2025). A.3. Outlook and Risks Assessing land suitability for housing at the city Figure B.5: Land Required to Close the Quantitative and metropolitan levels means aligning land use Housing Gap. with appropriate affordable housing types and A.4. Policy Hectares Priorities densities based on income levels, risk exposure, Single Family Landed House and resilience needs, while evaluating their social, (Type 45/96) economic, and environmental impacts. To address Single Family Landed House the new housing gap, Indonesia needs 104,000 hectares (Type 36/60) Indonesia 2045 to a Golden B.1. A Path to build 5.4 million single-family homes nationwide (Type-45 at 52 units per hectare).68 However, if very Mid-Rise Vertical Housing high-density vertical housing is prioritized (1,000 units High-Rise Vertical Housing (High Indonesia per hectare), the land requirement would decrease to Density) Urban 5,400 hectares (Figure B.5). Translated to the city scale, 10 Metropolitan Areas B.2. Pillar 1. Housing High-Rise Vertical Housing (Very this means that for Semarang to close its quantitative & Infrastructure High Density) Investments housing gap, 55,349 Type-45 units require 1,063 hectares, but only 55 hectares for very high-density vertical housing.69 The housing sector faces a trade- off: low-density housing requires more land and incurs higher infrastructure and service delivery costs. In Note: The housing density offered by each type: Single Family Landed House (Type 45/96): 52 per Ha; Single Family Landed contrast, high-density development can enhance land House (Type 36/60): 83 per Ha; Mid-Rise Vertical Housing: 190 Institutional Reforms B.3. Pillar 2. Policy & use efficiency, reduce emissions, and lower the costs per Ha; High-Rise Vertical Housing (High Density): 580 per Ha; associated with infrastructure and service delivery. High-Rise Vertical Housing (Very High Density): 1,000 per Ha. Source: World Bank staff original calculations for this report (2025). A robust and integrated data system is a core enabler of scalable and resilient housing. The government can strengthen Indonesia’s housing housing data, including HREIS, RumahQu, and the data systems by integrating HREIS (Housing and Real Residential Property Price Index (RPPI), along with B.4. Conclusion Estate Information System) with RumahQu (Housing increased survey frequency, supports property rights, Queue) to align updated housing data and standards, streamlines processes, enhances emergency response, alongside monitoring and evaluation to track supply, and enables targeted interventions. Furthermore, a quality, and performance. Nationally synchronized national data and coordination platform could help 68 Type-45 refers to a typical landed housing unit with 45 square meters of floor area, commonly used as a benchmark for middle- and lower-middle- income housing in Indonesia. 69 World Bank original staff calculation, “Assessing Land for Housing in Indonesia,“ 2025. 31 Indonesia Economic Prospects June 2025 monitor compliance with licensing and enable public– based investments. While urban operators could help overcome common coordination challenges, the Contents private partnerships in on-demand housing projects. Table of Capacity-building programs can be introduced to local governments could explore alternative financing ministries70 and local governments. Joint platform options such as loans, municipal bonds, and sukuk and incentive frameworks can keep Indonesia ahead (syariah bonds) to support BUMN, BUMD, and the Summary Executive of the curve and advance resilient, inclusive housing central government in co-financing local government- solutions nationwide. led initiatives. Jakarta Mass Rapid Transit demonstrated the role of such BUMD, including leveraging alternative With improved data collection and management, financing options such as LVC.72 innovation in construction and financing would Developments A.1. Recent Economic accelerate scalable, resilient housing delivery. National regulations could clarify the roles of state- Strategic government incentives and blended public- and regional-owned enterprises, while ensuring private financing can attract private-sector investment effective coordination with local governments and and drive the adoption of innovation and modular private developers. Regulatory and legal changes are A.2. The Policy housing technologies—such as RUSPIN (Rumah needed to enable public asset management aligned Stance Unggul Sistem Panel Instan, or Advanced Instant Panel with land use plans and housing policies, facilitating System House) and RISHA (Rumah Instan Sederhana more strategic use of land and government- Sehat, or Simply and Healthy Instant House)—which owned assets to support urban housing delivery. have already been used in more than 60,000 units, The government has identified 79,925 hectares of A.3. Outlook and Risks primarily for post-disaster housing. Scaling these abandoned land. Assessing the suitability of these areas technologies nationwide with localized support can could help determine the portion that could be used to help “Build Better Before” and address regional needs. support the 3 Million Housing Program.73 Harnessing Promoting innovative construction also strengthens the full potential of this public assets, combined with the workforce and creates quality jobs. To support the recommended regulatory changes, would enable A.4. Policy Priorities this transformation, clear regulations and policies the government to better leverage public–private tailored to various housing types, skills training, and partnerships and mobilize private investment for inclusionary zoning are essential to ensure affordability urban housing. To effectively tackle critical housing Indonesia 2045 and social inclusion. Incentives such as expedited challenges, especially for low-income populations, to a Golden B.1. A Path permits, increased floor-area ratios, co-investment, the government should offer sufficient incentives to green certification, and carbon credits can further improve housing quality and upgrade settlements promote resilient construction, safeguard housing to enhance residents’ socioeconomic conditions. To investments, and reduce vulnerability. address the backlog, the central government could collaborate with local governments by providing B.2. Pillar 1. Housing & Infrastructure Indonesia’s national SOEs (BUMN) and city-level incentives for quality affordable housing units through Investments Regional Owned Enterprises (BUMD) could play self-help and public–private partnership modalities, a pivotal role as urban operators if tasked with encompassing improvement, rental, and ownership.74 planning, managing, and delivering integrated urban development projects.71 These operators would With these elements in operation, prioritizing serve as institutional anchors for implementing large- transit- and housing-oriented development in scale housing and multisectoral urban investments. metropolitan areas offers a pathway to consolidate Institutional Reforms B.3. Pillar 2. Policy & Their mandate would need to be strengthened, fragmented growth, attract private investment, providing them with legal authority to represent local and enhance urban productivity and resiliency. The governments, coordinate across sectors, and align government can promote strategic spatial planning land use with infrastructure and service provision. in key economic centers and integrated development They would also require the capacity to prepare and areas, prioritizing high-density vertical housing and package integrated projects, manage public assets mixed-use developments near transit nodes and major and land, and operate public-private partnerships economic centers. B.4. Conclusion by entering into contracts to deliver complex, area- 70 For instance, the Ministry of Public Works, the Ministry of Housing and Settlements, the Coordinating Ministry for Infrastructure and Regional Development, Central Statistics Agency, and so forth. 71 Based on a World Bank study, “Supporting Implementation Modalities for Climate-Smart Urban Transformation in Jakarta,” 2024. 72 DKI Jakarta has used the three LVC approaches altogether for different projects: tax-based, fee-based, and development based. All of those instruments are included in the Perpres No.79/2024 and, thus, have the potential to be replicated. 73 Based on data from Ministry of Agrarian Affairs and Spatial Planning, ”Spatial and Land Planning Policies to Support the 3 Million Homes Program,“ 2024. 32 74 According to the Indonesia Housing Grand Design 2020-2045 published by the Ministry of Public Works and Housing. Indonesia People-First Economic Housing: Prospects A Roadmap June from Homes 2025 to Jobs to Prosperity in Indonesia 3. Pillar 2. Policy and Institutional Reforms Contents Table of 3.1 Public Housing Finance: Doing More with to collect savings from government and private- Less sector employees, but it remains non-operational. Furthermore, it has been directed to serve the MBR Summary Executive The previous recommendations focused on segment, leaving young households in expensive maximizing the impact of public investments. But urban areas with limited financing options. closing the financing gap for housing requires going beyond public spending to increase families’ savings There are several other significant barriers to housing Developments finance. In addition to limited mortgage products, A.1. Recent and the availability of private capital—and that means Economic considering several changes to how public housing using property as mortgage collateral is challenging in finance is structured and what it offers. Today, the Indonesia given the absence or weakness of land titles, Indonesian housing finance market comprises a small, difficulty in enforcing one’s ownership rights, costs or high-income segment that banks serve through their frictions in registering titles or obtaining construction A.2. The Policy own funding sources at variable rates, and a larger permits, insufficient access to urban services, and, in Stance segment of lower-income earners heavily dependent particular, low-quality housing construction. There on long-term government fixed-rate funding at are few legally feasible alternatives, such as financial deeply concessionary rates. Informal workers are leasing or non-collateralized housing lending. largely excluded: they constitute more than half of the A.3. Outlook and Risks Indonesian labor force, but access only 2.5 percent of Short-term actions would lead to a significant the country’s mortgages. expected return on investment. Reforms and institutional coordination can multiply the number of Key gaps in institutional and program designs are units in the status quo scenario. A.4. Policy Priorities causing people to be left behind: • For households with the lowest incomes, the Proposed strategy BSPS subsidy scheme has supported disaster resilience improvements with assistance from Achieving the government’s 3 million homes goal Indonesia 2045 requires developing both private- and public- to a Golden B.1. A Path regional government facilitators. These facilitators provide guidance to ensure compliance with sector housing finance in parallel. To this end, public resilient standards. However, the program does housing finance would need to undergo several shifts. not include housing microfinance, which limits Subsidies need to be rationalized to increase efficiency financial leverage. Based on consumer research and reduce costs; public-sector incentives need to B.2. Pillar 1. Housing under the World Bank’s National Affordable strike a balance between new and better housing & Infrastructure Investments Housing Program in 2020, this segment reveals a solutions, focusing on mobilizing private investment preference for repairing their existing homes over both from family savings and capital markets; and building new ones. public housing programs need to be progressively • For low-income communities, or Masyarakat repositioned to change their scope within the Berpenghasilan Rendah (MBR),75 the FLPP-funded ecosystem of lenders, developers, and borrowers, as mortgage loans76 exclusively support new units well as involve microlenders. Institutional Reforms B.3. Pillar 2. Policy & purchased from developers.77 The high demand for developers using this government funding Pragmatic Subsidies: Reforms to Offerings prompts low-cost ceilings for fiscal reasons, leading to substandard construction quality. Consequently, Public housing finance instruments are geared most households opt to self-build (at least 70 towards making initial mortgage payments percent), making families the largest financiers of affordable. There are two ways to do this effectively: housing in Indonesia. by temporarily reducing interest rates or by temporarily B.4. Conclusion • For non-MBR housing excluded from banking reducing principal payments. Instead, under FLPP, services,78 the 2016 TAPERA Fund was designed Indonesia has chosen to permanently reduce loan 75 Housing up to Rp 180 million is considered MBR housing. 76 FLPP (Fasilitas Likuiditas Pembiayaan Perumahan, or Housing Financing Liquidity Facility) is now channeled through BP TAPERA (Badan Pengelola Tabungan Perumahan Rakyat, or Public Housing Savings Management Agency). 77 Under the World Bank–funded NAHP, which tested down-payment subsidies as an alternative to the government deposit, only 1 out of 9 participat- ing lenders was willing to finance self-construction. Lending is scarce because the underwriting and servicing costs for these financing techniques are high for banks relative to the size of the principal. 78 This applies to housing between Rp 180 million and 500 million. 33 Indonesia Economic Prospects June 2025 interest rates to 5 percent and keep that reduced level Mobilizing Private Investment: Reforms to Incentives fixed for 20 years. This yields a modest 0.5 percent Contents Table of return for the government, compared to the 7 percent Private capital for housing can either come from it must pay to bond investors. Indonesia’s nominal family savings or private investments channeled GDP growth, a proxy for nominal household income through loans. By modifying its programs, public Summary Executive growth, is 5 percent. housing finance can incentivize both sources of financing. A primary strategy in low-income housing To reduce costs, the government could shorten the finance is incentivizing households to save for a home. fixed-rate commitment to 10 years and then switch While commercial banks offer savings accounts, their to a floating, market-determined interest rate reach is limited, and they lack a systematic housing Developments A.1. Recent Economic that could be stepped up over the next 10 years. benefit for savers. To fill this gap, a reinvigorated Alternatively, more acceptable returns of 4 to 5 percent TAPERA could introduce an incentivized voluntary can be achieved if the first 10-year phase began with a contract savings for housing (CSH) product, targeting higher fixed rate of 8 percent and gradually phased in informal workers, low-income households, and other A.2. The Policy principal repayment over the next decade.79 This would households currently ineligible for government Stance lead to the same initial payment under the current programs. CSH helps consumers signal creditworthiness 5-percent loan, in which an additional 3 percent is to lenders and allows families to accumulate a down charged to consumers for initial amortization. payment for future loans. Reforming the loan design could also enable the two current TAPERA Funds to A.3. Outlook and Risks Initial monthly payments can remain affordable to achieve long-term yields of 5–6 percent, acceptable borrowers as shown in Figure B.6.80 Most importantly, to their contributors. This reform assumes a portfolio these reforms could help the government reach more mix of 35 percent securities/bank debt (5–7 percent families with the same fiscal expenditure and stimulate return) and 65 percent investment in loans under the flow of private investment. the proposed changed product designs (4–5 percent A.4. Policy Priorities return), which is typical for mandatory provident funds Figure B.6: Payment-to-Income Profile for Three (e.g., Mexico, Brazil, Philippines). Interest-Rate Scenarios. Indonesia 2045 To address Indonesia’s large, underserved segment to a Golden B.1. A Path 35% living in housing deficit, public housing finance 30% tools could focus on incentivizing commercial lenders to use their ample liquidity. By implementing Mortgage payment to income ratio 25% rational pricing of public housing finance instruments, the government can better align the supports provided B.2. Pillar 1. Housing 20% & Infrastructure with the payment capacity of beneficiaries and, thus, Investments 15% gain room to leverage its limited fiscal resources and attract additional funding from banks (primarily 10% 5% loan, status quo commercial banks, which are highly liquid), institutions, 5% 8% loan, principal graduation and, potentially, international investors. Two central 5%,7%,9%,11% interest graduation channels exist for doing so: 1) co-financing and 2) 0% supporting less-liquid lenders through buying debt. Institutional Reforms B.3. Pillar 2. Policy & 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Years of mortgage financing Source: World Bank staff original calculations for this report (2025). B.4. Conclusion 79 Higher interest rates are standard in public housing finance in neighboring countries. For example, the Philippines’ successful government-managed Pag IBIG mutual fund offers mortgages for 8.5% for 20 years. The fund offers maturities up to 30 years to reduce the burden of principal repayment. 80 This holds also true regarding the other key risk metric, the loan-to-value ratio. Assume that the initial loan-to-value ratio was 80%. After 10 years, even in the product design where principal is being phased in and assuming only a conservative 3 percent per year nominal house price growth, below 5% income growth, the loan-to-value ratio will have fallen already to 50%. 34 Indonesia People-First Economic Housing: Prospects A Roadmap June from Homes 2025 to Jobs to Prosperity in Indonesia First, many banks do not fully utilize their resources Progressively Repositioning Institutions: Reforms to for the 25 percent co-financing required by the Scope Contents Table of FLPP. Instead, nearly half of the participating banks rely on additional support from the Secondary Mortgage To improve current housing finance challenges, Facility to meet their obligations.81 To address this, Indonesia can re-examine programs that offer Summary Executive public finance housing tools could incentivize banks to financing to underserved populations. Figure B.7 increase their contributions. One possibility is to raise highlights the current and potential future positioning bank co-financing shares for higher income brackets of institutions and programs in the low- and lower- within the FLPP target group. For families who are middle-income segments. now underserved, public financing could be lowered Developments A.1. Recent Economic to approximately a 20 percent loan-to-value ratio, FLPP could explore incorporating micro mortgage which would effectively mean those loans are offered and non-mortgage lending, aiming to strengthen as second mortgages, while the banks would entirely its reach into the informal-labor segment expanding finance the rest. from the top-left quadrant into the top-right and A.2. The Policy bottom-left). This approach would mean enabling the Stance Second, liquid banks could be incentivized to FLPP to finance self-construction, extension, and home purchase bonds issued by the government-owned improvement lending, which would be distributed Secondary Mortgage Facility (SMF). SMF would then through banks rather than developers, in line with other refinance less-liquid banks engaged in low-income public loan programs (BP TAPERA and BPJS). When it A.3. Outlook and Risks housing finance. The larger ones, particularly BTN (Bank comes to the informal-labor segment, FLPP lenders Tabungan Negara, a state-owned enterprise bank can create an enabling environment (e.g., credit scores, known for its specialization as a mortgage provider), linking to databases, leveraging AI tools, and fintech) could issue bonds themselves.82 By providing these for lending to informal households, including those additional funding sources, the government could in the lowest deciles of income, by raising the quota A.4. Policy Priorities further decrease FLPP‘s financing share and eventually beyond the current level of 10 percent. BTN could also replace the entirely government-funded program with take a more proactive approach in servicing this market, blended finance. potentially doubling or even tripling the existing Indonesia 2045 to a Golden B.1. A Path Figure B.7: Potential Repositioning of Public Housing Finance Institutions. FLPP Loan Collateralization Mortgage Lending Non-Mortgage Lending B.2. Pillar 1. Housing & Infrastructure Investments Lenders Commercial Banks Commercial Banks (Potential) Formal Government Program Tapera Fund, FLPP Tapera Fund, FLPP (Potential) Labor Formality Tapera Fund Microfinance (Potential, voluntary), Lenders Institutional Reforms Commercial Banks B.3. Pillar 2. Policy & Informal (Expanded quota) Government Program FLPP/BP2BT (BTN) BSPS, BSPS+, FLPP Sponsored BSPS+ microfinance revolving fund BSPS B.4. Conclusion Source: World Bank staff original analysis for this report (2025). 81 Going forward, a maximum government-supported financing of 75% could be enforced. Banks that lend to informal or low-income segments could be granted higher government financing shares. 82 A suitable vehicle for such interbank investment could be “affordable housing bonds,” whose proceeds are earmarked for low-income housing finance and come with regulatory preferences. A temporary government guarantee envelope for SMF and issuing banks for such bonds could additionally attract investments. 35 Indonesia Economic Prospects June 2025 quota. Evidence from countries such as India supports financing could be delivered through banks and, in this strategy; lenders like Aye Finance and Capital particular, through microlenders. Similarly, the KOTAKU Contents Table of Float have successfully used alternative data (e.g., infrastructure subsidy scheme can be combined with invoices, mobile transactions) and AI-based scoring to housing microfinance. An important complement underwrite loans to informal micro, small, and medium could be an extension of the current KUR (Kredit Usaha Summary Executive enterprises, achieving repayment rates exceeding 95 Rakyat, or The People’s Business Credit) guarantee percent. These examples, confirmed by International design to housing loans. Finance Corporation research, demonstrate that data- linked and fintech-enabled credit tools can significantly With BP TAPERA and the SMF, Indonesia already broaden financial access while mitigating risk.83 has the two central public finance institutions Developments A.1. Recent Economic needed to mobilize long-term capital. To make The successful BSPS subsidy scheme could expand them fully operational will require product redesign by leveraging housing microfinance, increasing and institutional reform. Implementing the remaining access to financing for the very low-income segment. regulations necessary to make TAPERA fully operational A.2. The Policy Target loans in this very low-income segment would and create a more conducive bank, legal-regulatory, Stance be between two and five years, US$1,000–US$3,000 for and government support framework for SMF will be self-construction, extensions, and improvements. This essential. A.3. Outlook and Risks 4. Conclusion While the government’s housing goals are highly actionable, with a clear direction established. ambitious, they are achievable. Public funding can Nonetheless, to realize its vision, the Government of A.4. Policy Priorities be optimized to accelerate the delivery of resilient and Indonesia will need to demonstrate a willingness to act affordable housing for all Indonesians, while private decisively and swiftly. Indonesia is positioned to enter capital can be leveraged to enhance housing programs a new Golden Era, one built and designed “For the (Table B.2). The reforms required in the sector are People.” Indonesia 2045 to a Golden B.1. A Path Table B.2: Static Simulation of 3 Million Housing Program: Before (2023) and After Comparison. Indicator Before After Private Capital Mobilization (US$ Million) 560 2,777 B.2. Pillar 1. Housing Jobs Created 868,151 2,336,616 & Infrastructure Investments Better Housing / Total Housing Volume Share 39% 71% Better Housing / Total Housing Budget Share 9% 28% New Housing / Total Housing Volume Share 61% 29% New Housing / Total Housing Budget Share 91% 72% Government Budget (Rp Trillion) 35.54 62.79 Institutional Reforms B.3. Pillar 2. Policy & Government Budget (US$ Billion) 2.15 3.81 Total Number of Units Supported/Achieved 386,222 1,200,000 Note: *Government programs support 36.2% (2015-2024) of the housing solutions delivered in the country. Source: Ministry of Housing and Settlements (2025); Performance Reports of Directorate of Implementation of Housing Finance and DG Infrastructure Financing, Ministry of Public Works and Housing (2023); World Bank original calculations for this report (2025). B.4. Conclusion International Finance Corporation. 2020. Artificial Intelligence in Emerging Markets: Opportunities, Trends, and Emerging Business Models. 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