Indonesia's New Capital Nusantara: Legal Setbacks and Investor Sentiment

Indonesia's ambitious relocation of its capital to Nusantara, a project central to former President Joko Widodo's legacy, has become a focal point for debates over sustainable development and foreign direct investment (FDI). However, the project is now grappling with legal setbacks, enforcement challenges, and shifting investor sentiment. As land-use restrictions face persistent violations, the implications for FDI and capital allocation strategies are becoming increasingly complex.

Legal Setbacks and Enforcement Challenges

The Nusantara Authority for Public Security and Safety has acknowledged that illegal mining and farming activities have damaged over 13,000 hectares of forest land in the region. Despite the establishment of a task force to enforce land-use laws and rehabilitate degraded areas, the government's capacity to manage the project is under scrutiny. Political support for Nusantara has waned under President Prabowo Subianto, while funding shortfalls-both public and private-have exacerbated delays. These legal and administrative hurdles raise concerns about the long-term viability of the project as a magnet for FDI.

FDI Trends and Sectoral Shifts

According to a report by Trading Economics, Indonesia's FDI (excluding financial and oil & gas sectors) fell by 8.9% year-over-year to USD 12.78 billion in Q3 2025, marking the steepest decline since Q1 2020. Within this, the base metal sector attracted the largest share of FDI at USD 3.5 billion, followed by services (USD 1.2 billion) and mining (USD 1.1 billion). Singapore remains the largest source of investment, contributing USD 3.8 billion, followed by Hong Kong and China. However, the broader decline in FDI reflects investor caution amid global economic headwinds, including U.S. tariff policies and weakening domestic purchasing power.

Investor Sentiment and Geopolitical Leverage

Investor sentiment in Nusantara is not solely shaped by local challenges. Regional political instability, such as coalition fractures in Malaysia, has indirectly influenced capital allocation strategies. Meanwhile, geopolitical dynamics have created unexpected opportunities. For instance, the anticipated return of Donald Trump to the U.S. presidency has boosted the fortunes of Indonesian property mogul Hary Tanoesoedibjo's MNC Group. Shares of MNC Land, involved in Trump-branded luxury developments in Bali and West Java, surged as investors bet on cross-border real estate synergies. This illustrates how global political shifts can redirect capital flows, even in regions with regulatory uncertainties.

Land-Use Transition and Ecological Trade-offs

A study published in Land journal reveals that Nusantara's land-use patterns have undergone dramatic changes between 2003 and 2023. Built-up areas expanded from 86.63 km² to 171.354 km², driven by infrastructure development and urbanization. While wetlands increased from 290.52 km² to 396.500 km², the conversion of 8.37 km² of wetlands to built-up areas highlights ecological risks. Investors are increasingly aware that regulatory pressures for sustainability-both domestic and international-could reshape capital allocation. Projects that align with green infrastructure or eco-tourism, such as those funded by the Indonesian government, may gain traction, while those contributing to biodiversity loss could face backlash.

Capital Allocation Strategies in a Shifting Landscape

The socio-economic dynamics of Nusantara further complicate capital planning. Migration to the region has created new markets for housing and services, but it has also intensified competition for land and resources. Investors must navigate these challenges while addressing concerns about social equity. The Gini ratio, a measure of income inequality, remains a critical factor: while the new capital could generate jobs, its benefits may be unevenly distributed unless development is inclusive.

Conclusion

Indonesia's Nusantara project embodies the tension between rapid urbanization and sustainable governance. Legal setbacks in enforcing land-use restrictions, coupled with volatile FDI trends, underscore the need for a recalibration of capital allocation strategies. Investors who prioritize adaptability-balancing short-term gains with long-term ecological and social responsibilities-may find opportunities in sectors like green infrastructure or technology-driven urban solutions. Yet, without stronger regulatory clarity and political commitment, Nusantara's potential as a global investment hub remains uncertain.