Indonesia's Policy Shifts and Economic Resilience in Wake of Political Instability

Indonesia’s political landscape in 2025 has been marked by significant unrest, driven by austerity measures and controversial policy shifts. Protests such as #IndonesiaGelap and #TolakRUUTNI have highlighted public dissatisfaction with a 70% cut in public works spending and a 25% reduction in education funding, both redirected to support the Nutritious Meals Program (MBG) [1]. These fiscal reallocations, while addressing immediate social needs, have exacerbated concerns about long-term infrastructure development and institutional trust. The government’s decision to revise the Indonesian National Armed Forces Law (RUU TNI), expanding military roles in civilian governance, has further fueled fears of democratic backsliding [1].

Despite these challenges, Indonesia’s economy has shown resilience, with growth projected at 5.1% in 2025 [3]. This resilience is underpinned by strategic infrastructure projects and fiscal reforms aimed at attracting investment. The Nusantara capital project, for instance, has emerged as a beacon of opportunity. As of May 2025, it has secured over US$4 billion in private-sector investment, with 42 companies committing to development and six new agreements signed in the same month [2]. The government has allocated IDR 48.8 trillion (USD 2.99 billion) for the project’s second phase (2025–2029), following an initial investment of IDR 89 trillion (USD 5.44 billion) from 2022 to 2024 [3].

However, the infrastructure funding gap remains a critical issue. For the 2025–2029 period, total requirements are estimated at Rp1,905.3 trillion, with a projected shortfall of Rp753 trillion (39.5%) [4]. To bridge this gap, the government has introduced public-private partnerships (PPPs) and blended financing mechanisms. A PPP program worth IDR 60.93 trillion (USD 3.72 billion) is targeting six road projects, a multi-utility tunnel, and a solar power plant [3]. These initiatives aim to leverage private-sector expertise while mitigating fiscal strain.

Fiscal reforms have also sought to stabilize the economy. Tax incentives for foreign investors, such as 100% corporate income tax (CIT) exemptions for 5–20 years and 50% CIT reductions for pioneer industries, are designed to attract capital [1]. Special Economic Zones (KEKs) and Integrated Economic Development Zones (KAPETs) offer additional benefits, including import duty exemptions and accelerated depreciation deductions [1]. These measures are critical in a context where FDI fell by 12.23% in Q2 2025, driven by political instability and a depreciating rupiah [3].

The path forward for Indonesia hinges on balancing social welfare with fiscal prudence. While the government has demonstrated commitment to growth, inconsistent regulatory actions and policy reversals risk undermining investor confidence [3]. For instance, abrupt changes in land and property tax policies have sparked protests in cities like Pati and Bone [1]. Addressing these issues requires regulatory certainty and institutional reforms to restore trust.

In conclusion, Indonesia’s infrastructure and fiscal reforms present a mixed landscape of risks and opportunities. The Nusantara project and PPP initiatives signal long-term potential, but political instability and capital outflows remain pressing concerns. Investors must weigh the government’s resilience against the volatility of policy implementation. For those willing to navigate these complexities, Indonesia’s demographic dividend and resource endowments—particularly in nickel and renewable energy—offer compelling long-term prospects [3].

Source:
[1] Indonesia's Social Unrest and Policy Missteps: A Looming Risk to Economic Growth and Foreign Investment [https://www.ainvest.com/news/indonesia-social-unrest-policy-missteps-looming-risk-economic-growth-foreign-investment-2508/]
[2] Indonesia's New Capital Sees US$4B in Investments [https://www.china-briefing.com/china-outbound-news/indonesias-new-capital-sees-us4b-in-investments]
[3] Assessing Indonesia's Economic Resilience Amid Political Unrest [https://www.ainvest.com/news/assessing-indonesia-economic-resilience-political-unrest-strategic-opportunity-long-term-investors-2509/]
[4] Solution to close the infrastructure funding gap [https://www.pwc.com/id/en/media-centre/infrastructure-news/june-2025/solution-to-close-the-infrastructure-funding-gap.html]