Emerging Markets – A Letter from Indonesia
17 June 2025
Last month, Northcape Capital’s Emerging Markets (EM) team travelled to Jakarta to meet with over 20 Indonesian companies across key sectors traversing consumer, financials, telecoms, industrials, and resources. The team also met with leading economic and political experts to gain a deeper understanding of Indonesia’s evolving macroeconomic landscape. The Warakirri Global Emerging Markets Fund had a 6% geographic weighting to Indonesia as at 31 May 2025.
This information has been prepared by Northcape Capital, the underlying investment manager for the Warakirri Global Emerging Markets Fund.
A Letter from Indonesia
Indonesia is the world’s fourth most populous country, home to over 280 million people, with a median age of around 30 years. It is a young, rapidly urbanising nation spread across a vast archipelago of over 17,000 islands. However, Java remains the central island, and accounts for more than half the population. As Southeast Asia’s largest economy, Indonesia boasts a nominal GDP of approximately USD 1.5 trillion (2024), ranking it among the G20.
The economy is driven by a mix of natural resources, manufacturing, digital services, and a growing consumer base. It has a sizeable middle class, strong domestic demand, and a strategic location along key global trade routes. While GDP growth slowed during the pandemic, it has since rebounded, with annual growth hovering around 5%, supported by infrastructure investment, digital transformation, and reforms aimed at attracting foreign investment.
Exhibit 1: President of Indonesia, Prabowo Subianto
Source: ASPI
2024 marked a year of transformation for Indonesia. As of April 8, 2025, the Jakarta Composite Index (JCI) was down by -15.3% year-to-date, sharply underperforming the broader MSCI Emerging Markets Index. This weakness was driven by a confluence of local headwinds: fiscal delays, policy ambiguity under the incoming administration, and broader investor concerns about macroeconomic stability.
Despite Prabowo’s decisive electoral victory (Exhibit 1), market sentiment remained cautious. Investors were unnerved by his expansive social spending promises, which raised questions about fiscal discipline given Indonesia’s constrained fiscal headroom. The stalling of key infrastructure projects, weaker-than-expected Q4 2024 GDP data, and growing concerns about central bank independence—including Bank Indonesia’s indirect bond purchases—further weighed on sentiment.
Against this backdrop, foreign investors pared back their exposure amid heightened global risk aversion, compounded by continued US-China trade tensions. The result was persistent net outflows and underperformance in sectors sensitive to government spending and policy direction.
However, the tide turned in early April. Donald Trump’s so-called “Liberation Day” announcement on April 2 sent shockwaves through global markets. While the JCI was closed until April 7 due to local holidays, April 8 marked a striking reversal in market sentiment. Since then, Indonesia’s equity index has staged a dramatic recovery—rising +1.45% YTD as of today—a 1,675 basis point rebound from its April low. This recovery suggests that investors are beginning to reprice Indonesia’s risk, albeit cautiously, as they await greater clarity on the new administration’s economic agenda.
Indonesia remains a structurally important and demographically vibrant market within the ASEAN region. However, we observed a notable shift in tone compared to past visits. Under President Prabowo’s new administration, there is a clear pivot from large-scale infrastructure projects toward social spending, with implications for fiscal allocation and sectoral growth.
2024 Presidential Election
Indonesia’s 2024 presidential election marked a significant transition, with former Defence Minister Prabowo Subianto winning a decisive victory to succeed President Joko Widodo (Jokowi). Riding on Jokowi’s broad popularity and with the backing of Jokowi’s son as his running mate, Prabowo campaigned on continuity but has since signalled a shift in priorities from infrastructure-led development to increased social spending. While his military background and nationalist rhetoric raised questions early in the campaign, his pragmatic economic stance and alignment with business interests helped reassure markets. The election outcome consolidates power but also introduces uncertainty around reform execution, particularly regarding fiscal discipline, central bank independence, and SOE restructuring.
Danantara and the Evolving Economic Landscape
One of the most consequential developments in Indonesia’s policy architecture is the formation of Danantara—a state-owned holding entity designed to consolidate and professionalise the management of Indonesia’s vast network of State-Owned Enterprises (SOEs). Inspired by models like Malaysia’s Khazanah or Singapore’s Temasek, Danantara aims to act both as a strategic investor and an operational reformer. Its dual mandate includes improving governance, reducing inefficiencies, and enhancing returns across key sectors such as infrastructure, energy, transportation, and digital services.
This structural reform holds significance for long-term investors. Indonesia’s SOEs have historically suffered from poor capital discipline, political interference, and low return on equity. If Danantara succeeds in its mission, particularly if granted sufficient autonomy, it could reshape how capital is deployed and improve the investing allure of sectors long avoided by foreign capital.
Economic Outlook is Mixed
In parallel, Indonesia’s macroeconomic backdrop remains mixed. The transition from Jokowi to Prabowo has shifted fiscal focus away from megaprojects like the new capital city (Nusantara on Kalimantan, Borneo island) towards social assistance and food security. While this may broaden domestic demand in the longer term, it has contributed to a near-term slowdown, with infrastructure investment stalling and private sector sentiment weakening. Fiscal headroom is constrained, but the government remains committed to keeping the budget deficit within the 3% cap, a sign of fiscal prudence that markets are watching closely.
The economy experienced a noticeable slowdown throughout 2024, weighed down by fiscal delays, softer investment activity and policy uncertainty surrounding the presidential transition. While early indicators from Q1 2025 suggest a modest recovery is underway, momentum remains fragile. The government has set a GDP growth target of 5% for 2025, but the subdued pace of public spending (particularly on infrastructure) makes this increasingly ambitious. Current estimates suggest growth is more likely to come in between 4.8% and 4.9%, barring a material pickup in domestic demand or investment execution in the second half of the year.
In this context, Special Economic Zones (SEZs) have emerged as a key growth lever. These zones offer tax and regulatory incentives and are increasingly positioned as vehicles for attracting foreign direct investment (FDI) into sectors such as battery materials, data centres, healthcare, and education. Danantara is also expected to play a role in structuring and supporting projects within SEZs, offering clearer entry points for institutional investors.
President Prabowo Subianto has set an ambitious target for Indonesia to achieve 8% annual GDP growth by the end of his term in 2029, aiming to elevate the nation to high-income status by 2045 and is central to the “Golden Indonesia 2045” vision. However, many economists view this target as overly optimistic, given that Indonesia’s growth has hovered around 5% in recent years.
Achieving 8% growth would necessitate significant increases in government spending, substantial private investment, and structural reforms to enhance productivity and competitiveness. Challenges include a relatively low tax-to-GDP ratio, fiscal constraints due to a 3% budget deficit cap, and the need for effective implementation of policies to stimulate sectors like manufacturing, infrastructure, and the digital economy. While the administration remains confident, citing historical precedents of high growth, the path to 8% will require careful navigation of both domestic and global economic headwinds.
Overall, Indonesia remains an economy with compelling long-term fundamentals – favourable demographics, resource wealth, and growing digital infrastructure. Yet realising its higher growth potential hinges on execution: delivering structural reform, preserving policy credibility, and unlocking private sector investment. Danantara could be pivotal in that journey, but its success will depend on transparency, governance, and genuine operational independence.
Focus on high-quality businesses
While opportunities are clear, so too are the challenges: weakening central bank independence, currency volatility, complex regulation, and execution risk under the new government. Our focus remains on identifying high-quality businesses with strong governance, cash flow visibility, and exposure to long-term structural trends. One of these companies is Bank Central Asia (BCA), see exhibit 2.
Exhibit 2: Bank Centra Asia
Source: Northcape Capital
BCA stands out as Indonesia’s most valuable bank and one of the high-quality stocks to own across the whole EM equity asset class. This is thanks to its best-in-class fundamentals, conservative risk management, and independence from state control. As the country’s leading private-sector bank, BCA benefits from a superior deposit franchise, maintaining the largest share of low-cost CASA deposits (~15–16%), supported by strong digital capabilities and customer loyalty.
Unlike state-owned peers such as Mandiri and Bank Rakyat, BCA is not part of the Danantara framework, Indonesia’s new hybrid investment and governance entity for SOEs, and thus avoids the political pressure and strategic mandates that may constrain business. Unlike the SOE banks which dominate the industry, BCA controls its own destiny, avoiding directed lending or national service, with a sole focus on maximising shareholder value. The results have been spectacular, with the bank’s shares delivering a total shareholder return of 3,807% (20.1% p.a.) over the past twenty years according to Bloomberg data. Its structural competitive advantage in cost of funds (low-cost deposits) is unlikely to be eroded any time soon, providing a foundation for many more years of exceptional performance.
Despite current macroeconomic headwinds including tight liquidity, weak post-Ramadan consumption, and soft growth in Java, BCA is prudently managing margins (targeting a steady NIM of 5.7–5.8%), preserving asset quality, and focusing on SME lending as a key growth area. BCA remains firmly anchored in its home market and well-positioned to grow in line with Indonesia’s long-term structural trends. Its consistent profitability, disciplined cost structure (targeting ~34% cost-to-income), and avoidance of price discounting in funding make it a resilient investment in a volatile macro environment.
Meanwhile, businesses exposed to domestic consumption like Astra International and Alfamart remain good proxies for Indonesia’s domestic demand story, but both are navigating a weak macro environment. Consumer purchasing power has softened, particularly in Java, with middle-income households under pressure and layoffs impacting manufacturing.
Both companies are structurally well positioned, but until fiscal spending and household sentiment recover, earnings may remain under pressure. A stronger second half of 2025 will be key to unlocking upside.
For more information, please contact us on 1300 927 254 or visit Warakirri Global Emerging Markets Fund.
The information in this document is published by Warakirri Asset Management Limited ABN 33 057 529 370 (Warakirri) AFSL 246782 and issued by Northcape Capital ABN 53 106 390 247 AFSL 281767 (Northcape) representing the Northcape’s view on a number of economic and market topics as at the date of this report. Any economic and market forecasts presented herein is for informational purposes as at the date of this report. There can be no assurance the forecast can be achieved. Furthermore, the information in this publication should only be used as general information and should not be taken as personal financial, economic, legal, accounting, or tax advice or recommendation as it does not take into account an individual’s objectives, personal financial situation or needs. You should form your own opinion on the information, and whether the information is suitable for your (or your clients) individual needs and aims as an investor. While the information in this publication has been prepared with all reasonable care, Warakirri and Northcape do not accept any responsibility or liability for any errors, omissions or misstatements however caused.
