Indonesia's Power Play US Trade Deal Fuels Growth & Ambition
The recently announced US-Indonesia trade agreement is set to significantly reshape bilateral trade dynamics. Under the agreement, Indonesian exports to the US will face a reduced tariff of 19%, down from an initially proposed 32%. Importantly, energy commodities and critical minerals have been exempted from tariffs, aligning closely with Indonesia's strategic ambitions in industrialisation. In exchange, Indonesia has agreed to substantial purchases from the US, including $15 billion in energy commodities, $4.5 billion in agricultural products, and 50 Boeing 777 jets. These commitments not only support key American industries but also strategically enhance Indonesia's position in the competitive global market.
Indonesia's resilience following the devastating Asian Financial Crisis of 1997-1998 highlights its robust economic recovery. That crisis saw severe economic contraction, currency collapse, and substantial capital flight. However, comprehensive macroeconomic reforms, restructuring of the banking sector, and prudent management of foreign reserves have enabled the nation to achieve steady growth, projected by the World Bank to average 4.8% annually between 2025 and 2027.
A key factor underpinning this resilience is Indonesia’s demographic advantage. As the world's fourth most populous country, with an estimated population of 284.44 million by mid-2025, Indonesia boasts a large workforce and expansive domestic market. Although the annual population growth rate has moderated to around 1.11%, the sheer size of its population continues to fuel domestic consumption and production, underpinning sustained economic activity.
Central to Indonesia's modern economic strategy is its mineral downstreaming policy, which mandates the domestic processing of minerals like nickel, bauxite, and copper. This policy aims to retain greater economic value within the country, attract foreign direct investment (FDI), facilitate technology transfers, and create employment. The policy has proven successful, attracting record FDI inflows, primarily within the basic metal and non-machinery sectors. The International Monetary Fund (IMF) has endorsed this strategy, acknowledging its positive impact on Indonesia's external financial stability. The critical minerals exemption included in the US trade agreement further validates this approach, securing crucial markets for Indonesia’s processed minerals.
Despite ongoing challenges related to environmental sustainability and equitable employment, Indonesia's downstreaming policy exemplifies its ambition to climb the global value chain, reinforcing economic sovereignty and long-term resilience.
A pivotal indicator of Indonesia’s economic transformation is the significant improvement in its Net Foreign Assets (NFA). Following the Asian Financial Crisis, Indonesia's net foreign liabilities stood alarmingly at -106% of GDP. Through disciplined economic management, sustained current account surpluses, strategic foreign exchange reserve accumulation, and increased FDI, Indonesia has notably improved its NFA position to around -19% recently. This progress, reflected by the country's upgrade from a one-star to a four-star rating on our net foreign asset analysis, underscores Indonesia's enhanced capacity to manage financial imbalances and navigate future economic shocks.
In contrast, the US has experienced a stark deterioration in its NFA position. Previously rated four stars in 1998, it is now rated two stars due in part to prolonged budget deficits. With a projected deficit of around $1.9 trillion, or approximately 6% of GDP, the US faces continued reliance on external financing. In contrast to Indonesia’s successful turnaround, the US NFA outlook suggests limited improvement unless significant fiscal adjustments are implemented.
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