What Does Indonesia’s Upper Middle-Income Status Mean?

In a momentous leap forward, Indonesia has recently become an upper-middle-income nation, marking a significant milestone in its economic growth journey. This remarkable feat, characterized by increased gross national income (GNI) per capita, solidifies Indonesia’s position as a burgeoning economic powerhouse in the Southeast Asian region. 

As Indonesia continues to forge ahead on its path of progress, the world watches with anticipation to witness the manifold opportunities for this dynamic nation.

In this article, we will explore the factors behind this milestone and its potential implications for the nation’s economic landscape.

Indonesia regains upper-middle-income country status

With the ending of the COVID-19 pandemic in Indonesia, the largest archipelago country has regained its status as an upper-middle-income country.

Indonesia’s gross national income (GNI) per capita reached USD 4,580 in 2022. As the World Bank database reported, the number shows a significant increase of 9.8% from the previous year with USD 4,140.

The GNI per capita measures the sum of money a nation earns divided by its population. 

This successful growth has led to Indonesia reacquiring its upper-middle-income country status.

Will Indonesia become a high-income country?

Despite the positive update, Indonesia still needs to achieve the status of a high-income country. To obtain a high-income country status, it should reach USD 13,845.

Below are the income classifications or categories according to the World Bank from July 1, 2023, to 2024:

• Low-income countries: Below USD 1,135, this threshold has increased from the previous USD 1,085.
• Lower-middle-income countries: From USD 1,146 to USD 4,465, this threshold has increased from USD 1,086 to USD 4,255.
• Upper-middle-income countries: From USD 4,466 to USD 13,845, this threshold has increased from USD 4,256 to USD 13,205.
• High-income countries: USD 13,845 and above; this threshold has increased from the previous USD 13,205.

Previously, Indonesia achieved upper-middle-income status based on its GNI per capita in 2019. Still, due to the impact of the COVID-19 pandemic on the economy, it temporarily dropped back to lower-middle status.

Read more: Addressing Business Challenges in the Indonesian Market

The pandemic’s impacts on Indonesia’s economy

The COVID-19 pandemic lasted for three years in Indonesia, resulting in severe consequences, including unemployment, poverty, income inequality, declining GDP, and reduced domestic and international trade.

Due to the restrictions and lockdown policies in various countries, investment progress in Indonesia has also slowed down, leading to considerable financial losses for the country.

The COVID-19 pandemic has affected various sectors, including transportation, tourism, trade, and healthcare, with the household sector bearing the brunt of the pandemic’s adverse effects the most.

Moreover, the World Bank’s Human Capital Index revealed that the closure of schools during the pandemic has led to a loss of learning, which will have long-term repercussions on Indonesia’s future generations. 

Albeit the severe impacts of the pandemic on the economy, several factors have contributed to the return of Indonesia as an upper-middle-income country, such as the pandemic handling policies and the economic transformation during the pandemic. 

Contributing factors to Indonesia’s upper-middle-income status

Indonesia’s return to the upper-middle-income country is attributed to several factors, including:

• The effective handling of the COVID-19 pandemic,
• The implementation of the COVID-19 Response and National Economic Recovery Program (PC-PEN), and
• The economic transformation through the downstream of natural resources.

Various instruments within the state budget (APBN) through the PC-PEN program for 2020-2022 were crucial in providing policy support during the pandemic and accelerating national economic recovery.

On the other hand, the significant impact of downstream natural resources policies has boosted export performance and strengthened Indonesia’s external balance. Indonesia is one of the few countries worldwide capable of a swift and robust recovery. 

Given the positive economic trends, the government is committed to maintaining the quality of economic recovery.

In the medium to long term, the government continues to focus on structural reforms to support and expedite economic transformation, building high-value-added, inclusive, and environmentally friendly sectors. 

Other than those contributing factors, the economic rebound is also shown in Indonesia’s export performance.

The strength of Indonesia’s export

Indonesia exports showed positive performance in May 2023. According to data from the Indonesia Statistics (BPS), Indonesia’s export value in May 2023 it reached USD 21.72 billion. It showed a 12.61% increase compared to April 2023 and a 0.96% increase compared to May 2022.

Non-oil and gas exports in May 2023 amounted to USD 20.40 billion, indicating a 13.18%  rise from April 2023 and a 1.94% increase from May 2022.

The largest non-oil and gas export destination in May 2023 was China, with USD 4.78 billion, followed by the United States, with USD 2.05 billion, and Japan, with USD 1.77 billion, with their combined contribution reaching 42.12%

Indonesia’s exports to the Association of Southeast Asian Nations (ASEAN) and the European Union countries, a total of 27 nations, have hit remarkable milestones. 

Specifically, exports to ASEAN countries have surged to an impressive USD 3.97 billion, while those to the European Union countries reached a substantial USD 1.56 billion. This export surge reflects Indonesia’s growing economic prowess and strengthened trade relations with key global markets.

Will Indonesia’s upper-middle-income status attract Investors?

With Indonesia’s upper-middle-income status, Finance Minister Sri Mulyani mentioned that this achievement could attract foreign investors. Indonesia has targeted to attract IDR 1,400 trillion (approximately USD 93 billion) in investment this year.

As of the first quarter of 2023, Indonesia has already accumulated IDR 328.9 trillion in investment, with 53.8% (IDR 177 trillion) coming from foreign investors.

Given the substantial investment target, businesses interested in exploring investment opportunities in Indonesia must understand its trade and regulatory landscape to ensure their investments’ success.

InCorp Indonesia offers expert Business Advisory services, assisting your business in establishing a strong foothold while ensuring full compliance with the latest investment-related regulations.

Furthermore, investors also need to comprehend the benefits of an Indonesian Investor KITAS or stay permit, which offers advantages to those investing in the country.

Conclusion

The return of Indonesia’s upper-middle-income status provides momentum for the country to recover its economy post-COVID-19 pandemic. It also demonstrates Indonesia’s resilience, as it quickly bounces back after being significantly impacted by the pandemic.

With ambitious investment targets in 2023, businesses can leverage this situation to explore potential investment opportunities in Indonesia.