As a country with the world’s fourth-largest population, the archipelago of Indonesia brims with youth and energy. With over 70% of its population aged between 15 and 64, Indonesia is benefitting from a demographic advantage often referred to as the ‘demographic dividend’. This statistical event is a potent catalyst of economic growth and an attractive pull-factor for global investors. Demographic dividends have historically correlated with an influx of foreign direct investment and Indonesia is no exception.
Figure 1. Indonesia population pyramid, 2022
Source: Statistics Indonesia (Badan Pusat Statistik)
The Indonesia Investment Authority, the country’s first and only sovereign wealth fund established in 2020, plays a crucial role in leveraging this demographic transition. INA’s investment strategy seeks to embrace the needs of Indonesia’s evolving and ever-growing population to not only create wealth for future generations, but to help Indonesia develop sustainably. To achieve these goals, one of INA’s areas of focus is to help drive investment and improve management in key sectors, such as infrastructure and logistics, energy transition, digitalisation and healthcare. To execute this, INA seeks to develop strategic and mutually beneficial partnerships with experienced investors who wish to participate in the opportunities that Indonesia provides.
As the Indonesian population’s average age and standards of living both continue to rise, its needs will continue to evolve. INA understands that the right investments should be made to address these needs. With this in mind, a fundamental part of the country’s investment destination and growth narrative is its potential to catch up with its regional peers given the low penetration across key areas. These areas, such as fixed broadband¹, private health insurance², domestic credit³ signal much-needed development. Such low penetration, augmented by the large proportion of its population within, or entering, working age, presents an opportunity for international investors seeking long-term, attractive risk-adjusted returns.
For example, although Indonesia has seen an improvement in internet access, with 74% of the population now using the internet compared to 35% in 2014, INA still sees digital infrastructure as an area of focus. The full potential of Indonesia’s people can only be fully unlocked with adequate infrastructure for high-speed internet, data centres and digital services. Other strategic focuses not only help meet the immediate needs of the population, but set the foundation for a thriving, resilient and sustainable economy for future generations.
Through these synergies, INA is steering Indonesia towards economic heights. In just over two years, it has deployed more than $3bn in capital alongside its investor partners. This includes partnerships with Abu Dhabi Investment Authority, GIC and Abu Dhabi Growth Fund to invest $800m into the initial public offering of Indonesia’s largest telecommunications tower company, Mitratel. There is also Indonesia’s partnership with Silk Road Fund to invest $150m in the largest pharmacy chain company in the country, Kimia Farma Apotek, as well as its partnership with Masdar to invest almost $500m into the initial public offering of Indonesia’s largest geothermal company, Pertamina Geothermal Energy. INA is committed to delivering optimal risk-adjusted returns, maintaining effective collaborations with investors, creating value, developing people and advancing Indonesia’s competitiveness.
Over the years, global powerhouses such as Singapore, Japan and China have recognised the investment opportunity provided by Indonesia’s demographic dividend4. This recognition is a testament to Indonesia’s demographic landscape, supported by a stable democracy, resilient economy, abundant natural resources and improved ease of doing business. Indonesia has also pursued strategic reforms to address structural challenges and move up the manufacturing value chain, to improve economic resilience and escape the middle-income trap. For example, iron and steel exports have increased exponentially in recent years (Figure 2).
Figure 2. Indonesia iron and steel exports in $bn
Source: Coordinating Ministry of Maritime and Investment Affairs of Indonesia
Despite the growing interconnectedness in the Association of Southeast Asian Nations region, each country exhibits specific economic and demographic characteristics. At the inaugural Caixin Asia New Vision Forum, INA highlighted how understanding the nuances of each Asean country is critical to crafting successful investment strategies. INA can collaborate with investors to help them navigate the regulatory, political and economic complexities of investing in Indonesia.
However, Indonesia’s demographic dividend is more than simply a feature of INA’s investment strategy. It is at its core, along with INA’s dedication to environmental, social and governance as a key investment pillar and its sound risk management principles. INA works to leverage this demographic advantage by making investments that cater to the growing needs of Indonesia’s young population and to fuel the country’s sustainable development, while seeking partners who share its values and align with INA’s strategic and investment objectives. Together, INA and its partners can help shape a better future that is not just prosperous, but truly sustainable.
¹ Four fixed broadband subscriptions per 100 people in 2020.
² Less than 5% in 2021.
³ Domestic credit to private sector at 38% of GDP in 2021 (vs >100% for Vietnam, Singapore and Malaysia).
4 Between 2012 and 2022, FDI into Indonesia from Singapore, Japan, China, Hong Kong, South Korea, USA, Malaysia and the Netherlands totalled almost $285bn.
Ridha Wirakusumah is Chief Executive Officer of the Indonesia Investment Authority.
This article was originally published in the Bulletin, Summer 2023 edition.