Author: Primus Dorimulu – Head of Communications, Kadin Indonesia

Jakarta – Indonesia’s economic growth in 2026 has the potential to reach 5.4%, in line with the assumption set out in the 2026 State Budget (APBN). However, without a significant increase in investment accompanied by improvements in efficiency, economic growth next year risks being constrained at around 5.2%, only slightly higher than the 2025 outcome. A substantial acceleration in investment will be a decisive factor in boosting growth amid weakening purchasing power and limited fiscal space.

Achieving economic growth of 5.4% is not an unrealistic target, even though the baseline scenario remains around 5.2%. With improved ease of investment, full government support, and active participation from the private sector, the target is considered attainable.

“High growth targets are crucial to ensure Indonesia avoids the middle-income trap in the medium and long term. Failure to do so would come at a much higher economic cost,” said economist Joshua Pardede at the Global and Domestic Economic Outlook 2026: Encouraging the Role of the Private Sector in Economic Growth—Pro-Growth, Pro-Poor, Pro-Job, and Pro-Environment seminar hosted by Kadin Indonesia on Thursday (January 15, 2026).

Joshua noted that Indonesia’s Gross Domestic Product (GDP) structure has yet to undergo significant change. Household consumption continues to dominate at around 55%, while the contribution of investment remains in the range of 28–30%. The business sector, including Kadin members, needs to be given greater room to operate so that, together with the Indonesia Investment Authority (BPI) Danantara, it can more significantly increase investment’s contribution to GDP.

According to him, medium-term economic growth targets of around 8% can only be achieved if investment becomes the primary engine of growth. Large-scale investment will create more jobs and accelerate economic expansion.

“Without increasing the share of investment, achieving high growth targets will be extremely difficult,” he said.

Investment realization up to the end of December 2025 was also deemed suboptimal, with growth still below 5%. As a result, Indonesia requires major breakthroughs in improving the ease of doing business so that both domestic and foreign investors are encouraged to establish and expand operations. Joshua stressed that increased investment must go hand in hand with improved efficiency.

One key indicator of concern is the Incremental Capital Output Ratio (ICOR), which remains above 6.5. This figure indicates that each additional 1% of economic growth requires a relatively large amount of investment, reflecting low investment productivity.

The establishment of BPI Danantara, Joshua added, offers new hope for the management and acceleration of strategic investments. Nevertheless, the primary driver of the economy remains the private sector.

“Therefore, Kadin’s role is extremely important in driving and sustaining accelerated economic growth,” said the economist, who is also a member of Kadin.

Joshua further noted that government spending continues to play an important role as a growth catalyst. However, with numerous development agendas and priority programs, fiscal space is becoming increasingly constrained. Under these conditions, the private sector becomes the main pillar for driving investment and economic expansion.

In terms of recent economic performance, growth from the first to the third quarter of 2025 was recorded at 5.01%. Growth in the fourth quarter of 2025 is estimated at around 5.45%, bringing full-year 2025 growth close to 5.2%. This achievement serves as an initial foundation for the 2026 target.

Although inflation remains relatively under control, structural challenges persist. Job creation is considered insufficient, the middle class is shrinking, and economic inequality tends to widen. These conditions underscore the need to give equal attention to the quality of growth, not merely its pace.

Joshua emphasized the importance of a pro-growth and pro-market policy mix to strengthen economic resilience. Policy consistency is seen as critical to maintaining business confidence.

“Policy continuity will increase business confidence, which in turn will encourage investment,” he said.

Within the framework of medium-term development, Kadin is also promoting the concept of a collective economy, or Sumitronomics, built on three main pillars: high growth, equitable development, and dynamic stability. Collaboration schemes between the private sector and state-owned enterprises (SOEs) through public-private partnerships (PPP/KPBU), PINA, and the use of land value capture mechanisms are considered essential to strengthening development financing.

From a sectoral perspective, manufacturing remains the largest contributor to GDP. However, to improve the quality of equitable growth, strategic sectors such as agriculture, fisheries, the green economy, and the creative economy need to be further strengthened to generate higher value-added activities and broader employment opportunities.

The quality of human resources has also become a key concern. Indonesia’s labor market structure is still dominated by workers with primary school education or below, limiting optimal labor absorption. Future investment, according to Joshua, must be directed toward improving human capital quality while simultaneously absorbing unemployment.

In terms of financing, banking sector liquidity is considered ample, yet credit demand remains relatively weak. Strong growth in third-party funds has not been fully matched by credit expansion, reflecting business caution and weak financing demand, particularly from MSMEs.

This phenomenon is also influenced by corporations’ tendency to rely more heavily on internal funds or retained earnings to finance investment. As a result, liquidity injections into the banking system have not fully translated into credit growth in the real sector.

Looking ahead, Joshua believes regulatory certainty, improved licensing processes, law enforcement, and greater efficiency in reducing high economic costs will be key to attracting investment, including foreign direct investment (FDI), amid increasingly intense global competition.

With fiscal discipline maintained and ongoing bureaucratic simplification, the state budget is expected to remain a credible instrument for supporting development. However, transforming the economic structure toward higher value-added sectors remains a fundamental requirement for Indonesia to sustainably return to growth levels of 7–8% and to become more resilient to economic shocks.

Policy Recommendations

Joshua Pardede stressed that achieving the 2026 economic growth target requires a consistent, pro-growth macroeconomic policy mix that is responsive to business dynamics. Fiscal, monetary, and financial sector policies must move in alignment to ensure economic expansion is not hampered by uncertainty or high economic costs.

On the fiscal front, the government is expected to maintain an expansionary yet measured 2026 state budget, with the deficit kept below 3% of GDP. Spending priorities should be strategically directed toward food and energy security, the Free Nutritious Meals (MBG) program, education and healthcare, strengthening villages, cooperatives and MSMEs, the defense sector, as well as accelerating investment and trade. This approach is considered essential to sustaining growth momentum while preserving fiscal stability.

Meanwhile, monetary and financial sector policies should remain cautious yet accommodative. Bank Indonesia and the Financial Services Authority (OJK) are expected to ensure that interest rate reductions are implemented gradually, while safeguarding exchange rate stability and the financial system. At the same time, room for credit expansion must be created so the real sector can respond to growth opportunities.

Banks are also expected to prepare early. Strengthening liquidity management, asset quality, and capital adequacy is a prerequisite for accelerating credit disbursement when fiscal and monetary policy become more accommodative. In this context, institutional readiness is key to ensuring that growth momentum is not missed.

Joshua highlighted the importance of more intensive involvement of business associations in macroeconomic policy coordination, beyond formal forums such as the Financial System Stability Committee (KSSK). Regular communication forums are needed to align business expansion plans, incentive requirements, and real demand projections with budget assumptions and policy directions.

Beyond macroeconomic policies, strengthening domestic demand—particularly from the middle class—is viewed as a key engine for growth and credit expansion. The government needs to ensure timely and well-targeted distribution of MBG, social assistance, and civil servant spending, focusing more on lower- and middle-income groups with a higher propensity to consume. At the same time, caution in increasing consumption-related taxes and excise duties is essential to prevent erosion of purchasing power.

On the financing side, BI and OJK are encouraged to utilize digital transaction data—such as payment systems, QRIS, and e-commerce—as a basis for creditworthiness assessments. This approach is expected to expand access to financing for households and businesses previously considered unbankable, enabling productive consumer credit and working capital loans to grow at more reasonable costs.

Joshua also encouraged collaboration between banks and industry players—including retail, automotive, property, and food and beverage sectors—in designing joint financing schemes. These schemes may include lighter but measured down payments, tenors aligned with cash flows, and selective promotions. In doing so, demand surges will be non-speculative and will genuinely enhance production capacity and employment absorption.

In terms of investment and ease of doing business, the government, together with BI, OJK, banks, and business associations, needs to develop a pipeline of cross-sector priority projects, ranging from food and energy to downstream processing, logistics, tourism, and housing. These projects must be well-prepared, with feasibility studies, spatial planning certainty, risk-based licensing, and clear risk-sharing arrangements.

Project financing, Joshua added, should be designed from the outset using blended schemes that include bank loans, syndications, project bonds, the role of Danantara or a sovereign wealth fund, and PPP mechanisms. This approach is essential to ensure that financing burdens do not rest solely on bank balance sheets.

On the regulatory side, reforms should focus on cutting overlapping permits, restructuring the Online Single Submission (OSS) system, and rationalizing regulations that increase business costs, such as taxes, consumption excise, import duties on raw materials, and logistical barriers. Reducing business and logistics costs is seen as critical to enhancing investment competitiveness.

Joshua also emphasized the importance of private sector commitment to priority projects, including through long-term contracts or off-take agreements. Certainty of cash flows will strengthen banking confidence in financing while ensuring that investments genuinely add production capacity, exports, and new credit demand.

For MSMEs and labor-intensive sectors, strengthening cluster-based financing ecosystems is viewed as a structural solution. Central and regional governments need to synchronize People’s Business Credit (KUR), guarantee programs, business mentoring, and village funds, focusing on productive clusters such as food, small-scale industries, tourism, and local logistics to avoid program fragmentation.

BI and OJK are encouraged to expand cluster- and supply chain-based financing by reducing reliance on physical collateral. Cash flow-based assessments, transaction track records, and support from guarantee institutions are expected to help lower MSME credit risk.