Macro Strategy

2026: Reassessing the Investment Cycle

 

• Manufacturing-led FDI now anchors investment growth, lifting GFCF and widening regional benefit with Ex-Java areas benefiting the most.
• Despite rising manufacturing-led FDI, investment momentum is soft. Capex cycle, utilisation, and minimum wages are key factors to watch.
• Wage growth tracks investment in productive regions, highlighting the need to shift UMR rules toward productivity-based, region-specific.

 

Ongoing Structural Shifts. Continuing our 2026 thematic series, we take a closer look at one key lever for lifting Indonesia’s growth: investment, which particularly the increasingly important role of FDI. FDI composition continues to shift in line with Indonesia’s deeper industrialization. The secondary sector has strengthened sharply, rising from 35.3% in 2018 to 59.6% in 9M25, driven by metals, chemicals, machinery, and electronics. This reflects the maturing of the Jokowi administration’s downstreaming policy, with more value-add now occurring inside manufacturing clusters rather than raw material extraction. Mining, which previously boosted by the commodity upswing has moderated, falling from 12.3% in 2021 to 8.8% in 9M25 as global prices normalized and policy emphasis moved toward processing. Meanwhile, tertiary-sector inflows dropped from 48.2% in 2018 to 29.3% in 9M25 as utilities, logistics, and real estate cooled following years of infrastructure expansion. In our view, this evolving structure sets the primary stage for Prabowo’s first year, which inherits a strong industrial momentum but a softer services pipeline. We also believe that FDI’s tilt toward industry reinforces its importance for driving broader investment activity. Our analysis indicates that every IDR1 tn in FDI correlates with c.IDR1.13tn in additional GFCF, evidence of a strong multiplier effect. Secondary-sector FDI produces the largest boost due to its capital-intensive nature, while primary and tertiary contributions are more moderate. Regionally, Ex-Java FDI generates significantly stronger GFCF responses, reflecting deeper capital requirements outside Java and underpinning FDI’s role in supporting more geographically balanced growth.

 

Foreign Direct Investment: Normalizing but Still Solid. Indonesia’s FDI performance in 2025 shows mild normalization from last year but remains supported by resilient regional inflows. In 3Q25, FDI eased as commitments from Singapore and China softened although both remained the top contributors. Hong Kong and Malaysia held steady, reflecting ongoing interest in downstream processing and logistics-related sectors. Sectorally, inflows stayed concentrated in the top five industries. Metals and non-machinery continued to lead on the back of Indonesia’s downstream industrial expansion. Mining moderated from its 2024 peak, while chemicals and pharmaceuticals saw slight improvement, signaling gradual diversification. Transport and warehousing cooled, consistent with a softer logistics cycle. Recent large-scale commitments, including KUFPEC’s USD 1.54 bn Natuna gas

project, Eni’s Merakes East expansion, Apple’s USD 320 mn manufacturing investment, and Sichuan Hebang’s USD800mn chemical plant. Such large scale investment continue to reinforce that energy, manufacturing, and industrial processing remain the core pillars of medium-term FDI pipeline.

 

The 3 Key Elements: Capex cycle, Utilisation and Minimum Wages. While FDI flows have increasingly shifted toward manufacturing and downstream industries, the domestic capex cycle has yet to align. The latest indicators suggest local investment remains cautious. In our view, three indicators become essential to track to assess investment momentum: capex cycle, capacity utilization, and minimum wage growth.

 

Aggregate capex of JCI-listed corporates fell to IDR272tn in 2024 from IDR 296 tn in 2023, marking an 8.1% YoY decline. Most sectors kept spending selective; only Technology and Transport & Logistics posted solid increases. Industrials and Infrastructure continued to normalize after the sharp upcycle in 2022–2023.

 

Capacity utilization remains stable but shows limited acceleration. The national utilization rate hovered around 74% in 3Q25, only slightly above early-2023 lows but still below levels typically associated with strong capex upturns. Manufacturing and Agriculture remain around the mid-70% range, while Mining stays near 70% as the sector continues adjusting after the commodity boom.

 

Indonesia’s PMI also diverged from peers. After hovering near neutral, it slipped into contraction in early 2025, at a time when ASEAN, US, and China Caixin PMIs were stabilizing or improving, signaling domestic softness rather than external pressure. With Indonesia’s PMI returning to expansion only from August and holding into October, firms appear to be waiting for more consistent demand visibility before committing to larger investment plans.

 

Minimum Wage in Indonesia: Market Forces vs Policy Instruments. The government’s ongoing review of the Regional Minimum Wage (UMP) formula, designed to reduce inter-provincial disparities and improve proportionality, highlights continued evolution in Indonesia’s wage-setting framework: balancing policy-driven objectives (equity and KHL-based adjustments) with market-driven forces (investment, productivity, labour demand).

 

Our study reveals several important insights into the structure and behavior of Indonesia’s minimum wage system.:

1. Our analysis of minimum wage growth and FDI/DDI inflows from 2010–2025 shows that meaningful wage acceleration occurs primarily in mature industrial ecosystems such as DKI Jakarta and West Java. These regions exhibit a strong positive correlation between high-quality investment and higher wage growth, reflecting robust productivity and competitive industrial structures.
2. However, West Java also illustrates a structural duality: its provincial UMP remains intentionally low to attract labour-intensive, cost-sensitive industries, while the District Minimum Wage (UMK) in industrial hubs like Karawang and Bekasi has surged rapidly due to strong market pressure from capital-intensive investment. We also found that regional variations reinforce this pattern.
3. Papua’s high UMP is largely driven by extreme cost of living (KHL) and logistics constraints, with capital-intensive extractive industries providing partial justification but not broad-based productivity gains.
4. Meanwhile, Central and East Java maintain low UMP levels due to abundant labour supply and the dominance of labour-intensive manufacturing sectors seeking cost efficiency.

 

To close these gaps sustainably, the UMP formula needs structural adjustment. Heavy reliance on KHL metrics perpetuates low wages in low-productivity regions. Shifting toward a productivity- and investment-quality–based approach would better reflect regional economic capacity. This ensures future wage increases especially in emerging downstreaming hubs like North Maluku and Central Sulawesi, are supported by internal market strength, helping narrow welfare disparities through real economic progress rather than policy intervention alone.

 

BRI MSME Survey: Momentum Eases, Optimism Rises. Based on BRI’s MSME Survey, which covers 7,064 debtors across 33 provinces, MSME performance in 3Q25 continued to soften, extending the slowdown observed since early 2025. The MSME Business Index fell from 103.7 to 101.9 yet remained in expansion, supported by relatively affordable agricultural inputs, stronger prices for farm, livestock, and fishery products, and the acceleration of private and government projects toward year-end. However, post-holiday normalization, rising retail input costs, intensifying competition with modern and online retailers, and weather-related disruptions in mining weighed on MSME activity.

 

The Production Volume Index declined further into contraction at 92.8, consistent with Bank Indonesia’s survey, which also showed slightly weaker activity among medium and large firms. Liquidity conditions eased from 103.3 to 102.2, while profitability dropped sharply to 92.4 amid weaker turnover and higher costs, widening the gap with medium-large enterprises, whose liquidity and profitability improved in the same period. This widens the performance gap with medium-large firms, whose liquidity and profitability improved during the same period.

 

Despite these pressures, business expectations strengthened to 120.7, reflecting optimism for 4Q25. Most sectors remained expansionary but slower, except agriculture and construction, which gained momentum. Regionally, 25 provinces stayed in expansion, though major economic hubs: Jakarta, West Java, and Central Java registered contractionary readings.

 

Stronger DXY, Softer IDR Drive Continued Outflows. Global yields eased as the 10-year US Treasury fell 7 bps to around 4.06%, while the 2-year yield declined 9 bps to 3.51%. In contrast, Indonesia’s 10-year INDOGB yield rose 6 bps to about 6.19%. The US Dollar Index strengthened 0.83% WoW to 100.12, while the Rupiah was broadly stable, edging up 0.02% to IDR16,700 per USD. Indonesia’s 5-year CDS widened slightly by 3 bps to 78 bps, indicating a mild uptick in perceived credit risk.

 

• Fixed Income Flows. Foreign investors posted a weekly outflow of IDR5.06tn in the SBN market, extending total MTD outflows to IDR9.88tn and reducing foreign holdings to IDR868tn. Domestic flows were more supportive: banks booked IDR13.60tn in inflows for the week and IDR33.90tn MTD. Bank Indonesia (ex-repo) recorded continued outflows of IDR3.38tn w-w and IDR13.29tn MTD. Mutual funds added IDR4.02tn w-w, while insurance and pension funds collectively saw IDR2.02tn in inflows.
• SRBI Flows. SRBI outstanding declined modestly by IDR0.76tn to IDR699tn. Foreign investors posted a weekly outflow of IDR3.43tn, bringing YTD outflows to IDR143.83tn. Foreign ownership now stands at IDR7tn, or roughly 10% of total SRBI outstanding.
• Equity Flows. JCI rose 0.5% w-w, supported by IDR2.1tn of foreign inflows in the third week of Nov25. This lifted MTD inflows to IDR5.4tn, while YTD outflows narrowed to IDR39.9tn. Consistent foreign buying remained concentrated in BMRI, BBCA, TLKM, BREN, and ASII.

 

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