Indonesia has long been a commodity powerhouse, but with its government making digital transformation a policy priority, the country’s economic opportunities are rapidly diversifying.
Indonesia’s government has identified the digital economy as a cornerstone of its long-term economic strategy and laid out plans to accelerate digitalization. Initiatives include the launch of a “Smart Cities” program, a national strategy for artificial intelligence (AI) adoption, and a comprehensive “digital roadmap” that outlines the goals for the roll out of digital infrastructure across key industries.
This policy framework complements the country’s favorable demographics. Indonesia is the largest economy in Southeast Asia and over half of its population are between the ages of 18 and 39, belonging to the digital-native Millennial and Gen Z generations. Indonesia’s digital economy is one of the fastest growing in the region, according to joint research from Google, Temasek and Bain & Company, and is forecast to exceed US$130 billion by 2025.
These strong underlying fundamentals are set to drive increasingly high levels of digital investment in what is still an underserved market, particularly in relation to the roll out of fiber-to-home infrastructure and data centers.
According to consultants L.E.K., the Indonesian data center industry has the potential to grow from a current installed base of 150MW to as much as 1GW by 2030, a more than sixfold increase. Meanwhile, the fiber-to-home market is poised to attract investment ranging from US$8 billion to US$10 billion over the next few years.
The world’s largest technology companies, noting the impressive growth dynamics of the country’s digital infrastructure market, have begun to direct capital toward Indonesia to build data centers and fund digital education.
Tencent Cloud, for example, is constructing its third data center in the country as part of a pledge to invest US$500 million in Indonesia’s technology industry by 2030, and Alibaba Cloud, which also operates three data centers in the country, plans to support the training of 800,000 cloud computing workers by 2033. Meanwhile, Microsoft plans to invest US$1.7 billion in cloud computing and AI infrastructure in Indonesia, with the company expecting the Indonesian digital infrastructure market to deliver additional growth of 10% to 12%.
Beyond commodities
The growth projections for India’s digital infrastructure rollout reflect the country’s rapid maturation, having evolved from a commodities hub into a diversifying economy and magnet for investment across a wide range of fast-growing sectors.
However, realizing the full potential of the digital economy will require significant and sustained support from equity and debt capital markets to complement corporate investment.
As a percentage of GDP, spending on information, communication and technology in Indonesia has historically lagged behind that of other Southeast Asian countries, according to consultancy Kearney. Investment has increased in recent years, but all financing channels will have a part to play to sustain this momentum.
Indonesia’s financial ecosystem appears ready to provide the levels of financing required to support the country’s digital transformation. Historically, lending activity—especially from domestic banks— has focused on Indonesia’s vast commodities sector. However, there is capital and expertise available now to shore up technology companies and infrastructure projects.
The formation of a new government following Indonesia’s general election in February 2024 greatly benefitted domestic currency lending activity, which had stalled in the lead up to the vote. Meanwhile, falling interest rates in the US have made raising offshore, dollar-denominated debt cheaper and more attractive for Indonesian issuers.
According to ratings agency Fitch, local banks are well-capitalized and well-placed to support ongoing demand from domestic companies for local-currency debt. Fitch also expects Indonesia to be one of the largest US dollar debt issuers over the medium term, with sukuk issuance also projected to remain robust, reflecting the mix of financing lines available to the Indonesian government and state.
After a challenging period, companies in the fintech and consumer-tech spaces are also hoping to see investment recover in 2025. Both sectors saw a dip in activity during the cycle of rising interest rates (Q1 2022-Q2 2023) in the US, in line with the broader global slowdown in growth and venture capital investment activity. In 2021 and 2022, eight Indonesian start-ups secured unicorn status, and none did so in 2024.
As growth-hungry investors increasingly target Indonesia’s expanding technology infrastructure, the country’s start-ups will be eager to capitalize on this renewed sense of vitality. Their success could further drive the diversification and sophistication of Indonesia’s evolving economy.