Plans for an International Financial Center
The government and the House of Representatives are expediting the drafting process for the bill on the Indonesian International Financial Center (PFII), aiming for passage before August and implementation by the year-end. Features of the PFII include: 0% corporate income tax for any business operating in its jurisdiction, 0% on individual income tax for foreign financial experts working there. Other tax facilities include total exemption of value-added tax (VAT) in certain services procurement. VAT is also exempt for construction of necessary facilities including houses, stores, warehouses, schools and hospitals as well as basic infrastructure such as roads, bridges and utilities. Tax and duties on imports of capital goods “needed for construction and development in the PFII” are also set at zero percent, as are some luxury taxes. Moreover, the PFII’s supervisory authority is mandated to “protect the confidentiality of information” of businesses under its jurisdiction, except for tax purposes and matters relating to international agreements involving the government. Indonesia’s Finance Minister told reporters: “With a sizable economy, vast domestic market, strategic geographical position, abundant natural resources and good long-term growth prospects, Indonesia has all of the requirements to develop a center for international financial activities,” Purbaya said, “Nevertheless, Indonesia still has yet to possess a specially designed international financial area with governance, institutional, legal certainty and competitive standards that are on a par with various international financial centers established in numerous countries.” One analyst remarked, “If the PFII only becomes a special enclave, the government instead stresses an economic duality: Big investors can take the fast track while national businesses still have to face slow bureaucracy and legal uncertainty.” (Editor’s note: Like it has with its special economic zones, Indonesia is attempting to bypass negative features of its economic system, such as a weak regulatory/judicial regime, with hopes of creating a blueprint for reform.)
Another Possible Ratings Downgrade
Similar to a recent announcement by Morgan Stanley Capital International (MSCI), S &P Dow Jones Indices (DJI) has put Indonesia on a watch list for a potential downgrade to frontier market status in its next annual review in 2027. The New York-based global index provider issued the warning in an announcement on Tuesday, adding it was continuing to monitor developments related to stock ownership transparency and guidance from the Indonesia Stock Exchange (IDX) to address disclosure-related concerns and potential liquidity impact in the country. “If circumstances worsen, S&P DJI may consider implementing special treatment for Indonesian securities,” reads the announcement. The index provider added that if these matters remained unresolved one calendar year from the date that special measures were introduced, Indonesia’s market classification was set to be assessed at the 2027 annual review. In response, newly appointed IDX president director Jeffrey Hendrik said in a statement on Wednesday that the exchange would conduct “constructive communications and discussions” with S&P DJI to understand its concerns and evaluations. “Together with the OJK [Financial Services Authority] and all stakeholders, IDX will continue to take various measures to address existing concerns. (Jakarta Post)
Layoffs
Indonesia’s labor market has come under growing pressure as a string of major companies across the textile, footwear, electronics, digital, manufacturing, and media sectors have announced mass layoffs since 2025, despite the country’s economy continuing to expand at a robust pace. The wave of layoffs comes even as Indonesia’s economy grew 5.61% year-on-year in the first quarter of 2026, following 5.11% growth in 2025. However, Manpower Ministry data show layoffs have continued to rise over the past three years. The number of workers affected increased from 64,855 in 2023 to 77,965 in 2024 and 88,519 in 2025. Between January and May 2026, another 23,470 workers lost their jobs, bringing the cumulative total since 2023 to at least 254,809. Economist Achmad Nur Hidayat of UPN Veteran Jakarta said “Economic growth of 5.61% cannot be considered healthy if the number of workers losing their jobs continues to increase.” (Jakarta Globe)
Manufacturing Contracts in June
Collapsing demand and the fastest rise in factory-gate prices in nearly 13 years have sent Indonesia’s manufacturing sector into its sharpest contraction in a year at the close of the second quarter, according to the latest purchasing managers’ index (PMI) data. The S&P Global Indonesia Manufacturing PMI plunged to 46.9 in June from 50.0 in May, which is also the threshold that separates expansion from contraction, signaling a fresh decline in the health of the goods-producing sector. Production volumes contracted for a fourth consecutive month, falling at a rate not seen since April 2025. Manufacturers responded by slashing workforce numbers and reducing purchasing activity. The pace of job shedding was the most severe since September 2021, while input buying fell for the fourth month in a row, and at the sharpest rate in nearly five years. Compounding the sector’s woes, cost pressures remained historically elevated. Input price inflation accelerated to its most pronounced level since September 2013, registering the second-highest rate in the survey’s history. Manufacturers widely cited surging raw material prices as the primary driver. (Jakarta Post)
Improving Bond Market
Foreign demand for Indonesian sovereign bonds has improved thanks to recent interest rate hikes from Bank Indonesia (BI), while the stock market is still in the doldrums. BI Senior Deputy Governor Destry Damayanti revealed in a press conference on Monday that, as of Friday, government and BI bonds combined had seen a net inflow of US$9 billion year-to-date (ytd), reflecting “offshore confidence” in Indonesia. Following the press conference, Destry told The Jakarta Post that government bonds alone had still recorded a “small” net outflow of $570 million ytd but noted there had been a net inflow of Rp 25 trillion ($1.4 billion) in the second quarter so far. Destry spoke before reporters after attending a closed meeting with the government and House of Representatives leaders. Deputy National Economic Council head Mari Elka Pangestu, who attended the same meeting and press conference, said it was agreed that “what’s important is maintaining short-term macroeconomic stability”. “The Indonesian economy, in terms of fundamentals, is actually good enough, but we’re facing a worse [currency] depreciation than our peers. That means we have to pay attention to upholding confidence and trust,” said Mari. (Jakarta Post)