Indonesia Weekly Intelligence Brief, September 22–October 5, 2025
In the week of 29 September–6 October, Jakarta signaled pragmatic recalibration and continuity: Nusantara’s rebrand as a “political capital” narrows the near-term build to core state functions while deferring grand citymaking; trade ties deepened even as frictions persisted, with Indonesia winning a WTO case on EU stainless-steel duties as Brussels appealed a biodiesel ruling; governance risks were addressed head-on with the launch of a Police Reform Commission after August’s unrest; and industrial policy moved from rhetoric to courting, with fresh pushes to anchor European and Asian partnerships across batteries and EVs. Net-net for multinationals: clearer phasing and timelines on the capital move, proof that disputes will be channeled through rules-based fora, early but meaningful steps to shore up public-order credibility, and widening entry points into Indonesia’s critical-minerals-to-mobility value chain—albeit with ESG and execution diligence at a premium.
New Capital Project Redefined as “Political Capital,” Raising Questions
Issue Summary:
President Prabowo’s administration has signaled a strategic shift in the development of Nusantara – Indonesia’s planned new capital city in East Kalimantan. In late September, it was revealed that Prabowo signed a regulation reclassifying Nusantara as the nation’s “political capital,” a term not used in the original capital city law. This change, made via a presidential regulation in June but only made public in September, specifies that by 2028 Nusantara should serve primarily as Indonesia’s political and administrative center. The new designation has prompted debate over the scope and future of the $34 billion project, which was originally pitched by former President Jokowi as a smart, green city to fully replace Jakarta as the seat of government and a new economic hub. Officials claim the “political capital” label is meant to reassure investors that Nusantara’s core government functions will indeed proceed on schedule. Basuki Hadimuljono, head of the Nusantara Capital Authority, stated on Sept. 26 that the regulation provides certainty that the project will continue and reach its targets, despite a change in national leadership. However, many observers interpreted the move as a potential downscaling or refocus of the project. By emphasizing political/administrative functions, Prabowo may be de-prioritizing some of the broader economic and social ambitions of Nusantara (such as becoming a giant new metropolis). Construction at the site is ongoing – government buildings and housing for civil servants are being built – but questions remain about financing and private investment, which so far has reached only around Rp 65–70 trillion (≈ $4.3 billion) of the multi-year project’s needs.
Stakeholders’ Responses:
The new framing of Nusantara drew mixed reactions. Supporters within the government insist it’s merely a clarification: Nusantara will definitely become Indonesia’s administrative capital (hosting the president’s office, parliament, and ministries), while Jakarta can remain the commercial and financial hub. They argue this clarity could help focus resources on completing key government facilities by the 2024–2028 target and reassure those worried the project might be abandoned. Indeed, some investors from countries like China and the Middle East have pledged funds for infrastructure and real estate in Nusantara, contingent on the government moving in. These stakeholders welcomed the affirmation that Nusantara’s political function is on track. On the other hand, critics and independent analysts see the “political capital” label as potentially downgrading Nusantara’s scope. Legislator Muhammad Khozin publicly asked, “Is ‘political capital’ the same as national capital?”, reflecting confusion over whether economic development in Nusantara will be as robust as initially promised. Urban planners who championed Jokowi’s vision of a fully fledged new city worry that Prabowo might scale back investments in non-government sectors there. Some opposition figures quietly suggest Prabowo was never as enthusiastic about Nusantara (a project initiated by his predecessor) and is now hedging – ensuring the government center is built, but possibly slowing the broader city expansion to avoid a white elephant. It’s worth noting that Prabowo’s coalition includes many who supported the capital move, so outright cancellation is unlikely. Investors in real estate and construction are seeking more clarity: will incentives for businesses to relocate to Nusantara (tax holidays, etc.) still be offered at the same scale? As of now, officials maintain all previously announced incentives remain in place, and that private investment interest “continues to be strong,” though concrete commitments beyond a few initial projects have been limited.
Lexico Take:
For multinational companies and foreign investors, Nusantara’s trajectory matters because it could create new economic centers and infrastructure opportunities. The latest development – rebranding it as a “political capital” – suggests that Prabowo is narrowing the project’s immediate focus to its core purpose: housing the central government by 2028. In practical terms, this may mean that resources (and political capital) will be devoted first to government buildings, civil servant housing, and essential services, while plans for extensive commercial districts, universities, or tech hubs may be slowed or left more to the private sector. Companies eyeing Nusantara should temper their expectations about the city’s short-term growth as a business center. Jakarta will likely remain Indonesia’s economic heartbeat for longer, with Nusantara growing more gradually. That said, the commitment to proceed with relocating the government is still on track – indicating continuity in this national strategy which can open opportunities in construction, utilities, and logistics. We anticipate more transparency from the government in coming months on phasing and priorities. If Nusantara is indeed mainly an administrative capital, foreign firms might focus on infrastructure PPPs (public-private partnerships) there, rather than expecting an immediate consumer market boom. In sum, Prabowo’s recalibration might be a realistic move to ensure Nusantara doesn’t over-promise and under-deliver. As long as the government relocation happens successfully, it could pave the way for organic economic activity to follow. Multinationals should continue to monitor policy announcements related to Nusantara, especially any changes in investment incentives or timelines, and adjust their strategy to the project’s refined scope.
Trade Tensions Persist – Indonesia Wins WTO Case on Steel, EU Appeals Biodiesel Ruling
Issue Summary:
Even as Indonesia and the EU celebrated a new trade pact, several bilateral trade disputes simmered in the background. In a high-profile decision on October 2, a World Trade Organization panel ruled in favor of Indonesia in its case against the European Union’s tariffs on Indonesian stainless steel. The WTO panel found that the EU’s anti-dumping and countervailing duties – imposed in 2021–2022 on Indonesia’s stainless steel products – violated WTO rules and recommended the EU remove them. Indonesia’s trade ministry touted the ruling as a major victory that will restore access for Indonesian steel to the EU market. Trade Minister Budi Santoso urged the EU to “immediately lift the unlawful duties,” calling the outcome a “major achievement in ensuring market access” for Indonesia. This case was part of a broader friction: the EU had originally put tariffs (ranging ~10–21%) on Indonesian steel alleging unfair subsidies (due in part to Indonesia’s nickel ore export ban and Chinese joint ventures). The WTO decision essentially vindicates Indonesia’s downstream nickel policies, confirming that its export restrictions and tax incentives did not constitute prohibited subsidies. However, the dispute is not entirely settled – the EU retains the right to appeal (though the WTO Appellate Body is currently not fully functional). Meanwhile, another trade fight continues over biodiesel. Just a week earlier, the EU announced it would appeal a WTO panel ruling that had backed Indonesia in a separate case over EU anti-dumping duties on Indonesian palm-oil-based biodiesel. Those EU duties (8–18%) had severely curtailed Indonesia’s biodiesel exports to Europe since 2019. The WTO panel had found the EU’s measures on biodiesel inconsistent with trade rules (in a report circulated in mid-September), but with the EU appeal, the case entered a limbo due to the WTO appellate impasse.
Stakeholders’ Responses:
The Indonesian government is celebrating the steel verdict as a diplomatic win. Officials note it comes at a “pivotal moment” – Indonesia joined BRICS this year and just sealed the CEPA deal with the EU – bolstering Jakarta’s narrative that it can pursue assertive industrial policies without isolating itself. The EU, for its part, has been cautious. Brussels has not immediately lifted the steel tariffs and is reviewing the lengthy WTO report. European steel producers (in countries like Spain, Finland, Italy) have lobbied to keep protections, arguing Indonesia’s nickel export ban and subsidies unfairly benefit its stainless steel industry. However, following the ruling, European importers of stainless steel are pushing the EU to comply and remove the duties, which could lower their costs. In the biodiesel case, EU officials signaled resolve by filing an appeal – a move Indonesia’s biodiesel industry association criticized as undermining the WTO decision. This effectively delays any removal of the EU’s tariffs on biodiesel indefinitely (given the WTO’s appellate body dysfunction). European climate lobbies have also weighed in, noting that Indonesian palm biodiesel faces separate EU sustainability criteria, so even without tariffs there are other barriers. Within Indonesia, the rulings energize proponents of its resource nationalism policies. They argue that the favorable steel outcome proves Indonesia can add value to its minerals (like nickel) and defend those policies legally. Indeed, Jakarta has already expanded export bans to other minerals (bauxite this year, with copper concentrates next), and is negotiating with trading partners to avoid conflict. The EU–Indonesia CEPA itself has chapters to address such issues, and EU negotiators have said the deal is a forum to resolve future trade irritants. Both sides publicly maintain that these disputes won’t derail overall relations – highlighting that they concluded the CEPA even amid the ongoing WTO cases.
Lexico Take:
These parallel developments illustrate that trade frictions between Indonesia and the EU remain alive, even as deeper economic ties are being forged. For companies, the outcomes are significant. The WTO steel ruling is likely to reopen the EU market for Indonesian stainless steel products (and by extension, for global companies sourcing from Indonesia’s burgeoning stainless steel sector). This could increase competition in Europe and benefit downstream users of stainless steel with potentially lower prices. It also reaffirms Indonesia’s strategy of banning raw ore exports to force investment in local smelting – a strategy multinational miners and metal purchasers must navigate. On biodiesel, the continued dispute (with the EU’s appeal) means the status quo of limited Indonesian biodiesel access to Europe persists for now, which keeps EU renewable fuel feedstock markets tighter and may subtly support palm oil prices globally. More broadly, the mixed signals from the EU – signing a trade deal while fighting Indonesia at the WTO – mean businesses should stay alert to regulatory risks. Non-tariff measures, especially around sustainability (e.g. the deforestation-free products law), will likely remain points of contention even after CEPA. The positive spin is that Indonesia is demonstrating capacity to use legal mechanisms to settle disputes rather than retaliatory measures. In the long run, the CEPA framework and Indonesia’s accession to groups like the OECD (which demands adherence to rules) could reduce such clashes. In the short run, expect Indonesia to continue aggressively defending its economic interests. Multinationals in the natural resources, energy, and manufacturing sectors should factor in that Indonesia will push the envelope on protecting nascent industries, and that the EU in particular will respond via legal channels. Engaging in policy dialogues and compliance with evolving standards (like sustainability criteria) will be key to avoid being caught in the crossfire of trade disputes.
Police Reform Commission Formed in Wake of Unrest
Issue Summary:
The Indonesian government is establishing a high-level Police Reform Committee following recent incidents that have eroded public trust in law enforcement. In early October, leaders in Parliament and the administration agreed to create an independent commission to oversee and recommend reforms in the National Police (Polri). This move comes on the heels of the August protest violence (see Issue 6) and other controversies that have plagued Polri in recent years (from corruption cases to public complaints about heavy-handed tactics). A senior coordinating minister, Mahfud MD, has been mentioned as a likely chair or key figure in the commission – a choice widely endorsed as Mahfud is a respected former defense minister and chief security minister known for his reformist credentials. The commission’s mandate is expected to include reviewing police standard operating procedures for crowd control, use of force policies, institutional culture changes, and mechanisms for handling misconduct allegations. This initiative was crystallized by President Prabowo’s directives after the protester’s death: he not only ordered investigations but also signaled that systemic changes are needed to prevent such tragedies. By the end of this week, the commission’s formation was formally announced, with a diverse membership of government officials, human rights experts, academics, and community representatives. They are tasked with delivering an initial report within 3–6 months, in time to influence Polri’s strategic planning for 2026.
Stakeholders’ Responses:
The decision to form a Police Reform Commission has been met with cautious optimism. The Speaker of the House lauded it as “essential to restore the police’s image and public confidence,” noting that Polri’s credibility is crucial for national stability. Lawmakers from both ruling and opposition parties appear supportive, a rare consensus born from mutual recognition that police missteps hurt everyone’s public standing. Civil society groups, which have long advocated for security sector reform, welcomed the announcement but stress that the commission must have real teeth. Amnesty International Indonesia and Komnas HAM urged that the body be truly independent and its recommendations implemented, not shelved as has happened with past reform blueprints. Many NGOs also insist that unresolved cases (like past allegations of torture or the 2022 football stampede incident) be reexamined by the commission to show commitment to justice. The National Police leadership publicly endorsed the initiative as well. Polri’s chief Listyo Sigit stated he “welcomes input from all stakeholders to improve the police,” and has appointed liaisons to cooperate with the commission. Rank-and-file police reactions are mixed – some officers feel unfairly maligned by one-off incidents, but others acknowledge that better training and community relations are needed. Importantly, Prabowo’s pick of Mahfud MD (a figure with a reputation for integrity) is intended to signal that this is not a token exercise. Mahfud himself has said in media interviews that comprehensive reform of Polri is overdue, citing everything from recruitment and education to budgeting and internal discipline that need overhaul. If empowered, the commission could recommend changes such as stronger civilian oversight (perhaps reviving an earlier idea to separate the police from the Home Ministry), improved pay and welfare for officers (to reduce petty corruption), and stricter accountability for abuses.
Lexico Take:
For foreign businesses and observers, the launch of a Police Reform Commission is a positive development signalling Indonesia’s commitment to good governance. A professional, accountable police force is fundamental to a safe business environment and the rule of law. If this initiative succeeds in curbing abuses and corruption within Polri, it would enhance Indonesia’s attractiveness as an investment destination by reducing security risks and improving public order. However, implementation is key. Similar reform drives have occurred in the past (post-1998 democratization efforts, for example) with limited follow-through. The difference this time might be the confluence of public outrage, political will (Prabowo’s government wanting to shore up legitimacy), and high-profile leadership under Mahfud MD. Multinational companies can anticipate a potential improvement in policing standards in areas such as handling of protests, IP protection (through better economic crime units), and more predictable enforcement of laws. It may also reduce the need for companies to rely on private security if trust in public policing increases. Over the next year, we will watch for concrete measures: e.g., new policing laws or revisions to the Police Act, adoption of body cameras, human rights training programs, or reforms in the police’s internal affairs division. Successful reform could reduce incidents that lead to social unrest or reputational damage (like violent crackdowns), thereby contributing to a more stable operating environment. The flip side is that if reforms stall, public resentment towards the police—and by extension the government—could resurface, which is a risk factor. On balance, this commission is a step in the right direction for addressing one of Indonesia’s longstanding institutional challenges. Stakeholders should remain engaged (for instance, chambers of commerce can offer inputs on issues like business-community policing or traffic management) to support the reform momentum. In summary, meaningful police reform would be a win-win: benefiting Indonesian society and bolstering confidence among the international business community.
Indonesia Courts EV Investment – Battery and Electric Vehicle Partnerships
Issue Summary:
Indonesia is accelerating efforts to become a regional hub for electric vehicle (EV) production by leveraging its rich nickel resources and large domestic market. During the week, Indonesian officials highlighted ongoing negotiations with major global automakers to establish EV and battery manufacturing partnerships in the country. Coordinating Minister Airlangga Hartarto revealed that Indonesia is in talks with several European carmakers about setting up joint production of batteries and possibly electric cars locally. This comes after Indonesia’s recent trade deal with the EU (see Issue 1) which explicitly encourages cooperation in the EV supply chain and gives European firms improved access to critical minerals like nickel. It also builds on existing investments: for example, a consortium of South Korea’s Hyundai and LG Energy Solution opened Southeast Asia’s first EV battery cell plant in West Java earlier in 2025, and Chinese battery giant CATL is investing in Indonesia’s nickel-based battery projects. The government’s message is clear – Indonesia wants to move up the value chain from exporting raw nickel to producing lithium batteries, and ultimately EVs. To support this, the government has banned raw nickel ore exports since 2020, offers tax holidays for EV-related investments, and has rolled out a national EV adoption plan (including a target for 2 million electric cars on the road by 2030). Notably, as of January 2025, Indonesia implemented a B40 biodiesel mandate (40% palm oil in diesel) to reduce fuel imports, and it is similarly pushing electrification in transport to cut oil use and pollution.
Stakeholders’ Responses:
Global automakers and battery producers are showing growing interest, albeit cautiously. European carmakers (like Volkswagen, BMW, and Stellantis) have been studying Indonesia’s market and resources – the news of trade negotiations suggests some of them might be considering Indonesia as a manufacturing base for EV batteries or even assembly, to serve both domestic and export markets. EU companies had previously been wary due to import tariffs and local content rules, but the new CEPA deal (once in force) will eliminate auto tariffs and could ease investment hurdles. Japanese automakers, long dominant in Indonesia’s auto market, are also stakeholders: Toyota and Mitsubishi have announced plans to produce hybrid or electric models in Indonesia and invest in battery supply (Toyota, for instance, committed $2 billion through 2025 for EV development in Indonesia). U.S. EV maker Tesla was in talks last year for potential battery material sourcing – while no factory deal materialized then, Tesla did sign contracts for Indonesian nickel supply. The Indonesian government, for its part, is actively wooing investors through various forums. President Prabowo and ministers have pitched Indonesia’s “comprehensive EV ecosystem” – from mining to refining nickel, to precursor materials, to cell manufacturing – in meetings with foreign CEOs. Domestically, Indonesian business groups, like the Indonesian Automotive Industry Association (GAIKINDO), support the push but also caution that infrastructure (charging stations, grid capacity) needs rapid development to make EV adoption viable. Environmental groups have a stake too: they support the shift to EVs in principle but are pressing for higher standards in nickel mining and processing (to ensure the EV boom doesn’t come at the cost of forests or pollution). They have urged that new investments meet stringent ESG criteria. Notably, Indonesia’s state-owned enterprises, such as PLN (the state electric utility) and Mind ID (the mining holding company), are being directed to partner with foreign investors – PLN to build charging networks and Mind ID to possibly co-invest in mineral processing.
Lexico Take:
Indonesia’s proactive courting of EV and battery investments is strategically significant for multinationals in the automotive and energy sectors. The country is positioning itself as a key node in the global EV supply chain, which could diversify and strengthen supply sources for battery materials at a time of rising demand. For automakers, manufacturing in Indonesia could serve the fast-growing Southeast Asian market and take advantage of lower costs – especially with tariff-free export potential to partners (the CEPA with EU, and possibly similar deals with other countries forthcoming). However, investors will weigh challenges: Indonesia’s requirement for a portion of EV batteries to be produced locally, the reliability of power supply (ensuring these new plants have sufficient electricity, ideally from renewable sources to maintain a green image), and ensuring compliance with international sustainability standards in mining. The fact that talks are underway with European automakers (who are under pressure to secure non-China battery supply) is a bullish sign – we may see announcements of joint ventures or factories within the next year. Companies currently outside Indonesia might consider entering or expanding via partnerships to not miss out on the EV incentives. The government’s strong backing (from top-level trade negotiations to local incentives) reduces political risk for these projects. Additionally, Indonesia’s huge domestic two-wheeler market provides an immediate opportunity: electric motorbikes are being promoted and could scale up quickly, potentially giving companies a volume base. On the flip side, those in fossil fuel and traditional auto sectors should note the trend: Indonesia is clearly moving toward the electrification and value-add industry, which could gradually diminish opportunities in raw mineral exports or ICE (internal combustion engine) vehicle sales. Overall, Indonesia’s EV push aligns with global decarbonization trends and presents a new frontier for investment. In the coming months, watch for concrete deals (e.g., an EU carmaker announcing a battery plant in Kalimantan or Sulawesi). If realized, Indonesia could within a few years evolve from primarily a nickel ore supplier to a manufacturer of advanced battery components and EVs – a transformation that would reshape its economy and export profile, and potentially make it a Southeast Asian electric mobility leader.
For tailored advice on navigating these developments, including government relations strategy and deeper insights, please contact connect@lexico.id. Our experts can help multinational companies align business policies with Indonesia’s evolving political and economic landscape.