Defeated by Vietnam, Indonesia's PMI Falls into Danger Zone

JAKARTA – Economist Prof. Didik J Rachbini from the Institute for Development of Economics and Finance (INDEF) has assessed that the overall state of the Indonesian economy can be captured by a single indicator: the continuously declining Purchasing Managers’ Index (PMI). Data released by S&P Global shows Indonesia’s PMI stood at 46.9 in June 2026, well below the neutral 50 level. ‘This figure indicates that the national industrial sector has long been ailing and has now entered a red danger zone, even though the overall economy grew by 5.61 per cent last quarter,’ Didik stated in a written release received on Sunday (5/7/2026).

Didik compared Indonesia’s situation with Vietnam, which has achieved 8 per cent economic growth, supported by an industrial sector developed over the past two to three decades. He noted that Vietnam implemented investment-friendly policies and built its industrial sector, transforming its economy into a newly industrialised country. As a result, the World Bank classified Vietnam as an upper-middle-income country in July 2026, with a gross national income (GNI) per capita of approximately 4,970 US dollars, surpassing the 4,636 US dollar threshold.

‘Indonesia’s industrial sector has long been adrift without a clear policy footing. The declining manufacturing PMI into contractionary territory is the fruit of an absence of policy for industry and investment,’ said Didik, who is also the Rector of Paramadina University. He added that beyond the lack of industrial policy, businesses are facing cost pressures due to global geopolitical factors and domestic issues. ‘Businesses will not invest as long as there is no clear policy, bureaucratic hurdles remain complex, and incentives are insufficient to spur rapid industrial growth,’ he explained.

Didik also pointed to declining public purchasing power, but argued this is a consequence of a shrinking industrial sector and an economy that fails to provide enough productive employment. He described the situation as a vicious cycle that can only be broken through industrial structural transformation, deregulation, and debureaucratisation to allow the business sector, particularly industry, to develop. ‘The best policy practices were implemented by the government in the 1980s and 1990s, resulting in economic growth of 7-8 per cent and industrial sector growth of 10-12 per cent. However, such policies have not been or are not yet able to be replicated,’ he said.

Didik explained that Vietnam has successfully executed these policies, allowing it to leapfrog into becoming an upper-middle-income industrial country. In contrast, Indonesia has not consistently pursued structural transformation and deregulation, leaving economic growth stagnant at a moderate 5 per cent without strong industrial support. ‘If you examine the quarterly growth rates of each sector, the industrial sector has been declining over time. This is a warning sign, exactly matching the current indication of a falling PMI,’ he stated.

Meanwhile, Didik noted, Vietnam implemented an economic structural transformation strategy by first entering the global production chain and then gradually moving up the value chain. ‘Vietnam’s industrial strategy is outward-looking, exactly like what Indonesia did in the 1980s,’ he said. According to Didik, the process involves attracting quality foreign direct investment. He contrasted this with Indonesia, which he said attracts low-quality investment such as restaurants, trading services, and packaging. ‘In Vietnam, investment is directed towards export markets while developing domestic industry. The most important aspect is the process of technology transfer and innovation development within that policy framework,’ he explained.

Didik remarked that Indonesia is now losing out to Vietnam, whose citizens were still displaced and suffering on Galang and Rempang islands in the 1970s. He warned that without massive policies to revive industry and improve the business climate, Indonesia could become the ‘sick man’ of ASEAN. Conversely, he noted that Vietnam is not only now an upper-middle-income country but is also entering a phase some observers call ‘Đổi Mới 2.0’ – a transition from a low-wage economy to one based on innovation and high-value-added industry. ‘Unlike Indonesia, in a short time and with 8 per cent growth, this country can escape the middle-income trap,’ Didik concluded.