Indonesia's Drought Challenge Through 2035: Business Impacts Across Sectors and Strategic Adaptation Pathways

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Executive Summary

Indonesia confronts intensifying drought challenges over the coming decade with far-reaching implications for businesses across economic sectors. The Meteorology, Climatology and Geophysics Agency (BMKG) predicts that while the 2025 dry season will be shorter than previous years, peak drought conditions will still occur during June through August with 115 Climate Zones (ZOM) entering dry phases starting April 2025.¹ This occurs within context of neutral global ENSO (El Niño-Southern Oscillation) and IOD (Indian Ocean Dipole) conditions, though warmer sea surface temperatures may trigger local weather disturbances across Indonesia.

Long-term projections indicate Indonesia will experience annual rainfall decreases ranging from 1-4% compared to the 1995-2010 period, except for Kalimantan and Sulawesi regions. This phenomenon impacts drought conditions resulting in reduced water availability, creating potential conflicts in water allocation needs among agriculture, industry, and energy sectors.² Without policy intervention, Indonesia's economic losses for 2020-2024 period could reach Rp 544 trillion, with largest risks from coastal and marine sectors (Rp 408 trillion), followed by agriculture (Rp 78 trillion), health (Rp 31 trillion), and water (Rp 28 trillion).

Drought impacts on businesses operate across multiple dimensions, touching nearly all economic sectors. Agricultural sectors face threats of rice production decreases between 1.13 and 1.89 million tons due to ENSO phenomena, with 2,256 hectares of rice fields threatened by drought and farmer incomes risking 9-25% declines.² Manufacturing industries experience reduced productivity or even facility closures due to water supply disruptions. Energy sectors face decreased hydroelectric generation capacity. Trade and retail encounter agricultural commodity supply chain disruptions. Tourism experiences destination attractiveness declines from water source depletion and environmental degradation.

Confronting this reality, businesses require comprehensive strategic approaches including water-efficient technology investments, supply source diversification, sustainable practice implementation, risk management system development, and collaboration with government and other stakeholders. The Asian Development Bank (ADB) and International Fund for Agricultural Development (IFAD) launched initiatives supporting 200,000 Indonesian farmers through dryland farming enhancement programs more resilient to drought conditions.³ This analysis explores drought impacts across diverse business sectors and formulates adaptation strategies applicable for building long-term business resilience facing water availability challenges in the coming decade.

Indonesia Drought Projections 2025-2035: Climate Trends and Pattern Analysis

Deep understanding of Indonesia's drought projections over the next decade requires comprehensive analysis of climate trends, weather patterns, and seasonal variability affecting water availability. BMKG predicts the 2025 dry season will begin gradually in April, with 115 Climate Zones entering dry periods. This number will increase in May and June, covering most of Java, Bali, Nusa Tenggara, Kalimantan, and Papua.¹ Unlike 2023 influenced by strong El Niño phenomena, the 2025 dry season occurs under neutral global climate conditions in both Pacific and Indian Oceans.

Despite shorter duration compared to previous years, peak dry season is projected to occur June through August 2025, with August being the most difficult month affecting most regions with worst drought conditions. In North Sulawesi, areas such as Bolaang Mongondow, Minahasa, Manado, and Bitung will experience heaviest impacts, where weather tends to be stable with no rain and very low humidity. This condition poses significant challenges for agriculture and forestry sectors, as low rainfall can increase crop failure risks and trigger forest and land fires, especially in areas with limited groundwater reserves and inadequate reservoir infrastructure.¹

Long-term climate analysis indicates that Indonesia will generally experience stable conditions without significant disturbances from phenomena such as El Niño or La Niña, which are expected to remain in neutral conditions throughout most years. However, BMKG estimates around 67% of Indonesia will receive more than 2,500 mm of rainfall annually, with high rainfall areas including most of Sumatra, Kalimantan Island, and Papua. Some areas are predicted to experience below-normal rainfall, including small parts of South Sumatra, East Nusa Tenggara, North Maluku, and northern West Papua, requiring preparation for potential drought especially in East Nusa Tenggara region.⁴

Recent climate research on future extreme rainfall projections in Indonesia provides compelling evidence for continuous increases in future extreme wet events and extended dry periods throughout the 21st century. Studies show that Indonesia's unique geography, with mountainous terrain and numerous islands, promotes orographic lifting and local sea and land breezes, which enhance extreme rainfall patterns. With climate change context, extreme rainfall patterns undergo significant alterations due to increased evaporation rates from Earth's temperature rise, causing the atmosphere to hold more moisture that consequently leads to more extreme downpours interspersed with longer dry spells.⁵

Agricultural Sector: Production Risks and Adaptation Requirements

Agriculture constitutes Indonesia's most vulnerable economic sector to drought impacts, with direct consequences for food security, rural livelihoods, and national economic stability. The sector faces threats of rice production decreases ranging from 1.13 to 1.89 million tons due to ENSO phenomena, with 2,256 hectares of rice fields threatened by drought conditions. Climate change also causes difficulties in determining planting times due to shifted peak rainy seasons, both in start and end timing, which significantly affects agricultural production and farmer income.²

Temperature increases will reduce plant effectiveness, thereby causing decreases in farmer profits. The main problems faced by Indonesian agricultural sector include the existence of various gaps including yields, information, purchasing power, and policies, showing complexity of problems faced from farmer level to government. Due to uncertain planting periods, agricultural productivity has decreased substantially. Climate change also narrows areas suitable for plant growth and development, with farmers' income at risk of decreasing by 9-25%.²

International organizations recognize urgency of supporting Indonesian agriculture adaptation. IFAD and ADB launched joint initiative expected to benefit over 200,000 farmers by boosting dryland farming practices more resilient to drought conditions. This program focuses on improving agricultural productivity in rain-fed areas, introducing climate-smart farming techniques, and strengthening farmer organizations to better cope with water scarcity challenges.³

Recent wet drought phenomenon presents mixed implications for agriculture. While continuing rainfall during dry season benefits rice farmers through relatively available irrigation water supply supporting planting continuity and agricultural production, increased rainfall during dry season also poses risks to horticultural agriculture, generally more sensitive to high humidity conditions causing disease pressures and quality degradation. Farmers must carefully manage these dual challenges while adapting planting strategies to unpredictable weather patterns.⁶

Manufacturing and Industrial Sector: Water Supply Disruptions and Production Continuity

Manufacturing and industrial operations depend fundamentally on reliable water supplies for production processes, cooling systems, cleaning operations, and employee facilities. Drought conditions create multiple challenges for industrial operations including water supply interruptions, quality degradation, increased costs, regulatory constraints, and community relations pressures. During drought periods, reductions in or interruption of water supply can result in reduced plant productivity or even closure of manufacturing facilities, particularly for water-intensive industries such as food and beverage, textiles, chemicals, paper, and electronics.

Companies growing crops like palm oil, sugarcane, and rubber face increased risks due to droughts, floods, and extreme weather disrupting production and reducing yields. Climate change stands as one of the biggest threats to crop production in Indonesia, with agriculture companies managing large-scale plantations particularly vulnerable to unpredictable weather patterns and shifting seasons.⁷ These impacts extend throughout supply chains affecting downstream manufacturing dependent on agricultural raw materials.

Integrating drought and extreme weather events into routine business planning allows manufacturers and communities to proactively prepare for water scarcity challenges. Companies should develop comprehensive water management strategies including consumption audits, efficiency targets, alternative source identification, storage capacity assessment, emergency response protocols, and stakeholder communication plans. These proactive measures reduce vulnerability to water supply disruptions while demonstrating corporate responsibility in water stewardship.

Water-intensive manufacturing sectors require particular attention to drought preparedness given high dependency on reliable supplies. Food and beverage operations need water for ingredient processing, cleaning, cooling, and sanitation. Textile operations use water for dyeing, washing, and finishing processes. Chemical plants require water for reactions, cooling, and dilution. Paper mills consume large volumes for pulping and processing. Electronics manufacturing needs ultrapure water for cleaning and processing. Each sector faces specific challenges requiring tailored adaptation strategies aligned with operational requirements and local conditions.

Energy Sector: Hydroelectric Capacity and Power Generation Challenges

Indonesia's energy sector experiences significant vulnerability to drought conditions through impacts on hydroelectric generation capacity, thermal power plant cooling water availability, and biofuel feedstock production. Hydroelectric facilities, which contribute substantial portions of electricity generation in regions like Sumatra, Sulawesi, and Papua, depend directly on river flows and reservoir levels that decline during prolonged drought periods. Reduced water availability forces generation curtailments or shutdowns, requiring compensation through fossil fuel alternatives or load shedding affecting industrial and commercial customers.

Thermal power plants including coal, gas, and geothermal facilities require large water volumes for cooling systems enabling efficient operations. Drought conditions reduce cooling water availability from rivers, lakes, or coastal sources, potentially forcing generation derating or temporary closures during peak water scarcity periods. This compounds electricity supply challenges when hydroelectric capacity simultaneously declines, creating reliability concerns for grid operators and power-dependent industries requiring stable supply for production continuity.

Energy sector adaptation requires comprehensive approaches addressing generation diversification, infrastructure resilience, and demand management. Expanding renewable energy sources less water-dependent, such as solar and wind, reduces vulnerability to hydrological variability while supporting climate change mitigation objectives. Implementing energy efficiency programs and demand response capabilities helps manage peak loads during supply constraints. Modernizing aging infrastructure improves operational flexibility and resilience. These measures collectively strengthen energy security while supporting Indonesia's sustainable development goals.

For industrial energy consumers, drought-related supply reliability concerns necessitate contingency planning including backup generation capacity, energy storage systems, demand flexibility capabilities, and potentially relocating operations to regions with more reliable supply. Companies should engage proactively with utilities and grid operators regarding supply plans, participate in demand response programs, and invest in energy efficiency measures reducing total consumption and peak load contributions. These actions improve operational resilience while contributing to broader grid stability during drought periods.

Tourism and Hospitality: Destination Attractiveness and Service Quality

Tourism and hospitality sectors face significant drought impacts through destination attractiveness degradation, operational challenges, and guest experience compromises. Natural attractions including waterfalls, lakes, rivers, and lush landscapes lose appeal during drought conditions with diminished water features, vegetation stress, dust, and general environmental degradation. Beach destinations experience challenges from reduced freshwater availability for facilities and potential saltwater intrusion affecting groundwater sources. Mountain and forest areas face increased wildfire risks during dry periods, sometimes forcing closures or creating hazardous conditions deterring visitors.

Hotels, resorts, restaurants, and tourism facilities require reliable water supplies for guest rooms, food service, swimming pools, landscaping, and recreational amenities. Drought conditions create operational challenges through supply interruptions, quality issues, increased costs, facility maintenance difficulties, and sometimes service limitations affecting guest satisfaction. High-end properties promising luxury experiences face particular challenges maintaining service standards during water scarcity, potentially resulting in negative reviews, reputation damage, and reduced bookings impacting revenues and profitability.

Tourism businesses should implement comprehensive water management programs addressing consumption reduction, alternative sources, recycling, and guest engagement. Installing water-efficient fixtures, appliances, and irrigation systems reduces overall consumption while maintaining service quality. Developing greywater recycling treating water from sinks, showers, and laundry for landscape irrigation and toilet flushing extends available supplies. Capturing rainwater during wet seasons provides storage for dry period use. Engaging guests through conservation messaging and optional participation in towel/linen reuse programs builds awareness while reducing water-intensive services.

Destination management organizations and tourism authorities should support sector adaptation through regional water resource planning, visitor management during drought periods, marketing emphasizing sustainable tourism practices, and coordination with water utilities ensuring adequate supplies for tourism facilities. Promoting drought-resilient tourism products including cultural experiences, culinary tourism, urban attractions, and indoor entertainment diversifies offerings less dependent on water-intensive natural features. These strategies help maintain sector viability and employment during challenging drought periods while building long-term sustainability.

Trade, Retail and Supply Chain: Commodity Availability and Price Volatility

Trade and retail sectors experience drought impacts through agricultural commodity supply disruptions, price volatility, inventory management challenges, and consumer demand shifts. Agricultural products including rice, vegetables, fruits, and livestock products face production declines during drought periods, reducing market availability and driving price increases affecting retailers, food service businesses, and ultimately consumers. Supply chain disruptions from production regions to urban markets create inventory uncertainties requiring careful management balancing stockouts against excess inventory risks during volatile periods.

Price volatility during drought periods affects profit margins for traders and retailers operating on thin margins in competitive markets. Sudden price increases may be difficult to pass fully to price-sensitive consumers, squeezing profitability. Conversely, rapid price declines when drought eases can leave traders with high-cost inventory sold at losses. Managing these risks requires sophisticated market intelligence, supplier relationships, pricing strategies, and sometimes hedging mechanisms protecting against extreme price movements impacting business viability.

Retail businesses should develop drought-resilient supply chains through geographic diversification, multiple supplier relationships, contracts with price adjustment mechanisms, and real-time supply monitoring capabilities identifying emerging shortages enabling proactive responses. Building collaborative relationships with key suppliers provides better visibility into production conditions and supply prospects, enabling more accurate demand planning and inventory decisions. Engaging customers through transparent communication about drought impacts, product availability challenges, and sourcing efforts builds understanding and loyalty through difficult periods.

E-commerce and online retail platforms face particular challenges managing customer expectations for product availability and delivery timelines during drought-disrupted supply conditions. Clear product availability messaging, expected delivery time communications, and proactive customer service addressing concerns help maintain satisfaction despite challenges. Leveraging data analytics for demand forecasting, supply monitoring, and pricing optimization enables more agile responses to rapidly changing conditions compared to traditional retail operations relying on slower information flows and decision cycles.

Financial Services and Insurance: Risk Assessment and Product Innovation

Financial services sector plays important roles in drought risk management through lending policies, insurance products, investment decisions, and advisory services helping businesses and households prepare for and respond to water scarcity challenges. Banks and other lenders face credit risks when borrowers experience drought-related income losses or business disruptions affecting loan repayment capacity. Agricultural lending proves particularly vulnerable given direct exposure to crop failures and livestock losses during severe droughts. Proactive risk management through borrower screening, diversified portfolios, and covenant structures mitigates these exposures while supporting productive lending.

Insurance companies develop specialized products addressing drought risks including agricultural crop insurance, business interruption coverage, and parametric products triggered by weather indices rather than requiring damage assessments. These products transfer risks from businesses and farmers to insurance companies and reinsurance markets, enabling recovery from drought losses while maintaining financial stability. Product design requires sophisticated actuarial analysis of historical drought patterns, climate change projections, correlation risks across regions and sectors, and pricing reflecting true risk costs while remaining affordable for target markets.

Investment managers increasingly integrate climate risks including drought into portfolio construction and asset allocation decisions. Companies and projects exposed to significant water risks may face valuation discounts or exclusion from portfolios emphasizing environmental, social and governance (ESG) criteria. Conversely, businesses demonstrating strong water stewardship, drought resilience, and climate adaptation leadership may attract premium valuations and capital flows from sustainability-focused investors. This creates financial incentives for proactive drought risk management and investment in resilience measures.

Development finance institutions and multilateral banks provide important support for drought resilience investments through concessional lending, technical assistance, and risk-sharing mechanisms improving project viability. ADB water efficiency improvement project and similar programs provide financing and expertise helping communities and businesses implement drought adaptation measures otherwise challenging to finance commercially. Expanding these programs and mobilizing private capital through blended finance structures can accelerate drought resilience investments supporting economic stability and development objectives.

Technology and Digital Solutions: Innovation for Water Management

Technology and digital solutions offer powerful tools for improving water management, drought monitoring, and business resilience amid water scarcity challenges. Remote sensing technologies using satellites and drones enable real-time monitoring of soil moisture, vegetation health, water body levels, and drought conditions across large areas providing early warning for businesses dependent on water availability or agricultural production. Internet of Things (IoT) sensors deployed in irrigation systems, industrial facilities, and water distribution networks provide granular data supporting optimization and rapid response to emerging problems.

Artificial intelligence and machine learning algorithms analyze complex datasets including weather patterns, hydrological conditions, water consumption, and operational parameters to generate insights, predictions, and optimization recommendations improving decision-making. Predictive analytics forecast drought likelihood, duration, and severity enabling proactive preparations. Optimization models identify efficient water allocation across competing uses, irrigation scheduling minimizing consumption while maintaining crop health, and industrial process adjustments reducing water intensity without sacrificing quality or productivity.

Businesses should invest in technology capabilities supporting drought resilience appropriate to their sector, scale, and risk exposure. Agricultural enterprises benefit from precision agriculture technologies enabling efficient water use through targeted irrigation, variable rate applications, and real-time crop monitoring. Manufacturing facilities gain from industrial water management systems optimizing consumption, detecting leaks, enabling reuse, and ensuring regulatory compliance. Service businesses implement smart building technologies reducing consumption through efficient fixtures, systems, and occupant engagement.

Digital platforms facilitate collaboration and information sharing among stakeholders including businesses, government agencies, research institutions, and communities. Water data sharing platforms aggregate information from multiple sources providing comprehensive pictures of supply, demand, quality, and risks supporting coordinated management. Stakeholder engagement tools enable transparent communication, participatory planning, and collective action addressing shared water challenges. These digital collaboration capabilities prove especially valuable during drought emergencies requiring rapid coordination across numerous actors and interests.

Policy and Regulatory Environment: Business Operating Context

Government policies and regulations shape business responses to drought through water allocation rules, environmental standards, economic incentives, infrastructure investments, and institutional arrangements. Water allocation frameworks determine which users receive priority during scarcity, affecting industries dependent on reliable supplies. Regulations governing groundwater extraction, surface water withdrawals, wastewater discharge, and environmental flows constrain business operations while protecting resources and ecosystems. Understanding regulatory environments and engaging constructively in policy development proves essential for businesses managing drought risks and planning investments.

BMKG emphasizes importance of regularly monitoring weather information from official sources and taking necessary mitigation steps to anticipate and reduce impacts of hydrometeorological disaster risks in respective areas. Government has prepared several climate-resilient development strategies for agricultural sector including implementing smart agriculture, developing quality and competitiveness of local human resources, and strengthening rice intensification systems. Responding to climate change through implementation of low-carbon adaptive agriculture and modernizing new drought-resistant variety nurseries forms part of national adaptation strategy.²

Businesses should actively engage in policy dialogues and planning processes affecting water management and drought preparedness. Industry associations provide collective voices representing sector interests and concerns in government consultations. Individual companies with significant water dependencies or expertise can contribute technical knowledge and practical perspectives improving policy design and implementation. Constructive engagement builds relationships with regulators, demonstrates corporate responsibility, and helps shape enabling policy environments supporting business adaptation while protecting public interests.

International cooperation through organizations including ADB, World Bank, IFAD, and others provides important support for Indonesia's drought resilience efforts. These institutions provide financing, technical assistance, knowledge sharing, and capacity building strengthening government capabilities and enabling investments difficult to finance domestically. Private sector engagement with these programs creates opportunities for partnerships, technology transfer, and project development supporting business objectives while contributing to national adaptation goals. Companies should monitor these programs and actively explore participation opportunities aligned with strategic interests.

Strategic Business Responses: Comprehensive Adaptation Framework

Effective business responses to Indonesia's drought challenges require comprehensive adaptation frameworks integrating risk assessment, strategic planning, operational improvements, investment programs, stakeholder engagement, and continuous learning. Companies should begin with thorough drought risk assessments evaluating exposure across operations, supply chains, markets, and enabling infrastructure. Understanding specific vulnerabilities, potential impacts, and adaptation priorities enables targeted interventions delivering greatest resilience benefits relative to costs and resources required for implementation.

Strategic planning should incorporate drought scenarios into business continuity planning, investment decisions, market strategies, and long-term development plans. Scenario analysis exploring various drought severity, duration, and timing possibilities helps identify robust strategies performing adequately across multiple futures rather than optimizing for single expected conditions. Building flexibility through modular investments, phased implementation, reversible commitments, and diverse options maintains adaptation capacity as understanding of climate risks and business conditions improves over time.

Investment programs should prioritize measures delivering multiple benefits including operational efficiency, cost savings, risk reduction, regulatory compliance, reputation enhancement, and employee engagement. Water efficiency improvements often generate attractive returns through reduced utility costs, deferred infrastructure expansions, and lower environmental footprints. Recycling and reuse systems extend available supplies while reducing wastewater volumes and treatment costs. Alternative sources provide supply security and independence from potentially constrained municipal or shared resources.

Stakeholder engagement proves essential for successful adaptation given interconnected nature of water resources and diverse interests depending on shared supplies. Building collaborative relationships with water utilities, government agencies, neighboring businesses, and local communities facilitates coordinated management, mutual support during emergencies, and collective advocacy for enabling policies and infrastructure investments. Transparency about water use, conservation efforts, and challenges builds trust and legitimacy supporting continued operations during tight supply conditions when tensions may arise over allocation priorities.

Conclusions and Path Forward

Indonesia confronts significant drought challenges over the coming decade with substantial implications for businesses across all economic sectors. While BMKG projects relatively stable climate conditions without extreme El Niño or La Niña phenomena through much of the period, gradual rainfall declines, extended dry spells, and increased variability create persistent water availability pressures. Without proactive adaptation, businesses face production disruptions, cost increases, supply chain challenges, regulatory constraints, reputational risks, and ultimately reduced competitiveness and profitability. Economic losses potentially reaching Rp 544 trillion underscore magnitude of threat to national prosperity and business sustainability.

Agricultural sectors experience most direct impacts through crop failures, yield reductions, input cost increases, and income losses threatening rural livelihoods and food security. Manufacturing industries face operational disruptions from water supply interruptions affecting production continuity and customer commitments. Energy sectors struggle with reduced hydroelectric capacity and thermal plant constraints requiring costly alternatives or load curtailments. Tourism destinations lose attractiveness from degraded natural features and operational service quality declines. Trade and retail navigate commodity shortages and price volatility challenging inventory management and profitability. Financial services manage credit risks and develop insurance products supporting risk transfer and recovery.

Effective responses require comprehensive business adaptation frameworks integrating risk assessment, strategic planning, operational improvements, infrastructure investments, supply chain resilience, and stakeholder engagement. Companies should conduct drought vulnerability assessments identifying specific exposures and priorities, develop business continuity plans incorporating water scarcity scenarios, implement efficiency measures reducing consumption and costs, invest in alternative sources and storage enhancing supply security, build collaborative relationships supporting coordinated management, and engage constructively in policy development shaping enabling environments.

Technology and innovation offer powerful capabilities improving water management through monitoring systems, optimization algorithms, efficient equipment, recycling technologies, and decision support tools. Financial institutions play important roles mobilizing capital for adaptation investments through lending, insurance products, investment funds, and advisory services. Government policies and programs provide essential frameworks, incentives, and public investments supporting private sector adaptation. International development partners including ADB, IFAD, and World Bank provide financing and technical assistance strengthening Indonesia's drought resilience.

Success requires treating drought adaptation as strategic business priority rather than narrow environmental or operational concern. Senior leadership commitment, adequate resource allocation, cross-functional integration, performance accountability, and sustained attention through inevitable competing priorities prove essential for effective implementation. Companies demonstrating drought resilience leadership will maintain operational continuity, protect financial performance, strengthen stakeholder relationships, and potentially gain competitive advantages during challenging periods affecting less-prepared competitors. This represents not only risk management necessity but also strategic opportunity for differentiation and value creation in water-constrained future.