The Report: Indonesia 2018

Trade & Investment

Consistent, robust economic growth, a 255m-strong population and a favourable position as South-east Asia’s largest economy have driven Indonesia to become an increasingly important actor in global trade. The country’s trade with the US and China has recorded double-digit growth in recent years, and it stands as the largest market for intra-ASEAN investment, with middle-class expansion and a steady rise in domestic consumption expected to keep it at the forefront of the ASEAN trade agenda.

This chapter contains interviews with Thomas Lembong, Chairman, Indonesia Investment Coordinating Board; and Shinta Widjaja Kamdani, CEO, Sintesa Group.

Economy

Macroeconomic growth gained momentum in 2017 on the back of improved global commodities prices, increased foreign direct investment and robust domestic consumption. Although the country has not yet returned to the near-6% average annual GDP growth recorded in the five years leading up to 2012, its macroeconomic fundamentals remain robust, with an improved current account balance and a sweeping tax amnesty programme supporting a recent sovereign credit rating upgrade. New sovereign and corporate bond issuance will help fund Indonesia’s substantial infrastructure agenda over the medium term, providing a critical finance channel for infrastructure development stakeholders.

This chapter contains interviews with Jim Yong Kim, President, World Bank Group; and Hiroshige Seko, Minister of Economy, Trade and Industry of Japan.

Emerging Cities

Given Indonesia’s diversity, the country’s regional policy is crucial to sustainable progress. In the past, under Jakarta- and Java-based regimes, centralisation was seen as the best way forward. The post-Suharto era, however, has seen Indonesia move away from this concentration of power towards an approach that seeks to distribute authority and investment more evenly throughout the country’s many diverse regions. While this policy has not always lived up to expectations, it has seen a greater flow of investment into Indonesia’s second-tier cities, opening up new opportunities for investors.

This chapter contains interviews with Tri Rismaharini, Mayor of Surabaya; and Sri Sultan Hamengku Buwono X, Governor, Yogyakarta Special Region.

Banking

With a population of over 250m and the fourth-largest economy in Asia, Indonesia is one of the world’s biggest potential banking markets. Growth in profitability, loans and assets has been stronger than in other ASEAN countries, although an economic slowdown in 2015 and early 2016 curbed sector growth before an upswing in 2017. The Indonesian market has historically been – and continues to be – highly profitable in comparison to more developed economies. The banking sector still offers plenty of untapped potential and room for competition, leaving opportunities for higher margins and new product development.

This chapter contains interviews with Kartika Wirjoatmodjo, President Director, Bank Mandiri; Jahja Setiaatmadja, President Director, BCA; Suprajarto, President Director, Banks Rakyat Indonesia; and Batara Sianturi, CEO, Citi Indonesia; and Chairman, International Banks Association of Indonesia.

Capital Markets

Already one of the fastest-growing major capital exchanges in the world, Indonesia’s equity and bond markets saw increased activity in late 2016 and early 2017 after a lacklustre performance in 2015. This recent resurgence is based on the country’s strong economic fundamentals and aided by short-term trends which saw a recovery in commodity prices, increased government infrastructure spending and improved liquidity at home as a result of the government’s tax amnesty programme. Consequently, the Indonesia Stock Exchange (IDX) continues to grow more quickly than the majority of markets in developed and developing economies – not just in Asia, but around the world.

This chapter contains an interview with Loh Boon Chye, CEO, Singapore Exchange.

Insurance

Indonesia’s economy and, with it, the financial services sector, has experienced growth since 2015, spurring demand for a diverse portfolio of insurance products. Life insurance is the dominant segment, accounting for nearly two-thirds of the sector, but demand for general insurance products has risen in recent years. Growing interest has been driven by a number of factors, including successful education efforts by the public and private sector, leading to rising awareness of insurance products among different demographics. Prudent investment practices, the overall strength of the national economy and more robust reinsurance coverage has also led to a trend of increased uptake.

This chapter contains interviews with Ben Ng, President Director, AIA Financial Indonesia; and Jens Reisch, President Director, Prudential Indonesia.

Energy

Once a key pillar of the Indonesian economy, the energy sector has declined in influence as oil and gas production has fallen. The hydrocarbons segment, which is valued at an estimated $20bn, contributed 3% to state revenues in 2016, down from 14% in 2014 and 25% in 2006. Yet the value of Indonesia’s energy sector cannot be reduced to its direct contribution to national GDP, as the power and oil and gas sectors remain a critical component of the infrastructure necessary to sustain economic growth across every other industry.

This chapter contains an interview with Garibaldi Thohir, President Director, Adaro Energy.

Infrastructure

An infrastructure boom is under way in Indonesia, after the administration of President Joko Widodo committed to developing $414.6bn of new public works projects between 2015 and 2019, including large-scale transportation, utilities and ICT projects, as well as new schools, hospitals, and water supply and treatment plants. In recent years the government has mobilised a coordinated effort to deliver planned projects, with dozens of state actors collaborating to develop new infrastructure policy, including an organised framework for public-private partnerships, new finance models and risk management reforms. Public expenditure on infrastructure is expected to hit a historic high in 2017.

This chapter contains interviews with Bambang Brodjonegoro, Minister of National Development Planning; and Jin Liqun, President, Asian Infrastructure Investment Bank.

Transport

Road, port, airport and rail upgrades are a critical priority for the government of President Joko Widodo, with his administration having overseen an infrastructure and transport spending surge since taking office in 2014. The main aims of this increased resource allotment are to lower transportation costs – which are among the highest in South-east Asia – reduce congestion, and improve the sector’s business and investment climate. Progress is being made on all fronts, and infrastructure spending is forecast to hit a record high in 2017.

This chapter contains interviews with Elvyn Masassya, President Director, Pelabuhan Indonesia II; and William Sabandar, President Director, Mass Rapid Transit Jakarta.

Industry

As the largest economy in South-east Asia and the 10th-largest worldwide in terms of purchasing power parity, Indonesia’s vastly expanding middle-income base has enticed an influx of international manufacturers over the years. These factors have allowed the sector to perform well over the last decade, despite the global economic slowdown in consumption. Industry has long served as a vital engine of growth for the Indonesian economy, and it continues to play a pivotal role in the development of the business climate.

This chapter contains interviews with Airlangga Hartarto, Minister of Industry; Rosan Roeslani, Chairman, Indonesian Chamber of Commerce and Industry; and Hemant Bakshi, President Director, Unilever Indonesia.

Retail & E-Commerce

In the wake of pro-business reforms and infrastructure development commitments, some of the world’s largest retailers have been expanding their presence in Indonesia. At the same time, the continued liberalisation of the sector has brought decreased levels of risk and increased market penetration. Today, Indonesia is home to a mix of modern and traditional retail outlets, with an uptick in e-commerce activity, which is both advancing the growth of the modern retail sector and creating new opportunities for entrepreneurs.

This chapter contains interviews with Hans Prawira, President Director, Alfamart; Kusumo Martanto, President Director, BliBli.com; and Florian Holm, CEO, Lazada Indonesia.

ICT

Driven by rising demand for new, affordable technology products and services among the nation’s large youth population, as well as increased investments by both the state and the private sector, Indonesia’s ICT sector expanded rapidly in 2016 and the first half of 2017. By January 2017 Indonesia’s mobile connectivity penetration rate – a measure of the number of mobile subscriptions as a percentage of total population – stood at 142%, which was among the highest in the region and up considerably from as recently as two years ago.

This chapter contains interviews with Anthony Tan, Group CEO, Grab; and Safdar Khan, Division President for Indonesia, Malaysia and Brunei, Mastercard.

Construction & Real Estate

Following several years of robust expansion supported by the launch and implementation of a major public infrastructure programme emphasising significant new transportation, utilities and social infrastructure builds, Indonesia’s construction industry is set to remain on a rapid growth path. State-owned enterprises continue to dominate the construction landscape, although the government has increasingly sought private sector participation in new builds. A growing middle class and rising levels of urbanisation have supported rapid real estate growth, and there remains substantial room for expansion in the coming years. While a commodities price crash and macroeconomic slowdown weighed on growth between 2013 and 2015, the sector began to regain its footing in 2016, with property sales forecast to rise for the first time in six years in 2017.

This chapter contains interviews with Wong Head Fine, Group CEO, Surbana Jurong; and Michael Widjaja, Group CEO, Sinar Mas Land.

Tourism

Despite a range of economic and political challenges both at the national level and across the region, Indonesia’s tourism industry posted strong growth in most segments in 2016. According to data from the Ministry of Tourism (MoT), the country welcomed 12.02m foreign visitors, an increase of more than 15% on 2015. This figure matches almost exactly the government’s target of 12m tourist arrivals for the year. With this in mind, it was perhaps not surprising when in late December 2016 Arief Yahya, minister of tourism, announced that Indonesia had upped the ante further, targeting 15m tourist arrivals for 2017.

This chapter contains interviews with Taleb Rifai, Secretary-General, UN World Tourism Organisation; and Bram Hendrata, Managing Director, Ismaya Group.

Mining

Considered a powerhouse in the realm of mineral production, Indonesia’s mining sector has long served as a key pillar of economic expansion, acting as a significant contributor to GDP by attracting much-needed export dollars, while also creating employment opportunities across the nation’s diverse landscape. However, soft commodity prices, declining demand from China and regulatory changes intended to promote the down-stream industry have seen the sector’s contribution decline in recent years. Despite this trend, the country’s substantial mineral and coal reserves remain attractive assets. In order to further monetise these resources and create more viable investment opportunities, policymakers are addressing regulatory shortcomings, and reducing the perceived risk of investing in the country.

Agriculture

Sustained by a diverse landscape, Indonesia’s agriculture sector has long been an important source of income for local households and has contributed much-needed export revenue. The sector has historically served as a pillar of the Indonesian economy, but has yet to achieve its full potential, though significant progress has been made in recent years under the business-orientated administration of President Joko Widodo. Partly as a result of adopting business-friendly initiatives, the sector has been able to attract necessary investment, which in turn is helping to bridge structural gaps. In order to address challenges to the sector the administration of President Widodo has increased the use of mechanised agricultural technology, invested in infrastructure and expanded the total area of farming land.

This chapter contains an interview with Amran Sulaiman, Minister of Agriculture.

Health

Aiming to bring its population of more than 250m under coverage by 2019, Indonesia continues to roll out its universal health care programme, or Jaminan Kesehatan Nasional (JKN). State-driven developments, as well as activity in the private sector, are triggering impressive growth across the health industry. According to estimates from consultancy Frost and Sullivan, the value of Indonesia’s health care market will reach $21bn in 2019, up from $7bn in 2014. However, government expenditure on health care remains relatively low at just 3.6% of GDP, one of the lowest rates in South-east Asia. In the years to come, greater investment will be vital as demand for services, facilities and equipment increases under JKN.

This chapter contains an interview with Fachmi Idris, President Director, BPJS Kesehatan.

Education

Projected to have a workforce of 65m young adults by 2035, the country is turning its focus to education to better ensure its citizens will be prepared to perform in an increasingly competitive economy. Indonesia is the world’s fourth-most-populated country and guaranteeing that everyone has access to quality education is no easy feat, especially considering the many infrastructural challenges posed by its archipelagic terrain. While the construction of new school facilities continues to receive investment, authorities are simultaneously prioritising improvements to curriculum and teacher performance to boost the overall quality of public education. Meanwhile, the sector has seen increasing private participation since it was removed from the negative investment list in 2010, allowing foreign investment into the education sphere.

This chapter contains an interview with Mohommad Nasih, Rector, Universitas Airlangga.

Tax & Business

This chapter examines Indonesia’s tax regime, focusing on its recently completed tax amnesty programme, new zone-based concessions established to attract investors, digitalisation of tax administration and other key areas.

It also contains a viewpoint from Ay Tjhing Phan, Tax Leader, PwC.

Legal Framework

This chapter examines Indonesia’s legal system, focusing on laws passed to enhance trademark protection; procedural changes set to speed up the registration process and other major developments.

It also contains a viewpoint from Todung Mulya Lubis, Founder and Senior Partner, Lubis Santosa & Maramis.

The Guide

This chapter provides helpful tips and information for first-time travellers, listings for ministries and other key contacts, recommendations for quality accommodation options around the country and other useful information.

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