The Report: Indonesia 2020
Indonesia is the world’s 16th-largest economy and presents an enticing opportunity for investors, with ongoing reform efforts and attractive demographics. Meanwhile, a booming start-up ecosystem signals the country’s rising consumer power and regional influence. While headwinds are expected to follow Covid-19, Indonesia’s strong foundations will help maintain momentum in the medium to long term.
Country Profile
While the Republic of Indonesia is just over seven decades old in its current form, the South-east Asian nation of more than 17,000 islands has a much longer history. The name Indonesia was first used in 1850 by British anthropologist James Richardson Logan in reference to the extensive group of islands that was known at the time as the Indian or Malay Archipelago. Archaeological analysis indicates that the ancestors of modern humans lived on the archipelago as far back as 1.9m years ago, while evidence of modern humans goes back 40,000 years. By 2000 BCE the islands were inhabited by a diverse group known as the Austronesians. These people exhibited impressive maritime skills and took full advantage of the archipelago’s location, engaging in extensive inter-island trading. This chapter contains a viewpoint from President Joko Widodo, better known as President Jokowi.
Explore chapterTrade & Investment
Indonesia entered 2020 trying to navigate global economic headwinds, including the pressure of uncertainty surrounding the outcome of the Covid-19 pandemic; however, the second-term election victory of President Joko Widodo, better known as President Jokowi, in 2019 and his coalition’s control of the national legislature has put the government in a solid position to enact much-needed reforms. With the country long dependent on natural resources, the administration seeks to streamline investment processes to attract foreign direct investment in downstream processing, thereby raising the value of exports and providing a domestic alternative to imports. Meanwhile, Indonesia is also pursuing – and in some cases has already secured – a raft of bilateral and multi-stakeholder trade agreements. This chapter contains interviews with Luhut Pandjaitan, Coordinating Minister for Maritime Affairs and Investment; Chan Chun Sing, Minister for Trade and Industry of Singapore; and Bahlil Lahadalia, Chairman, Indonesia Investment Coordinating Board.
Economy
Indonesia is the only G20 economy in South-east Asia and is home to the world’s fourth-largest population. While it possesses a variety of natural resources, taking full advantage of this endowment is challenging due to constraints such as an archipelagic geography, an infrastructure deficit and workforce inefficiencies. Reforms aimed at addressing some of these shortcomings are on the table, though they face growing resistance, especially amid the Covid-19 crisis. Real GDP growth was 5.03% in 2019. Prior to the outbreak of Covid-19, an uptick in GDP was expected in 2020. At a policy meeting in February, Perry Warjiyo, governor of Bank Indonesia, predicted Covid-19 would have a V-shaped effect on economic growth in 2020, with a baseline growth rate of 5.1% that could rise to 5.2% with fiscal policy support. However, as the pandemic quickly worsened and numerous countries enacted strict lockdown measures, this was revised down to 2.3% in April. This chapter contains interviews with Sri Mulyani, Minister of Finance; Perry Warjiyo, Governor, Bank Indonesia; and Wimboh Santoso, Chairman, Financial Services Authority.
Banking
Indonesia’s banking sector is large and crowded, with more than 1600 licensed commercial and rural banks. However, there remains plenty of untapped potential, given that the country has the fourth-largest unbanked population worldwide, at 83.1m people as of November 2019. Policymakers want both the number of banks and the unbanked population to shrink. As more Indonesians join the formal financial sector, it is expected that banks will consolidate, thanks to increased foreign investment and mergers. Regulators have been relaxing rules in hopes of attracting foreign entities that are keen to buy banks and create bigger players in the process. This chapter contains interviews with Jahja Setiaatmadja, President Director, Bank Central Asia; and Batara Sianturi, CEO, Citi Indonesia, and Chairperson, International Banks Association of Indonesia.
Fintech
Indonesia’s financial technology sector is one of the most dynamic and competitive in the world, as evidenced by the emergence of four unicorn companies – start-ups valued at over $1bn – and one decacorn, valued at over $10bn. These new tech giants include one digital payment firm, OVO, while the rest offer a number of integrated payment options in e-commerce, ride hailing and delivery services, and travel bookings. Surrounding them is a fast-growing ecosystem that is helping expand financial inclusion to previously underserved segments of the population. Investment comes from a range of domestic and international sources, both public and private. Global backers, including Google and China’s Ant Financial, have entered into joint ventures in Indonesia. This chapter contains interviews with Reynold Wijaya, CEO and Co-Founder, Modalku; and Vincent Iswara, CEO, DANA.
Capital Markets
The development of Indonesia’s capital markets has been buoyed by strong investor interest and high, consumption-led economic expansion on the back of a push to boost annual GDP growth. Ongoing reforms hope to liberalise Indonesia’s financial landscape and provide a legal and regulatory basis for product diversification and deeper institutional investment. Nevertheless, slower regional growth as a result of the Covid-19 pandemic looks likely to strain liquidity and test debtors’ ability to repay, while also possibly acting as a barrier to fundraising. In the medium term, the proliferation of digital financial tools will continue to bring new retail players to the market – a move that has encouraged the government to include financial literacy education alongside its reforms to increase the participation of Indonesians in order to deepen the market. This chapter contains interviews with Inarno Djajadi, President Director, Indonesia Stock Exchange; and Jemmy Paul Wawointana, President Director, Sucor Asset Management.
Insurance
Indonesia’s insurance sector holds considerable potential, given the country’s current low penetration rate, large domestic population and growing middle class. While the industry suffered a setback in early 2020 when allegations of a “pump-and-dump” scheme involving investment funds managed by two state-owned insurers came to light, the strong and immediate regulatory response should restore confidence in the market. It is also an opportunity for other insurers that have demonstrated sound management of customer premium to differentiate themselves. Meanwhile, rapid advancements in the country’s digital economy are helping to increase financial literacy and provide new distribution channels to reach Indonesia’s fast-growing consumer class.
Energy & Mineral Resources
Indonesia has long been a key supplier to global energy markets, but focus has shifted from export-oriented production towards meeting domestic demand. Current objectives include meeting the demand for consumer fuel through crude and palm oil, addressing electricity demand via coal and renewables, and using natural gas to supply predominantly industrial consumers. The government aims to consolidate control over upstream crude oil activities, primarily through the state-owned enterprise Pertamina, but still welcomes foreign investment in the sector. Long considered one of the world’s premier mining destinations, Indonesia finds itself in a transition period in 2020 amid significant questions about the future of the industry. The archipelago is home to considerable reserves of a wide variety of metals that are crucial to the global economy, and several metals that are key inputs for electric vehicles and industrial-scale batteries. This provides opportunities for foreign investment in mining services and downstream industries. This chapter contains interviews with Dwi Soetjipto, Chairman, SKK Migas; and Hilmi Panigoro, President Director, MedcoEnergi.
Infrastructure & Transport
For many years, Indonesia’s sizeable infrastructure gap has hindered industrial development. On Java – the country’s most densely populated island – roads, airports and seaports are under pressure due to the large amount of people and goods that need to be moved. At the same time, Indonesia faces challenges connecting other islands across the vast archipelago. Due to this, infrastructure and transport have been key priorities for the government in recent years. At the start of his second term in office in 2019, President Joko Widodo, better known as President Jokowi, launched a $412bn programme to boost investment in the country’s transport infrastructure. While infrastructure development is likely to be affected in the short term by the disruptions caused by the global outbreak of Covid-19 in early 2020, the government is working to ensure that major projects are attractive to private investors in the coming years. This chapter contains interviews with William Sabandar, President Director, Mass Rapid Transit Jakarta; and Liew Mun Leong, Chairman, Changi Airport Group.
Industry
With the largest land mass, population and economy in South-east Asia, Indonesia has considerable potential to become the region’s industrial powerhouse. Nevertheless, with a development model traditionally reliant on the export of natural resources rather than processed goods, the Indonesian industrial sector remains below its potential. Indeed, in terms of output and exports of manufactured products, the country lags behind many of its neighbours. The expansion of the sector has been further hindered by restrictions on foreign investment, in conjunction with the relative underdevelopment of the county’s infrastructure network. However, this situation has changed in recent years, with the government identifying the industrial sector as a key driver of economic growth and diversification. The current administration aims to turn the country into a leading regional manufacturing centre, in part by easing the investment process for foreign firms and offering incentives, including through increasing the number of special economic zones. This chapter contains interviews with Agus Gumiwang Kartasasmita, Minister of Industry; and Rosan Roeslani, Chairman, Indonesian Chamber of Commerce and Industry.
Retail & E-commerce
Indonesia’s large and relatively young population, coupled with a fast-growing middle class and high levels of consumer confidence, has been a key driver of expansion in retail and e-commerce. Physical retail spaces remain prevalent, with new malls opening across the country in 2019. Despite the sector’s positive performance in recent years, it will face headwinds in the short term amid the Covid-19 pandemic. Other challenges include infrastructure issues and slow technology adoption among some demographic groups, especially in rural areas. However, the medium- to long-term outlook of the retail sector looks bright. The burgeoning e-commerce market should help weather the impact of the Covid-19 pandemic, with companies adapting their services and interactions to accommodate customers who are relying on online and mobile offerings as they practise social distancing. Given the popularity of e-commerce and ride-hailing apps, it is expected that tech-based services will continue to expand to meet shifting consumer expectations. This chapter contains interviews with Kevin Aluwi, Co-CEO, Gojek; and Muhamad Fajrin Rasyid, Co-Founder, Bukalapak.
Construction & Real Estate
Indonesia’s economy averaged 6% annual GDP growth in the years following the 1997-98 Asian financial crisis. However, by 2013 approximately one-third of the budget was being channelled into unprofitable fuel subsidies at the expense of infrastructure development. This meant that industry and transportation did not develop in line with economic gains, stunting growth of the construction sector in turn. Moreover, a deceleration in economic growth in 2014-15, coupled with rising property prices, ignited fears of a property bubble. This prompted the central bank to impose higher interest rates and larger minimum down payments for mortgages, while also curtailing lending for second-home mortgages to prevent an accumulation of housing debt. However, a commodity price rebound in early 2019 saw several incentives introduced to reinvigorate the property market. These included lower interest rates, a relaxed loan-to-value ratio and smaller minimum down payments, while mortgage lenders also implemented schemes to entice the growing young middle class. This chapter contains interviews with Wong Heang Fine, Group CEO, Surbana Jurong; and Niko Safavi, President Director, Mowilex Indonesia.
Explore chapterEmerging Cities
Indonesia is characterised by substantial cultural diversity, comprising more than 17,000 islands and 267m people. Until the turn of the new millennium, economic development policies were strongly skewed towards Indonesia’s main island of Java and the capital Jakarta; a series of decentralisation policies have since aimed to spread out authority and investment across the country’s diverse regions. August 2019 saw the government announce that a new capital city would be built in the province of East Kalimantan on the island of Borneo. The new location will provide a more accessible economic and commercial centre for Indonesia’s eastern inhabitants, and is expected to attract major investment – transforming a region known for its agricultural and mining activities into the country’s administrative centre. This, alongside the emergence of a number of cities as increasingly key economic players, is opening up a wealth of business opportunities beyond Java. This chapter contains an interview with Isran Noor, Governor of East Kalimantan.
Explore chapterICT
The vibrancy of Indonesia’s digital economy is evident in the ubiquity of the green-uniformed Go-jek and Grab delivery drivers navigating via mobile device through its streets. Indonesia has the largest and fastest-growing ICT market in South-east Asia, and presents an enticing opportunity for investors thanks to demographic and macroeconomic factors, particularly as the government presses on with omnibus laws to reform a host of financial, investment, labour and tax regulations. Challenges include an uncertain macroeconomic environment weighed down by the Covid-19 pandemic, and an undefined regulatory and legal framework under which cybercrime threatens to undermine confidence and trust. However, these issues are not insurmountable, and longstanding government plans to improve internet and mobile data service provision across the country are coming to fruition, in tandem with the evolution of a dynamic digital services ecosystem steered by homegrown unicorns and supported by a thriving market for ancillary services. This chapter contains interviews with Johnny Plate, Minister of Communication and Information Technology; and Ming Maa, President, Grab.
Explore chapterTourism
Indonesia encompasses more than 17,000 islands, spread out over thousands of kilometres between the Indian and Pacific oceans. With the world’s largest tropical coastline, Indonesia has become a leading tourism destination in South-east Asia; the country’s cultural and natural diversity also offer significant untapped potential. Although the country has seen expansion in tourism in recent years, the Covid-19 pandemic that broke out in early 2020 has dampened prospects in the short run. Even so, President Joko Widodo, better known as President Jokowi, has identified tourism as a strategic sector through which to boost foreign exchange reserves. The sector is also set to provide a training and employment platform for a youthful workforce – a factor that could drive growth in both the sector and broader economy in the medium term. This chapter contains an interview with Abdulbar Mansoer, President Director, Indonesia Tourism Development Corporation.
Explore chapterAgriculture
With millions of hectares of arable land across over 17,000 islands, Indonesia’s agriculture sector has long been an integral part of the economy. While its contribution to GDP may have declined in recent years – a result of economic diversification – it remains hugely important, employing roughly one-third of the workforce. Although major companies dominate the industry from a revenue standpoint, small-scale farmers who often operating in hard-to-reach rural areas comprise the backbone of the sector. Infrastructure issues are a hindrance to agricultural growth, but the re-election of President Joko Widodo in 2019 is expected to lead to continued focus on overcoming the issue and contribute to improved nationwide connectivity. In the meantime, technological advancements, often driven by entrepreneurs looking to fill market gaps, are presenting solutions to challenges that Indonesia’s farmers have faced for decades, which include a lack of access to the advanced technologies that could make operations more financially viable. This chapter contains an interview with Kiwi Aliwarga, Founder and Executive Chairman, UMG Idealab.
Explore chapterHealth
The health care sector in Indonesia is in the midst of change, with the government making a final push to roll out universal health care (UHC) against the backdrop of the global Covid-19 pandemic. The plan had initially aimed to bring the population of over 268m under coverage by end-2019, but it had yet to achieve the targeted levels of funding and coverage as of early 2020. While the health system is currently tackling multiple burdens, it is limited by comparatively low government spending, rising labour costs and insufficient infrastructure. The move towards UHC is driving demand for private health care, opening new opportunities for collaboration. Going forwards, investment in digital health and technology-based platforms – highlighted during the novel Coronavirus outbreak – must continue to ensure that the health care sector’s reach is vast and sufficient. This should also spur greater focus on personal health across the population. This chapter contains interviews with Terawan Agus Putranto, Minister of Health; and Jonathan Sudharta, Founder, Halodoc
Explore chapterEducation & Human Capital
As around half of Indonesia’s population is currently under the age of 30, President Joko Widodo, better known as President Jokowi, has repeatedly stressed the need for the country to overhaul its education system in order to prepare the future workforce to compete in an information-, technology- and creativity-driven global marketplace. While currently on hold due to the Covid-19 pandemic, the construction of a new capital city powered by smart technologies in East Kalimantan will further drive local demand for skilled engineers capable of spearheading the government’s Making Indonesia 4.0 initiative, a vision designed to prepare the country for the increasing automation of industry. This chapter contains interviews with Nadiem Makarim, Minister of Education and Culture; and Tony Fernandes, CEO, AirAsia Group.
Explore chapterTax & Business
The Indonesian government set a tax revenue target of Rp1786trn ($125.9bn) for the year and had successfully collected 86.5% of that figure by the end of December 2019. In 2020 the target was raised to Rp1861.7trn ($131.2bn). This chapter offers an overview of Indonesia’s tax system, including the proposed omnibus laws, international taxation, zero-rated services, tax concessions and the luxury good sales tax, as well as outlines the online single submission system for the electronic processing of tax allowance applications and analyses regulatory efforts to boost the digital ecosystem. This chapter contains a viewpoint from Subianto, Partner and Digital Services Co-Leader, PwC Indonesia.
Explore chapterLegal Framework
This chapter examines the legal system of Indonesia, focusing on regulations to boost investor appeal and enhance the ease of doing business. These include measures for the regulation of e-commerce activities to support ongoing digitalisation, data protection legislation and the proposed omnibus laws. This chapter contains a viewpoint from Teguh Maramis, Senior Partner, Lubis Santosa & Maramis.
Explore chapterThe Guide
This chapter contains selected listings of some of the country’s top hotels, and helpful tips for business and leisure travellers coming to Indonesia. This chapter contains an interview with Chris Wren, Executive Director, British Chamber of Commerce Indonesia.
Explore chapterTable of Contents
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