The Report: Indonesia 2014
On the cusp of 2014 national elections and the 2015 integration of the ASEAN Economic Community, Indonesia is poised to continue its rapid economic expansion. While the country’s natural resources are still plentiful, by channelling foreign direct investment into the right areas, the government is ensuring that true potential, in terms of value and manufacturing, is achieved. By inviting targeted investment and adapting existing regulatory frameworks, the government has taken significant steps to facilitate foreign investment and the development of value-added industries. Indonesia is a country renowned for its abundance of natural resources, which include oil, gas, coal, nickel, tin, copper, gold and silver. While slightly down on the previous year, the country’s total oil production for 2012 stood at 861,000 barrels per day, accounting for approximately 1.2% of the world’s oil production. Indonesia remains the world’s largest exporter of thermal coal, exporting a total of 304m tonnes in 2012 to countries such as Japan, South Korea, China and India. The country continues to be the dominant nation in South-east Asia politically and economically, and its participation within ASEAN in particular will likely determine the shape of regional integration, with the introduction of the ASEAN Economic Community (AEC) in 2015 looming as the bloc’s next major milestone.
Country Profile
With a population of approximately 247m made up of more than 300 different ethnic groups, Indonesia is the third-largest democracy in the world while also being the world’s most populous Muslim nation. The country has a total land mass of 1,904,569 sq km, spread over an archipelago of around 17,508 islands, some 6,000 of which are inhabited. Jakarta is the country’s most populated city, with more than 10.18m inhabitants living within an area of 740 sq km. A total of 15 parties are expected to contest the 2014 elections, vying for the votes of around 175m potential voters, 67m of whom will be voting for the first time. With the year ahead set to see the much-anticipated election of a new president and new national and regional legislatures, 2014 will likely be a time of great political activity in Indonesia. This chapter contains viewpoints from President Susilo Bambang Yudhoyono; and Xi Jinping, President of China; and an interview with Yasuo Fukuda, former Prime Minister of Japan.
Explore chapterTrade & Investment
Despite a 6.7% contraction in net exports in 2012, the value of Indonesia’s trade has expanded significantly over the past decade, with a doubling of exports between 2006 and 2011 to $203.50bn. Rising demand from Asian markets for Indonesia’s key commodity outputs has spurred a redirection of trade. Yet, with most foreign direct investment flowing to sectors linked to consumption, trade has been a smaller growth driver than household spending. This comes despite ASEAN-wide trade liberalisation that has encouraged conglomerates to expand their supply chains to Indonesia. By the first half of 2013, Indonesia’s 10 largest export markets accounted for 73.6% of its total exports, roughly 70% of which stay in Asia. In the first half of 2013, FDI accounted for 68.57% of total investment, while the total stock of inward FDI grew tenfold from 2000 to 2012, reaching $205.66bn. US Investment in oil, gas and mining grew 11% in the eight years to 2012, while manufacturing saw a rise of 21%. By 2012, 52.2% of US FDI was in extractive industries and 46.1% in manufacturing. As investment in Indonesia’s non-commodity sectors continues to grow, the authorities will need to expand access to credit and export finance for its small and medium-sized enterprises, which are key to reducing Indonesia’s reliance of commodity exports. This chapter contains interviews with Muhammad Lufti, Minister of Trade; Le Luong Minh, Secretary-General, ASEAN; Sri Mulyani Indrawati, Managing Director, World Bank; Paul Wolfowitz, former US Ambassador to Indonesia, and Visiting Scholar, American Enterprise Institute; and Wishnu Wardhana, Chair, APEC Business Advisory Council (ABAC) 2013, and President Director and Group CEO, Indika Energy.
Explore chapterEconomy
Following a decade of growth at an average rate of 6% per year, Indonesia’s economy faced external and internal challenges in 2013. As the world’s 16th-largest economy in 2012, with a GDP of Rp824trn ($824bn) and a population of 247m citizens, Indonesia has strong fundamentals for long-term growth. While the sharp reversal of foreign portfolio investment (FPI) flows from May 2013 emphasised economic imbalances, authorities are seizing on the sense of crisis as an opportunity for enacting needed structural reforms. Despite relatively high inequality and 115m people living on less than $2 a day, the large domestic consumption engine has insulated Indonesia from volatility in world trade. Since 2010 the services sector has become the major employer and accounted for 39% of GDP as of the second quarter of 2013. The manufacturing industry accounts for 23.8% of GDP, construction for 10.3% and mining for 10.4%. Despite disagreements on the pace of the slowdown, growth remains higher than emerging markets’ average of 4.5% in 2013, and points to the resilience of long-term drivers of economic growth. While policy continuity amid the political transition in 2014 will be an important factor in determining the pace of growth, the authorities will continue to balance the need to support domestic consumption growth with ensuring broader macroeconomic stability and the confidence of global investors. This chapter contains interviews with Dipo Alam, Cabinet Secretary; Jokowi, Governor of Jakarta; Suryo Sulisto, Chairman, Indonesian Chamber of Commerce and Industry; Jusuf Wanandi, Co-founder and Vice-Chairman, Centre for Strategic and International Studies; Edward Soeryadjaya, Chairman and Founder, Ortus Holdings; Prijono Sugiarto, President Director, Astra International; and Tri Rismaharini, Mayor of Surabaya.
Explore chapterBanking
Banking remains a highly profitable sector in Indonesia despite being limited in its reach. Leading banks’ average profits were the highest amongst major economies in 2012, according to Bloomberg data, a remarkable feat in an era of falling bank profits globally. Credit plays a modest role in the Indonesian economy, with loans amounting to 32.85% of GDP. This is considerably lower than in many neighbouring countries such as Malaysia (113.5%) and China (130%). Total credit has been growing rapidly in recent years, with a 24.4% increase in 2011, 23.9% in 2012 and 20.7% growth in the first half of 2013. Bank profits have remained consistently high, with a return-on-assets ratio of 3.09% by October 2013, which is more than double the regional average. Although rapid growth has put some strain on the banking sector, Indonesian banks continue to be well capitalised, with a capital adequacy ratio of 18.48% in October 2013, well above the central bank’s floor. Following over a decade of high profitability and fragmentation, the banking sector faces the twin challenges of increasing intermediation with the real economy and gradually lowering margins. As larger, more efficient banks capitalise on their positions, smaller lenders will need to innovate and study potential mergers and acquisitions to sustain their positions. Over the medium term, as the banking system faces increased ASEAN-wide competition, Indonesian banks will need to work at improving their efficiency. This chapter contains a banking viewpoint from Agus D W Martowardojo, Governor, Bank Indonesia; and an interview with Alan Richards, CEO, HSBC Indonesia.
Explore chapterCapital Markets
Growth in Indonesia’s stock market in recent years has been driven by the steady expansion in the total number of shares listed, which increased from 296 in 2008 to 479 by September 2013. Once dominated by commodities, such as mining, energy and agriculture stocks, the local market is now led by consumer-related shares, such as financial services, infrastructure and utilities. Domestic investors’ share of trading has steadily grown in recent years, climbing from 19% in mid-2007 to 44.2% by August 2013. Encouraging new supply is critical to the bourse’s ambitions of becoming the region’s largest exchange by capitalisation by 2015, when it hopes to reach $750bn. The number of IPOs nearly doubled from 13 in 2009 to 25 in 2012, raising a total of $1bn. Despite the challenges that have been caused by global volatility, most investors have maintained a bullish long-term outlook. Indonesia’s reliance on foreign portfolio investments to finance its current account deficit is a cause for concern. All the same, its consistent growth record, resilient corporate earnings and dynamic private sector highlight its strong prospects for expansion going forward. This chapter contains interviews with Muliaman D Hadad, Chairman, Otoritas Jasa Keuangan; and Eko Yuliantoro, CEO, Bahana Securities.
Explore chapterInsurance
Rising disposable incomes, consumption growth and sustained investment are key factors in the sector’s recent continued expansion and future potential growth. While still small compared to its potential, Indonesia’s insurance market is attracting global underwriters and reinsurers. The life segment, which comprised roughly two-thirds of premiums in 2012, is the market’s key growth driver. The segment has seen annual expansion of 25.6% in the decade to 2012. The inflow of foreign direct investment into the Indonesian market, particularly from Japan, has led to a wave of mergers and acquisitions in the insurance sector that can be expected to increase competition. In January 2013, oversight of the sector was handed over to a new independent regulator, the Financial Services Authority, which will work to help institute new regulations for the market. Stricter regulations imposed under a comprehensive framework by the new regulator will bolster underwriters’ financial and technical capacity, while growing affluence, rising awareness of natural disasters, and the need for financial planning will be key drivers of long-term growth. This chapter contains an insurance dialogue between David Beynon, President Director, Tokio Marine Life Insurance Indonesia, and William Kuan, President Director, Prudential Indonesia; and interviews with Elvyn G Masassya, President Director, Social Security Agency; and Tim Shields, President Director, ACE Jaya Proteksi.
Explore chapterEnergy
The nation’s vast territorial expanse and established presence of experienced, well-financed international and domestic oil firms has led to the discovery and exploitation of a succession of sizeable oil and gas projects across the country for more than 125 years. As of 2013, Indonesia’s total hydrocarbons reserves reportedly included 3.7bn barrels of oil and 103.3trn cu ft of natural gas. In 2012, 96 new exploratory wells were drilled across the country – 55 onshore and 41 offshore – up from 81 exploratory wells drilled in 2011. Indonesia ranked fifth in the world in terms of total liquefied natural gas exports, behind Qatar, Malaysia, Australia and Nigeria. The growing shortage of domestic petrol production capacity will see Indonesia surpass the US as the world’s largest importer of petrol by 2018. Exploring and exploiting new oil and gas fields – including more expensive plays such as shale gas, deepwater and frontier resources – will be increasingly important for both exports and the growing domestic market as maturing legacy fields continue to decline in productivity. The success of these efforts relies not only on the technical capabilities of the oil and gas operators in the country, but also on the creation of a stable regulatory framework to support investor confidence. This chapter contains interviews with Karen Agustiawan, President Director, Pertamina; and Nur Pamudji, President Director, Perusahaan Listrik Negara; and an energy roundtable with Andhika Anindyaguna, CEO, Sugih Energy; Jon M Gibbs, President, ExxonMobil Indonesia; Lukman Mahfoedz, President, IPA and President Director, Medco Energi; Roberto Lorato, President Director, Premier Oil Industries Indonesia; and Hardy Pramono, President and General Manager, Total E&P Indonesia.
Explore chapterMining
Buffeted by volatile global commodity prices and legislative uncertainty at home, Indonesia’s mineral output has fluctuated considerably in recent years. The mining sector comprised 11.24% of GDP in 2013, down slightly on 11.8% in 2012, but an improvement on the 8.94% recorded in 2004. Coal contributed $26.64bn to domestic exports in 2013, followed by copper ore at $3.38bn, nickel ore at $1.88bn and bauxite at $1.39bn. Key importers of Indonesian coal include China, India, Japan and Korea, though the expected rise in domestic consumption is also likely to affect demand and production going forward, with several new coal-fired power plants set to be built in the coming years. In spite of challenges, the country’s vast potential resource still provide substantial growth opportunities. With mineral prices expected to stabilise as emerging economies increase their demand for the country’s raw materials, domestic and foreign mining outfits should find further incentive to continue exploration and development plans, provided uncertainty around the legislative framework is addressed. This chapter contains interviews with Martiono Hadianto, President Director, Newmont Nusa Tenggara; and Arsjad Rasjid, Vice-President Director and Group CFO, Indika Energy.
Explore chapterIndustry Retail
Indonesia has all the makings of an industrial powerhouse: a young and talented population, relatively cheap labour and a large domestic market. The country has the capacity to develop its industrial capacity, specifically in terms of export-oriented industries. Indeed, manufacturing is vital to the Indonesian economy. Without it the country would have a difficult time addressing its current account deficit, escaping the middle-income trap and taking the edge off the commodity cycle. Indonesia must look for advantageous terms in foreign trade agreements and ensure that it is able to remain competitive in terms of import and export trade balance. Though national and presidential elections in April and July 2014, respectively, may bring some uncertainty for investors, on the whole most indicators point to a year of expansion for the economy. The challenge for the sector at this point is to make sure that a lack of infrastructure and demands for increased wages do not derail the return and rise of Indonesian manufacturing. This chapter contains interviews with Irvan K Hakim, President Director and CEO, Krakatau Steel (Persero); Klaus Lesker, Member of the Executive Board, Ferrostaal; Hiroyuki Fukui, President Commissioner, Toyota Motor Manufacturing Indonesia; and VP Sharma, CEO, Mitra Adiperkasa.
Explore chapterConstruction
Increased government investment in infrastructure has helped unleash a boom in Indonesia’s construction sector. With rapidly growing demand for residential real estate, office buildings, industrial estates and other property across the archipelago, the construction sector is poised to see significant expansion. And, although the sector has declined since 2012, a new law that allows foreign nationals to purchase condominiums is likely to help drive up foreign direct investment for future construction projects. One of the main challenges for the sector in 2013 was the rupiah’s depreciation against the US dollar, which significantly increased the cost of building materials. The prices for asphalt and concrete, for instance, rose 21% and 20%, respectively. Dams, roads, and bridges account for the majority of government projects that are currently under way or planned to begin construction in the next few years. Toll roads and bridges will be the first investment areas as the government seeks to improve the nation’s transport links. Human capital development and a boost in industry standards are key for the sector to increase its overall GDP contribution. Though the sector may slow in the first part of 2014, it is expected to gain momentum once the new administration is given time to establish new regulations. If it favours infrastructure development with similar attention as the current administration, the sector will continue to benefit from increased government spending.
Explore chapterReal Estate
Rising capital values, favourable interest rates and strong demand have created a promising environment for Indonesia’s real estate sector, which posted impressive expansion numbers in 2013. While the US and EU have struggled with the lingering effects of the global financial crisis, South-east Asia has powered on, with Indonesia topping the list of the world’s fastest growing luxury real estate markets in terms of price. A new loan-to-value ratio introduced in 2013 aims to protect against a property bubble, in part by requiring first-time home buyers to make a down payments of 30% of the purchase price, with this rising to 40% and 50%, respectively, for those purchasing a second or third home. Rapid population expansion, growth of the middle class and increasing road congestion in Jakarta mean that demand for properties in the city centre is expected to continue rising. Demand for office rental space, as well as for retail and hotel property, is also expected to continuing rising. Indonesia’s young population and growing consumer class will provide growing demand for property in the years ahead, and, as the country continues to strengthen its appeal as a location for doing business, the real estate market should remain an attractive option for investors over the longer term. This chapter contains interviews with Michael Widjaja, Group CEO, Sinar Mas Land; Santoso Gunara, President Director, Danayasa Arthatama; and Eddy Sindoro, Paramount Enterprise.
Explore chapterInfrastructure
A result of decades of underinvestment, creaky infrastructure has long been the Achilles’ heel of the Indonesian economy. Around $6.8bn will be spent on power and some $29bn on water utilities and other services under the Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development. The government is expected to fund 28% of the cost, with the rest coming from the private sector. The government aims to meet 2% of the country’s power demand from nuclear energy by 2017. In February 2014 it confirmed plans to build a 30-MW nuclear power plant in western Java. Although private sector involvement in water services remains limited to date, the government has envisaged that nearly 70% of water infrastructure investments between 2010 and 2014 will come through public-private partnerships, community participation and the private sector. Improving infrastructure will continue to be a priority with Indonesia’s sovereign rating upgraded to investment grade and its economy growing at a steady pace. This chapter contains interviews with Djoko Kirmanto, Minister for Public Works; Stuart Dean, CEO, General Electric ASEAN; and Bobby Umar, Chairman, Indonesian Engineers Association.
Explore chapterTransport
For an archipelago spread over more than 17,500 islands and spanning 5,000 km from west to east, the need for Indonesia to have an efficient transport network that seamlessly integrates sea, land and air transport systems is clear. The public sector manages 90% of total transport infrastructure, while private sector involvement is concentrated on a few tolled highway projects and private rail lines. By 2014 Soekarno-Hatta International Airport is expected to be able to handle 64m passengers annually; however, passenger demand is expected to soar to 87m by 2025. Indonesia has much to improve in the transport sector, which already comprises 40% of infrastructure investment. Deeper focus on development of the country’s transport networks is necessary for improving travel connectivity and reducing the cost of doing business throughout the archipelago. This chapter contains interviews with Emirsyah Satar, CEO, Garuda Indonesia; Sukmawati Syukur, President Director, Monorail; and Djarwo Surjanto, President Director, Pelindo III.
Explore chapterTelecoms & IT
There is a growing sense that the telecoms market is evolving and becoming more segmented, with increased differentiation among players. This is helping the industry to move beyond the commodity stage, as customers begin to pick and choose and are no longer seeing all carriers as being the same. The merger between XL Axiata and Axis Telekom Indonesia received approval from the Ministry of Communications and Information Technology in December 2013, and the deal was completed in 2014. The combined entity is set to become the second-largest player in Indonesia. The prospects for the sector are the best in years. Mergers, additional spectrum and new technologies are helping to stop the decline in average revenue per user that defined the market for so long. While much IT-related activity in Indonesia is very basic, it is on a large scale and is growing rapidly. A density of use is being attained that is driving profitable advances. The next few years should bring rapid growth and intense competition. Companies from all over the world will be battling for market share, which should help keep prices down. Last mile and digital divide issues remain, but as they are solved the market will expand further. This chapter contains interviews with Arief Yahya, President Director, PT Telekomunikasi Indonesia (Telkom); and Hasnul Suhaimi, President Director and CEO, XL Axiata.
Explore chapterTourism
Boasting some of the world’s greatest biodiversity and dynamic landscapes, Indonesia has long been a popular destination amongst tourists. The development of an Islamic heritage niche has seen an increase in arrivals from Gulf countries. Arrivals from the UAE and Saudi Arabia increased 122.4% and 34.2%, respectively, in 2013. The number of air travellers to Indonesia rose 15% in 2012, reaching 72.6m. Projections for 2013 were high, with as many as 83.4m travellers forecast to fly through Indonesia’s airports. Once the ASEAN single market integration is complete in 2015, there will be a regional market to serve some 600m potential tourists. The government spent approximately $1.53m on international marketing efforts in 2013, focusing on events in new markets such as China, India and Turkey. Infrastructure hurdles and human resource recruitment remain the top challenges, but the government’s prioritisation of tourism as a key source of economic growth is a good sign. As the nation’s $43bn infrastructure investment budget continues to support projects, tourism is set to benefit from improved connectivity. This chapter contains an interview with Anthony Akili, President and CEO, Smailing Tours.
Explore chapterAgriculture
In 2013 the agriculture sector accounted for 14.4% of total GDP. Food crops represented the largest segment, with more than half of the industry’s value. Tasked with providing sustenance for the country’s nearly 250m citizens while contributing a steady stream of export revenue, the Indonesian agriculture sector remains an indispensable industry with an influence that extends across a broad spectrum of the social, political and economic landscape. Rice, maize, and soybean are among the most widely grown crops and are cultivated primarily for domestic consumption. With a total output of 70.86 tonnes in 2013, rice is the dominant staple food. The government is focusing on food price volatility and increasing the contribution of domestic production to consumption in the country. Although the days of double-digit expansions for plantation crop acreage are now in all likelihood a thing of the past, continued demand should be enough to sustain profits for large agro-industrial exporters. This chapter contains interviews with Franky Oesman Widjaja, President Commissioner, Sinar Mas Agribusiness and Food; and Franciscus Welirang, Director, Indofood.
Explore chapterEducation & Health
In 2002, a new amendment to the constitution required that central and local authorities spend 20% of their budgets on education, a level achieved in only one year, 2009. The Indonesian education system is large, well-funded, fast growing and quickly improving. Despite some difficult years as a result of the 1997-98 Asian financial crisis and some ineffective policies instituted in its aftermath, the government has made a significant commitment to the sector. In 2013 the government increased the number of years of compulsory education from nine to twelve, the former having been a requirement since 1994. If Indonesia can carry out its programmes effectively, the improvements will be reflected in test scores and international rankings. Foreign universities would then be keener to form partnerships that further raise the country’s global standing. While Indonesia has faced significant setbacks in the past, it has made real progress in health care provision and the system is about to dramatically improve. The country is currently implementing a universal healthcare plan and, if all goes according to schedule, by 2019 everyone in the country will receive medically necessary services free of charge. Reimbursement rates need to be set at a level that the government can afford, but one that attracts the full participation of for-profit medical groups. Ultimately, the sector would like to attract inward medical tourism dollars and begin competing with the likes of Thailand, the Philippines and Malaysia. For international medical groups, the country will become a major target for business and investment, with new equipment, technology and capital needed to build the sector. If the government allows for enough international participation on good terms, the Indonesian health sector will be a profitable and growing market for health care operators. This chapter contains interviews with Nafsiah Mboi, Minister of Health; and Hasbullah Thabrany, President, South-east Asian Public Health Education Institutions Network.
Explore chapterTax
Featuring a tax viewpoint from OBG partner, Ay-Tjhing Phan, Tax Leader, PwC Indonesia, this chapter gives an overview of the tax system in Indonesia, with focus on changes to the tax system in recent years and regulations for potential investors.
Explore chapterLegal Framework
With a legal viewpoint from OBG partner, Todung Mulya Lubis, Senior Partner, Lubis Santosa & Maramis, this chapter navigates Indonesia’s legal framework, with focus on anti-corruption measures and other updates that may affect businesses and potential investors.
Explore chapterThe Guide
The Guide offers readers useful facts for visitors, including business etiquette, procedures for obtaining a visa, and tips for transport. It also contains a list of suggested hotels as well as the locations and phone numbers for embassies, hospitals, travel agencies and other important contacts for visitors. This chapter also features a guide piece on Indonesia’s Komodo National Park, home to the giant Komodo Dragon.
Explore chapterTable of Contents
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