The Report: Indonesia 2019
The Indonesian economy had a strong year in 2018, with growth of 5.2% marking the fastest pace in half a decade. This came on the back of robust domestic consumption, increased foreign investment and continuing efforts to reform policy and simplify investment procedures, and despite challenges including a falling rupiah, a trade imbalance and global political issues.
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 an interview with President Joko Widodo, and a viewpoint from Narendra Modi, Prime Minister of India.
Explore chapterTrade & Investment
Although Indonesia’s export receipts hit a five-year high in 2018, imports surged as the country moved to deliver a massive infrastructure development programme, bringing the trade deficit to an all-time high after three years of surplus. The country remains dependent on raw commodities for much of its export revenues; global commodity price volatility has weighed on the trade balance in recent years, while lower demand for Indonesian exports has further dampened the outlook. Foreign direct investment (FDI) inflows also slumped in 2018 after recording five years of consecutive growth, with global emerging market jitters and Indonesia’s upcoming presidential elections affecting investor sentiment. Recent reforms to prevent capital outflow from China have further weighed on FDI growth, highlighting the importance of fostering stronger trade and investment ties with smaller partners, as well as leveraging economic strength in major multilateral free-trade agreement negotiations. This chapter also contains interviews with Enggartiasto Lukita, Minister of Trade, and Thomas Lembong, Chairman, Indonesia Investment Coordinating Board.
Explore chapterEconomy
Indonesia is one of the world’s richest countries in terms of natural resources. With extensive oil, gas and solid mineral deposits, it is also one of the largest global economies. In 2017 the economy passed the $1trn mark, making it the 16th largest in the world. Its growing middle class, emphasis on industrialisation and services, and drive to improve infrastructure are laying the foundations for continued economic growth. Indonesia is also now home to four unicorns – start-ups valued at $1bn or above – highlighting its potential to develop the entrepreneurial and creative industries. The country is also working to attract both foreign and domestic funding by opening up and incentivising investment in additional sectors, as well as the development of infrastructure. This chapter also contains interviews with Perry Warjiyo, Governor, Bank Indonesia; Triawan Munaf, Chairman, Creative Economy Agency; and Wimboh Santoso, Chairman, Financial Services Authority.
Explore chapterBanking
Twenty years on from a severe financial crisis the effects of which still define the industry, the banking sector in Indonesia is crowded but rich in opportunity. A diverse array of banks and non-bank financial institutions vie for existing customers and work to attract new ones, in what remains a lightly penetrated market. With the world’s fourth-largest population, Indonesia is seen as having great potential, and continues to attract foreign investment. Market strategies, however, are in a state of flux. A handful of major lenders, some of them state-owned, have built national branch networks and constitute formidable competition for any lender following a nationwide universal banking model. Lenders are increasingly looking at financial technologies, in particular those that reach consumers via their mobile phones, as a way to scale up without investing time and money building a physical presence. This chapter also contains interviews with Kartika Wirjoatmodjo, President Director and CEO, Bank Mandiri; Achmad Baiquni, President Director, Bank Negara Indonesia; and Batara Sianturi, CEO, Citi Indonesia, and Chairperson, International Banks Association of Indonesia.
Explore chapterFintech
An increasingly prominent and disruptive force in the financial services sector, financial technology (fintech) comprises any innovative or technology-based financial service offered to consumers or businesses. Often viewed as a competitor to traditional financial service providers, fintech fills gaps left by the formal sector, offering an important avenue to boost financial inclusion in a country where smartphone and internet penetration rates are rising quickly, even as much of the population remains unbanked. Supported by rapid expansion of e-payment platforms and peer-to-peer (P2P) lending activities, Indonesia’s fintech industry is in the midst of a period of significant growth. P2P lending recorded a triple-digit increase in 2018, while e-payment services have grown more than six-fold since 2012, prompting a surge of new foreign investment into a vibrant and increasingly diverse start-up community. This chapter also contains interviews with Aldi Haryopratomo, CEO, GO-PAY, and Jason Thompson, CEO, OVO.
Explore chapterCapital Markets
Indonesia’s capital markets have been on a steady growth path in recent years, with market capitalisation and trading activity showing strong expansion since 2012. Meanwhile, the number of initial public offerings (IPOs) on the Indonesia Stock Exchange (IDX) reached a 26-year high in 2018. Debt markets have been resilient despite widespread global volatility, which prompted significant outflows from emerging markets that year. Nonetheless, some challenges remain for stakeholders: factors such as illiquidity, potential election shocks and stringent regulatory requirements continue to weigh on domestic companies’ market participation. The authorities are seeking to encourage more IPOs and boost broader market liquidity, although regulatory challenges and elevated listing fees continue to impede progress.A planned small and medium-sized enterprise board has yet to be established. New regulations surrounding cryptocurrency trading could also affect plans to diversify IDX product offerings, even as reforms help the sector maintain its upward trajectory in 2019. This chapter also contains an interview with Inarno Djajadi, President Director, Indonesia Stock Exchange.
Explore chapterInsurance
Indonesia’s insurance sector is crowded, reflective of the country’s sizeable population – the world’s fourth largest, at around 265m – as well as its potential. Some 152 companies vied for premium in 2017, operating in an environment that, although it presents significant opportunity, also comes with a measure of insurable risks, in particular from extreme weather and natural disasters. In the highly competitive life market, agents reach out to consumers by offering unit-linked policies, which combine life coverage and regular investment income. While formal products remain outside the reach of most Indonesians for now, the wealthier segments of the market nonetheless represent an attractive target for insurers. This chapter also contains an interview with Jens Reisch, President Director, Prudential Indonesia.
Explore chapterEnergy & Mineral Resources
Replacing diminishing reserves and guaranteeing domestic energy security are two of Indonesia’s policy priorities. As such, oil and gas exploration and development are key areas in which the government is eager to progress. To encourage this, policymakers have adopted a series of reforms aimed at ushering in a new wave of foreign investment in the sector. Similarly, in a bid to offset declining oil fields in western Indonesia, the government is working to incentivise contractors to explore deep-sea areas along the eastern frontier. Substantial mineral reserves have put Indonesia on the brink of a new wave of development. Nevertheless, investors still need to contend with a legacy of regulatory uncertainty and a growing trend of resource nationalisation. While policymakers have made efforts to adjust the regulatory regime, exploration hurdles remain in place in the form of divestment rules and a lack of coordination between central and regional governments. This chapter also contains interviews with Ignasius Jonan, Minister of Energy and Natural Resources, and Arie Prabowo Ariotedjo, President Director, ANTAM.
Explore chapterInfrastructure & Transport
Inadequate infrastructure has long been a challenge for Indonesia, the world’s largest archipelagic state. With more than 17,000 islands and a population of around 265m, it may be the most complicated country in the world in terms of logistics. Since President Joko Widodo was inaugurated, transport and infrastructure investment has become a key pillar of the Indonesian government’s policy agenda. The scale of infrastructure investment under “Jokowinomics” significantly exceeds that of previous administrations. Among the administration’s initial aims was the construction of 1000 km of toll roads, over 3000 km of railways, 15 airports, 24 seaports, 33 dams and power plants to supply 35,000 MW of energy, altogether costing some $355bn. A further 2650 km of new non-toll roads are targeted in the government’s National Medium-Term Development Plan 2015-19. This chapter also contains interviews with Luhut Panjaitan, Coordinating Minister for Maritime Affairs, and Bambang Brodjonegoro, Minister of National Development Planning.
Explore chapterIndustry
With the largest land mass, population and economy in South-east Asia, Indonesia is set on becoming the region’s industrial powerhouse. A historical reliance on natural resources has left its industry lagging behind that of regional peers Thailand, Malaysia and Vietnam in terms of exports, even as the country continues to clock robust GDP growth. Excessive bureaucracy and protectionist policies have further hindered the development of manufacturing exports, contributing to the double-digit decline in foreign direct investment in the third quarter of 2018, as well as the country’s persisting trade deficit. However, reforms are taking hold and Indonesia enjoyed GDP growth of 5.1% in 2018, with gains in both light and heavy manufacturing. Estimates put manufacturing’s contribution to GDP at 20.5%, not far below levels in most industrialised economies. This chapter also contains interviews with Airlangga Hartarto, Minister of Industry, and Rosan Roeslani, Chairman, Indonesian Chamber of Commerce and Industry.
Explore chapterRetail & E-Commerce
A large and youthful population, a fast-rising middle class and rapid digitalisation have underpinned strong growth in Indonesia’s retail and e-commerce sectors. Indonesian shoppers are the third-most optimistic globally, with consumer confidence benefitting from a steady rise in incomes that has supported recent growth in personal consumption and retail sales. New retail supply is on the rise in Jakarta and also across secondary cities, while occupancy rates of premium-class shopping centres remain above 90%. The formal retail sector could come under pressure in the coming years, however, as rapid growth in e-commerce activities is challenging traditional retail models. Although retail activity remains concentrated in bricks-and-mortar stores and shopping malls, e-commerce growth has soared in recent years, with online sales and customer volumes recording consistent double-digit growth since 2013. This chapter also contains an interview with William Tanuwijaya, CEO and Founder, Tokopedia.
Explore chapterConstruction & Real Estate
Supported by strong fundamentals, Indonesia continues to break ground on major construction projects. Fuelled by a comprehensive public infrastructure agenda, large-scale developments have become the norm. However, while the construction sector remains an important pillar of the country’s economy, project development is still hindered by domestic obstacles, including a lengthy land-acquisition process. On the back of a massive infrastructure agenda, new real-estate projects have driven growth in Indonesia’s property sector in recent years. A colourful mix of cultures has influenced the architectural layout of the capital city Jakarta, which is one of the many features that have attracted investors from around the world. While the government of Indonesia has pursued initiatives to bolster property investment, however, currency depreciation, political uncertainty and rising interest rates constrained growth in 2018. This chapter also contains interviews from Basuki Hadimuljono, Minister of Public Works and Housing, and David Cheadle, Managing Director, Cushman & Wakefield.
Explore chapterEmerging Cities
Stretching 5120 km from the shores of Aceh to the mountains of Papua, Indonesia encompasses 17,000 islands – around 6000 of which are permanently inhabited – and comprises 34 different provinces, each with its own capital city. Within these islands, 300 distinct ethnic groups exist, speaking more than 700 languages between them. Until the turn of the new millennium, centralisation was seen as the best way forward, and economic development policies were strongly skewed towards Indonesia’s main island of Java, where the country’s capital Jakarta is located. After the resignation of former President Suharto in 1998, however, successive administrations have implemented decentralisation policies, aiming to more evenly distribute authority and investment throughout the country’s many diverse regions. This chapter also contains an interview with Tri Rismaharini, Mayor of Surabaya.
Explore chapterICT
Some 70% of Indonesia’s citizens are under the age of 39, and many are mobile-first and digital native consumers, making the ICT market very attractive to purveyors of data services, applications, software and hardware. Developing domestic ICT infrastructure has been a key goal of President Joko Widodo’s administration. When his administration took office in October 2014, it unveiled an Rp278trn ($19.7bn) broadband connectivity plan, designed to spur broad-based and inclusive economic growth, with a 35,000-km, nationwide fibre-optic network, the Palapa Ring, as its centrepiece. This chapter also contains interviews with Rudiantara, Minister of Communication and IT; Nadiem Makarim, CEO, GOJEK; and Dian Siswarini, CEO & President Director, XL Axiata.
Explore chapterTourism
Boasting the world’s largest tropical coastline and renowned cultural heritage sites, Indonesia is becoming a leading tourism destination in South-east Asia. Strong gains have been noted internationally, with the World Economic Forum declaring Indonesia the region’s fourth-most-competitive destination after Singapore, Malaysia and Thailand in its most recent “Travel and Tourism Competitiveness Report” for 2017. Globally, Indonesia ranked 42nd out of 136 economies, an increase of eight spots over 2016. Tourist arrivals have recorded gradual growth in recent years – with 14m and 15.8m in 2017 and 2018, respectively, according to the Ministry of Tourism – but a string of natural disasters and other challenges have impacted the achievement of certain targets. This chapter also contains interviews with Shirley Tan, CEO, Rajawali Property Group, and Henry Hendrawan, CFO, Traveloka.
Explore chapterAgriculture
With an estimated 57m ha of agricultural lands, farming has long been the backbone of Indonesia’s economy. From small-scale farming to large commercial plantations, the sector employs around one-third of the workforce, is an important source of income for local households and has contributed much-needed export revenue. 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. However, there remain a number of challenges, including slow adoption of mechanisation and vulnerability to climate change. Rural income is predominately generated by small-scale growers who lack access to finance and technology, which limits their commercial viability. Nevertheless, the country’s vast areas of arable land and extensive marine resources, combined with a thriving tech innovation ecosystem, offer significant potential for long-term, value-added expansion. This chapter also contains an interview with Amran Sulaiman, Minister of Agriculture.
Explore chapterHealth & Education
Indonesia has entered the final stages of its universal health care system rollout, which is set to stimulate continued growth across the private sector. The public scheme will provide an alternative to the country’s private system, addressing the lack of access for Indonesians who cannot afford private coverage but do not qualify for state-funded care. Universal health care will encompass preventive treatment, emergency visits, prescriptions and other services, and the government hopes that increased access will improve the country’s public health indicators, including maternal and child mortality rates. Indonesia’s government allocates one-fifth of its budget to the education sector, with the goal of boosting its international rankings and pupils’ progress. However, certain challenges have impeded the full potential of this policy from being realised. For example, decentralisation of education policy undermines standardisation of curricula at all levels and creates regional disparities in teaching quality and student attainment. This chapter also contains interviews with Caroline Riady, CEO, Siloam Hospitals, and Muhammad Anis, Rector, University of Indonesia.
Explore chapterTax & Business
This chapter offers an overview of Indonesia’s tax system, focusing on the revision of the tax holiday facility; the introduction of the online single submission system; measures taken to improve financial inclusion, such as Regulation No. 13/POJK.02/2018, which supervises and regulates financial technology; revisions made to Article 22 Income Tax provisions in order to manage imports that could affect the strength of the rupiah; adjustments to Article 31D of the Income Tax Law for the mining sector; and measures to increase transparency, such as The Law on Financial Information Access for Tax Purposes. This chapter also contains a viewpoint from Sharly Rungkat, Partner, Deals Strategy, PwC Indonesia.
Explore chapterLegal Framework
This chapter examines the legal system of Indonesia, focusing on the issuance of Regulation No. 24 on Electronic Integrated Business Licensing Services. Under this regulation, a single online submission system was created to streamline the licensing process, combining licences for various regional and national institutions across a range of business sectors under one electronic system, and merging several licences into one. This chapter also 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, contact details for embassies, ministries and organisations, helpful tips for business and leisure travellers and other useful suggestions for travel to Indonesia.
Explore chapterTable of Contents
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