2007 Year in Review

Indonesia

Economic News

22 Jul 2010
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Indonesia proved resilient to the global liquidity crisis as foreign investors continued to flock to the country, a sure sign of high confidence in the economy.



Reforms of regulations governing foreign investment have spurred direct investment flows to Indonesia. The new investment law passed in April introduced a 61-page list of restrictions on foreign investment in specific industries, aimed at harmonising the regulations. The new law provides a clear roadmap for investors keen on opportunities in the country.



The interest rate now stands at 8% after 14 interest rate cuts by the central bank since July 2006. Third-quarter data released by the country's central bureau of statistics on November 15 revealed stronger than expected growth with the GDP rising at a rate of 6.5%, the fastest since the first quarter of 1997. This has led the government to renew its GDP forecast for 2008 to 6.8%.



As a result, Indonesia's ranking in the World Bank's Ease of Doing Business report published in October, rose 12 spots from the previous year to 123. However, despite these reforms, the report noted that at 105 days, Indonesia has the longest period in the region to set up a business, compared to 103 in Laos and five in Singapore.



In parallel to improving economic growth and streamlining bureaucratic measures, the government has pushed on with its privatisation programme. On July 27, it sold 25.8% of its stake in Bank Negara Indonesia, reducing its share to 73.3%. There are plans to list a further 16 state-owned enterprises, including the toll road operator and developer Jasa Marga and two construction companies, Wijaya Karya and Adhi Karya this year. According to government officials, the state is confident it can meet its privatisation revenue target of Rp4.7trn ($500m) this year.



Operators in the Jakarta Stock Exchange and in the Surabaya Stock Exchange merged their operations to create the Indonesian Stock Exchange in December 2007. Leading up to that, the market gained depth with a total of 25 new listings during the year, a significant rise over the 12 initial public offerings registered in 2006. The stock exchange is also pushing for the introduction of a 5% cut in taxes on companies putting 15% of their total capital on the market in the form of a capital markets development package to be introduced in 2008.



Additionally, a government fiscal package focusing on infrastructure development is set to stimulate further economic growth in the new year. In August, President Susilo Bambang Yudhoyono unveiled a plan calling for an increase in the budget for the ministry of public works of 41.1% over the previous year, to $3.8bn. In parallel, the allocation for the ministry of transport is set to rise by 64.1% over last year to reach $1.7bn. Total capital expenditure, a majority of which is slated to go towards infrastructure development, is expected to rise 50% to $10.8bn.



An additional transport issue was the EU's blanket ban on Indonesian airlines flying through the 27-nation bloc, made in July. A resulting rash of bad publicity for the country's airlines prompted the Indonesian government to adopt a series of measures to address safety concerns. While the ministry of transport revoked the licenses of four domestic carriers, the national carrier Garuda Indonesia its safety credentials by earning the International Air Transport Association's safety audit certificate. Through technical cooperation with international air safety institutions, Indonesian airlines are well on their way to turning around the industry's reputation.



The government has continued with its trade liberalisation agenda, sending a clear signal to investors that Indonesia is open for business. Indonesia and Japan signed a free trade agreement in August to boost bilateral trade and investment, an agreement accompanied by more than $4bn in energy deals.



Meanwhile, during the president's visit to Seoul in July, eight deals worth a total of $8.5bn were signed, many involving the state-owned hydrocarbons giant Pertamina, covering ventures from coal transport links to exploration rights.



Other significant trade deals were concluded with Russia in September. While the $1bn arms deal between Russia and Indonesia stole the media limelight in December, a string of business deals worth $10bn in the energy and mining sectors marked a significant change in economic relations between Indonesia and Russia, up from total trade of just $689.2m in 2006.



Furthermore, Indonesia's parliament enacted legislation in October finalising the legal framework for investment in the special economic zones on three islands in the Riau Archipelago south of Singapore. The new bill delineating the Batam Bintan Karimun free trade zone will further minimise bureaucratic and administrative hurdles in the shipping of goods in and out of the islands.



With such moves on the part of the government and an eager response from foreign investors, good times are set to continue in Indonesia. Despite the ongoing global credit crunch, which is taking a toll on many markets around the world, Indonesia is expected to continue to be resilient.

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