Indonesia encompasses over 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, with a population of approximately 268.1m in 2019 who speak over 300 languages.
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 the growth of both the sector and economy in the medium term.
Oversight & Structure
The Ministry of Tourism was renamed the Ministry of Tourism and Creative Economy (MTCE) in April 2019 following President Jokowi’s re-election. The change reflected the complexities of the tourism sector, and the need to remodel Indonesia’s various industries to better suit a technology-driven and globalised economy. In October 2019 Wishnutama Kusubandio was named the minister of tourism and creative economy.
The sector is comprised of public and private players, ranging from tour operators to online travel agencies and state-owned enterprises (SOEs). In January 2020 the government indicated its intention to establish a holding company for tourism and aviation-related SOEs in order to streamline decision-making and better coordinate strategy between the government and SOEs. Among the companies likely to be included are the national carrier Garuda and the Indonesia Tourism Development Corporation (ITDC). However, details of the holding company were not finalised as of May 2020.
International arrivals ticked upwards in recent years, while contribution to GDP fell. Tourism contributed 5.5% of GDP in 2019, down from 5.8% in 2017. Meanwhile, international arrivals reached 16.1m in 2019, up from 15.8m in 2018. According to the “Statistical Yearbook of Indonesia 2019” published by Statistics Indonesia (BPS), in 2018 the majority of visitors arrived via the country’s airports, or 10.1m of the 15.8m visitors. That year, Bali’s Ngurah Rai International Airport welcomed the most visitors, at 6m arrivals, followed by Jakarta’s Soekarno-Hatta International Airport, at 2.8m visitors. More than 3.2m arrived through seaports and 1.2m via land crossings, with Batam being the most popular seaport and Jayapura in Papua being the most popular land entry point.
The top-five inbound visitor markets for Indonesia in 2019 were Malaysia, China, Singapore, Australia and Timor-Leste, contributing 18.5%, 12.9%, 12%, 8.6% and 1.2% of total international arrivals, respectively. Overall, in 2019 tourist arrivals from Asia – excluding ASEAN – were down 10.3% compared to the previous year.
Although the government’s headline target for 2020 was 20m arrivals, prospects of achieving this are unlikely in the wake of the mass disruption to the global travel industry caused by the Covid-19 outbreak. In the early stages of the outbreak officials were hopeful that a decrease in Chinese arrivals could be offset by visitors from North America, Australia and Europe, but by mid-March it was clear that travel from all regions would be severely affected. In the long term, however, the MTCE is keen to attract visitors from new source markets. The July 2019 Bali and Beyond travel show attracted significant interest from non-traditional markets including Nepal, Morocco and Lithuania. In particular, the MTCE is interested in promoting Indonesia as a destination for halal tourism – a burgeoning segment that accounted for approximately 11.6% of total tourism expenditure worldwide in 2019.
10 New Balis
Indonesia is an archipelago that spans four time zones, with some 70% of territory consisting of remote islands that are either sparsely populated or unpopulated. These factors can make travel expensive and time-consuming, and infrastructure in more remote locations can be unreliable. The authorities have looked to address this in part through the 10 New Balis initiative.
First announced in 2016, the plan promotes other areas of Indonesia as tourist destinations in a bid to ensure sustainable and equitable growth across the archipelago, while developing critical infrastructure.
The government had become concerned about the over-reliance on Bali to attract increased international visitors, with fears that the island was nearing saturation. Attracting tourists to other parts of the country will not only encourage a more even spread of the benefits of inbound and domestic tourism, but also ease the strain on Bali’s infrastructure and delicate ecosystems. Indeed, the pace of international arrival growth in Bali was double that of the country as a whole, with total tourist arrivals increasing by 1.8% in 2019, compared to 3.6% in Bali. While these increased visitors have had economic benefits, the numbers have raised concerns about pollution, plastic and other waste, water shortages and overcrowding in the main island, as well in as the neighbouring smaller islands of Nusa Penida, Nusa Lembongan and Nusa Ceningan.
The destinations designated as the 10 New Balis are Lake Toba in North Sumatra; Tanjung Kelayang on the island of Belitung; Tanjung Lesung in Banten; Kepulauan Seribu (Thousand Islands) off the coast of Jakarta; the Borobudur Temple Compounds – the world’s largest Buddhist temple – in Central Java; Mount Bromo in East Java; Mandalika on Lombok; Labuan Bajo in East Nusa Tenggara; Morotai Island in North Maluku; and Wakatobi in South-east Sulawesi. The destinations were selected for their geographical, ecological and cultural characteristics to create a diverse and balanced tourism portfolio.
Each area will become a special economic zone (SEZ), allowing for the provision of tax breaks and other incentives that will encourage foreign investment. Attracting finance is vital to the plan’s success, as forecasts based on historical average investment in the sector – both domestic and foreign – predict that the government’s target of $15bn by 2024 will be missed by $3bn, which would equate to a 20% shortfall – even before Covid-19.
Other key components of the 10 New Balis initiative include physical and digital infrastructure development, the expansion of homestay and sustainable tourism offerings, increased levels of public investment, improved security, higher standards of health and hygiene, and the introduction of tourism-oriented vocational training programmes. The national budget for tourism development was also significantly increased to facilitate promotions that include television advertisements and roadshows.
In the months following the announcement of the 10 New Balis initiative, Labuan Bajo, Lake Toba, Borobudur and Mandalika were designated as priority destinations in the second quarter of 2019. Singhasari in East Java, Kendal in Central Java and Likupang in North Sulawesi were also identified as tourism development sites, with the latter added to the list of priority destinations. In January 2020 the government announced it was looking to attract up to $6.4bn into the Singhasari, Kendal and Likupang SEZs.
North Sulawesi, home to Likupang, attracted 100,000 visitors in 2018. The local authorities aimed to boost this to 500,000 visitors in 2020 through a combination of increased investment, ministerial guidance and dedicated marketing; however, the Covid-19 pandemic has negatively affected visitor numbers to both the destination itself and the country as a whole. Infrastructure preparedness in Likupang is an obstacle, with an insufficient number of beds, a lack of adequate toilet facilities and few upscale restaurants near the beach. However, once these issues are remedied, the location could become the Bali of the north due to its beaches and potential for luxury tourism. Unlike other parts of the predominately Muslim country, alcohol is more readily available in Bali and North Sulawesi, which could help attract tourists from the lucrative Western and Chinese markets.
Labuan Bajo, a fishing village on the island of Flores in East Nusa Tenggara, was selected to be one of the 10 New Balis in part due to its proximity to Komodo National Park, a UNESCO World Heritage site on the neighbouring Komodo Island. Local business owners and public officials have voiced concerns about the village’s infrastructure, which is not currently suitable to accommodate a sudden influx of luxury tourists. Addressing these concerns, the then-minister of tourism Arief Yahya told local media in October 2019 that the priority destinations of Lake Toba, Borobudur, Labuan Bajo, Mandalika and Likupang would receive combined public investment of Rp9.3trn ($655.7m) through to December 2019 to finance basic infrastructure.
Nature, Culture & Heritage
The priority destinations are strategically positioned throughout the archipelago, with each presenting the opportunity to showcase a different aspect of Indonesian landscape, culture and heritage. Lake Toba, the largest lake in South-east Asia and the largest volcanic lake in the world, is situated in North Sumatra. It is particularly suited for nature tourism and ecotourism, and, as such, boating, hiking, fishing and community-tourism activities are slated for development. A significant portion of funds injected into developing tourism in the region is expected to be used to raise and maintain safety standards, especially important in light of a ferry accident that occurred on the lake in June 2018, killing over 160 people.
The ancient temple site of Borobudur – Indonesia’s most visited tourist attraction – is a UNESCO World Heritage site and the largest Buddhist temple in the world, attracting around 5m visitors per year. The site averages over 13,500 visitors a day, causing UNESCO to call for enhanced maintenance of the site, and more stringent regulation and supervision of tourists visiting the ancient structures. The site’s popularity places Borobudur at the centre of the MTCE’s plan to attract more foreign visitors to Central Java. While the number of international visitors to the region fell from 781,100 in 2017 to 677,100 in 2018, the ministry set a target of attracting 1.2m foreigners and 40m domestic tourists to Central Java in 2019. However, as of May 2020 there was no official data yet available confirming whether or not the target had been met.
Located in the Central Lombok Regency in West Nusa Tenggara province, Mandalika is a planned, fully integrated resort area. Spread over 1175 ha, the SEZ was inaugurated in October 2017 after receiving $3bn in investment and has the capacity to create up to 58,000 jobs. Around 52% of the total area has been set aside for conservation efforts to protect the delicate ecosystem and rare species of flora and fauna. The government’s eagerness to see the project succeed was reflected in its allocation of Rp1.9trn ($134m) in the 2020 budget.
New hotels are continuing to be established in the area. In January 2020 Archipelago International, Indonesia’s largest hotel group, announced it would build the 226-key Harper Hotel Mandalika Kuta Lombok on the coast. The hotel will feature three meeting rooms, a restaurant and a beach club. The next month state-owned Hotel Indonesia Natour announced plans to construct a five-star hotel in Mandalika, with facilities that will enable it to become a meetings, incentives, conferences and exhibitions (MICE) centre.
Lombok is already a well established destination due to the reputation of the Gili Islands off the north-west coast for scuba diving, as well as several highly regarding surfing spots. It also has a convention centre, making it an attractive destination for MICE events. Lombok benefits from Lombok International Airport, which is serviced by an Air Asia connection with Perth, Australia. In addition, it has several operational seaports that connect the resort to the neighbouring popular sites of Komodo and Bali – the latter playing host to over 5m international visitors annually – and opening the potential for package and multi-stop tours.
Mandalika is set to host Indonesia’s first MotoGP event in 2021. As of February 2020 the Mandalika MotoGP track was 40% complete, with construction expected to be completed by October of that year. However, it remains unclear whether the complications arising from the Covid-19 pandemic will delay construction. Before the pandemic, it was estimated that around 100,000 spectators could attend the event. In April 2020 the Mandalika Grand Prix Association, a business unit of the ITDC, announced it had signed an agreement to host MotoGP through 2031. The series is part of an aim to build on the momentum cultivated by the Jakarta-Palembang 2018 Asian Games in harnessing the global popularity of sports, and enhancing the international image of Indonesia and its economy.
In 2018 the International Air Transport Association predicted that Indonesia’s aviation market would rise from the 10th-largest globally to the fourth-largest by 2030; however, it remains to be seen how the longer-term impact of the Covid-19 crisis will affect this forecast.
Because of a rapid growth in passenger numbers, many airports are operating beyond capacity. To remedy this, in recent years new airports have opened to meet the existing excess and future demand. These include Morowali Maleo Airport in Central Sulawesi, which opened in February 2018; Sintang Tebelian Airport in West Kalimantan, which opened in April 2018; West Java Kertajati International Airport, the second-largest international airport by area in the country after Soekarno-Hatta International Airport, which opened in May 2018; and Tambelan Airport in Bintan, Riau Archipelago, which opened in December 2019.
Many of Indonesia’s airports are government owned, with Angkasa Pura I and II – two SOEs that operate as sister companies – controlling 26 of the 27 busiest airports. Traditionally, state budget allocations and Angkasa Pura I and II have been the primary sources of funding for aviation infrastructure, but the country is also looking to private investment and public-private partnerships (PPPs). Much of this will come from abroad, according to a 2018 PwC report, as there are no local private airport operators. The report also noted that the lucrative returns enjoyed by investors in toll road and power PPPs suggest that injecting capital into infrastructure projects is a worthwhile venture.
Indonesia has already begun to attract international interest in its aviation infrastructure. Singapore’s Changi Airports International – in partnership with local aviation service provider Cardig Aero Services – won a 25-year concession in December 2019 to operate the revamped Komodo International Airport, the main gateway to the national park known for its Komodo dragons. The facility was expected to begin operating as an international airport in June 2020, ahead of the government target of 2021, but it was unclear as of May 2020 if the opening would be delayed due to Covid-19.
Despite the susceptibility of flights in and out of Indonesia to natural disturbances such as volcanic activity, carriers view the Indonesian market as one with potential. “From an international carrier’s standpoint, the Indonesian government is highly accommodating and provides a favourable business environment for carriers running flights in and out of the country,” Chris Bowden, Indonesia country manager for Cathay Pacific, told OBG. “However, if we wanted to enter the domestic market, the entry rules are different and we would have to look at more complex ownership structures.”
The Covid-19 outbreak demonstrated the aviation industry’s sensitivity to international shocks and events. On February 5, 2020 Indonesia banned all direct flights between mainland China and Indonesia, and in late April Indonesia banned commercial flights until at least June 1. Angkasa Pura I recorded a 8.1% decline in passengers and a 6% drop in traffic in its airports in the first quarter of 2020, compared to the same period in 2019. However, the impact on local carriers was cushioned by the relative strength of domestic travel, as capacity fell by one-third between January and April 2020, less than was seen by China, the US and Europe.
The effect of the outbreak will extend beyond aviation. In February 2020 the country had 885,067 foreign tourist arrivals, down by 29% year-on-year, and tourists from China – an important source market – fell by 93%, according to the BPS. In early April the country declared a state of emergency and banned the entry of foreign nationals, with the exception of aid workers, diplomats and permanent residents. That month the government announced that it expected the crisis would reduce tourism revenue by $10bn in 2020, with tourism arrivals falling from 16.1m in 2019 to 5m in 2020. That projection was based on the assumption that tourism will recover at least partially in the second half of the year. However, some economists and stakeholders expect the tourism sector – among the most-hit by the crisis – could take up to a year to recover.
In 2018 there were 3314 classified hotels with 314,051 rooms in Indonesia, up from 2387 hotels and 233,007 rooms in 2016, according to the BPS. The number of non-classified hotels and other accommodations also rose over that period, from 16,442 to 24,916 facilities. The occupancy rates for classified and non-classified hotels were 58.8% and 33.2%, respectively.
The Covid-19 pandemic hit hospitality as well as aviation, with occupancy rates significantly below the low-season average of 50-60%, at 30-40%, in March 2020, Mualana Yusran, secretary-general of the Indonesian Hotels and Restaurants Association (PHRI), told local media that month. The worst-hit areas were Bali, Jakarta, Manado, and Batam and Bintan. As of early April 2020, 1266 hotels had closed and 150,000 employees were affected across the country, according to the PHRI. In Bali alone, 17,000 workers were dismissed as of early April.
Before the pandemic Indonesia had announced a steady stream of hotel projects to be completed in the coming years. As of November 2019 there were 124 four- and five-star hotels in the pipeline, which would add 24,249 rooms to the total. There were to be 51 new hotels with 8832 new rooms opening in 2020, with 21 hotels opening in 2021 and the remaining 52 projects slated for completion in 2022 and beyond. However, these timelines may change in light of the circumstances surrounding Covid-19.
Significant strides have been made in recent years to increase visitor arrivals and broaden Indonesia’s tourism offerings away from Bali. While the Covid-19 pandemic is likely to negatively affect performance in the short term, in the medium to long term it is expected that growth in the tourism sector will pick back up. Indonesia has world-renowned cultural, natural and outdoor sporting sites, and the government’s focus on improving supporting infrastructure such as roads, sanitation, waste management and hotels in priority areas will go a long way in helping the country to be ready for when travellers eventually return to the archipelago.
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