The Report: Indonesia 2012

Politics

Since declaring independence from the Netherlands in 1945, Indonesia has become one of the world’s fastest developing and most economically promising nations. Its assumption of the presidency of ASEAN in 2011 testified both to the increasing interconnectedness of the region as well to the evolution of an Indonesian political system just over a decade removed from authoritarianism. Indonesia’s new democracy committed to addressing the legacy of centralised, authoritarian rule in part through decentralisation, which gave more autonomy to local administrative units. Problems of corruption and bureaucracy still remain, as in any developing country, but the record of post-Suharto politic stability has been a boon to economic development. This chapter contains interviews with President Susilo Bambang Yudhoyono; Abdullah Gül, President of Turkey; Marty Natalegawa, Minister of Foreign Affairs; Surin Pitsuwan, Secretary-General, ASEAN; and viewpoints from Hillary Clinton, US Secretary of State; and William Hague, UK Secretary of State for Foreign and Commonwealth Affairs.

Economy

Already the world’s 17th-largest economy with a nominal GDP of $768bn in 2010, Indonesia is one of the three fastest-growing economies in Asia. Authorities are working to use the country’s key competitive advantages to attract the long-term investment needed to realise their goal of becoming one of the top 10 economies by 2025. Growth was forecast to reach 6.3-6.5% for 2011. However, addressing infrastructure will be a major challenge for the government, which has struggled for several years to come up with a clear plan for public-private partnership (PPP) projects for transport. The administration of Susilo Bambang Yudhoyono has pledged increased spending, but projects have been delayed due to issues such as land acquisition, and are just now moving towards tenders. Overall, growth is expected for both the short and long term, but more investments will be necessary to keep up with the booming ASEAN region. This chapter features interviews with Hatta Rajasa, Coordinating Minister of Economy; Agus Martowardojo, Minister of Finance; Prijono Sugiarto, President Director, Astra International; Gita Wirjawan, Minister of Trade and Chairman, Investment Coordinating Board; Bobby Umar, President Director, Bakrie & Brothers; and a viewpoint from Maxime Verhagen, Deputy Prime Minister and Minister of Economic Affairs of the Netherlands.

Banking

With only about 20% of Indonesian adults having any sort of relationship with the financial service sector, the country’s massive, untapped customer base offers great potential for the big industry players. The combination of a broadening and deepening market, and ever-sinking interest rates, has boosted the already-growing demand for financial services in the archipelago, from microcredit to mezzanine finance. Challenges ahead include determining how and to what extent the private sector can fund Indonesia's massive infrastructural projects, which are expected to draw both foreign and domestic capital. These long-term projects require a recalibration of time-scales for banks used to thinking in yearlong or five-year periods. This chapter includes interviews with Darmin Nasution, Governor, Bank Indonesia; Gatot M Suwondo, President Director, Bank Negara Indonesia; and a roundtable with Jahja Setiaatmadja, President Director, BCA; Michael Young, President Director, HSBC; Zulkifili Zaini, President Director, Bank Mandiri and David Fletcher, President Director, Permata Bank.

Capital Markets

As one of the markets at the forefront of the South-east Asian growth story, Indonesia is seeing a surge of investment attention from capital managers eager to avoid the malaise lingering in developed economies. Indonesia now has a chance to strengthen its capital markets’ offerings, by broadening the options available, fostering a bigger roster of investors and smoothing operations at the country’s exchanges. The Indonesia Stock Exchange (IDX) teamed up with the Asian Development Bank in 2009 to plan improvements to the bourse. The stock market’s profile has been raised through adjustments to the country’s sovereign debt ratings, which Fitch labelled investment grade in December 2011, with Moody’s and Standard & Poor’s expected to follow suit in 2012. This chapter features an interview with Nurhaida, Chairman, Bapepam.

Insurance

At 1.7%, Indonesia’s insurance penetration rate is the lowest in the region, compared to 3.7% in Thailand, 5.1% in Malaysia and 11.1% in South Korea. Underwriters hope that as disposable income grows, the middle class – now estimated at up to 40% of the population – will purchase more coverage. In fact, gross premiums have grown an average of 23% annually since 1996, reaching a total of $16.02bn in 2010. This potential has brought foreign insurers into the market, mainly through buying up local players, and opportunities for mergers and acquisitions still remain. Sectors with potential include Islamic insurance, or takaful, which grew 47.6% in 2010. Other areas for growth include microinsurance, which would benefit from the more than 120m Indonesians living on less than $2 per day. This chapter includes an interview with Hotbonar Sinaga, CEO, Jamsostek.

Infrastructure

With a population of 245m, including a rapidly growing middle class, the Indonesian market is widely regarded as having huge potential. However, infrastructural deficiencies are threatening to cramp growth. Limited transport infrastructure, from ports to roads and rail, has increased manufacturing costs and shipping times. Indonesia is attempting to address this deficit through public-private partnerships (PPPs), and has projects worth around $115bn planned or under construction. The infrastructure drive will rely on several government bodies, such as the Indonesia Infrastructure Guarantee Fund, which underwrites private investment in infrastructure projects to encourage such financing. This chapter includes an interview with Kuntoro Mangkusubroto, Head, Presidential Delivery Unit (PDU).

Energy

Indonesia is at a turning point in its energy development. The country is looking to reverse years of declining production and investment in the oil and gas sector through new exploration contracts, the development of potentially vast offshore reserves, and acquisitions. Dozens of new contracts have been signed since 2008, however, including 11 new production-sharing contracts in November 2011 worth over $200m. Several new working areas have also been approved, with a number of the fields primarily containing natural gas. In the electricity sector, demand is increasing due to a growing, ever-wealthier population. With electrification rates at only 67% and the replacement of biomass with electric energy sources, the country is looking at nearly 10% annual growth. Indonesia will look to meet this demand by deploying a number of cheap coal-fired power plants, which will draw on vast domestic supplies. This chapter contains interviews with Evita Legowo, Director-General, Oil and Gas Directorate, Ministry of Energy and Mineral Resources; Karen Agustiawan, President Director, Pertamina; and a roundtable with Jim Taylor, President Director, ConocoPhillips; Sammy Hamzah, CEO, Ephindo; Terry McPhail, President & General Manager, ExxonMobil; and Hilmi Panigoro, President Commissioner, Medco.

Mining

Largely impervious to recent economic woes in the developed economies, Indonesia’s mining sector is riding high on a wave of high commodity prices. Meanwhile, the government has undertaken to revise regulations governing the sector in a bid to improve clarity and attract more investors. However, parliamentary opposition to some of the changes, including the removal of a requirement that foreign mining companies divest a majority of their companies to Indonesian entities, has resulted in uncertainty. Moreover, the government has clashed with mining companies over a measure that would require 99% refinement of all exports within five years of beginning production. Final clarification will be necessary to enable full investor confidence in this key sector. This chapter includes an interview with Martiono Hadianto, President Director, Newmont and Chairman, Indonesia Mining Association (IMA).

Industry and Retail

Efforts are under way to transition the economy from one based on the export of raw materials, particularly hydrocarbons, to more advanced production. Recent trends show that this push is gaining traction, as Indonesia’s GDP grew 6.1% in 2010 despite a 2.3% contraction in the oil and gas sectors. The country aims to become an industrialised country by 2025. To facilitate this transformation, state planners have identified six core sectors capable of contributing significantly to Indonesia’s GDP, and divided the country into six “economic corridors” that will focus on a specific set of industries for which they are most suited. Infrastructure development will be key to industry’s success. This section includes interviews with Sudhamek AWS, President Director, GarudaFood; John Gledhill, President Director, HM Sampoerna; and Suryo Sulisto, Chairman, Indonesia Chamber of Commerce (KADIN); and a viewpoint by Fransiscus Welirang, Director, Indofood.

Construction & Real Estate

Much of Indonesia’s construction sector is awaiting the unveiling of major infrastructure projects that will be necessary to unlock the high growth potential of the domestic market. The government has pledged to spend $150bn on infrastructure projects over five years in its 2011 budget, but sector figures are looking to see results, not just promises. The industry grew at 5.3% in Q1 2011, representing a slowdown from 2009, which reinforces uncertainties about material costs, legal issues, and bureaucracy-related project delays. Real estate, meanwhile, has a bright future, highlighted by surging demand and good value but undercut by potential bureaucratic bottlenecks. Interest rates have fallen below the 10% level, offering a record number of Indonesians the chance to buy their own home. Developers have not yet shown much interest in building low-cost housing, which is still the largest source of demand, primarily because margins are low. Reforms that would help the sector include more support for low-income housing, as well as a potential loosening of laws that currently restrict foreigners from buying real estate in Indonesia. This chapter includes interviews with Muktar Widjaja, Chairman, Sinarmas Land; and Trihatma K Haliman, President Director and CEO, Agung Podomoro Land.

Transport & Logistics

With logistics costs among the highest in ASEAN at around 25-30% of GDP, transportation improvements are high on the priority list when it comes to boosting Indonesian growth. Indonesia is investing in plans to boost the road network from 4400 km to 8666 km of roads by 2015. Rail is set for a similar upgrade, with plans that include the Trans-Java high-speed railway. Meanwhile, with 17.6% growth in traffic at Jakarta’s international airport, capacity expansion is highly necessary. The airport opened a third terminal in 2011 and will renovate the existing two, although rumours of a new airport are gaining momentum. Many of these expansion projects will be funded under public-private partnership agreements, which have been the focus of political contention over apparent delays. This chapter includes interviews with Emirsyah Satar, President & CEO, Garuda Indonesia; and Shanti L Poesposoetjipto, Chairman, Samudera Indonesia Group.

Telecoms and IT

With estimates that only about half of Indonesia’s 240m people use a mobile phone, there is great potential for growth. The three main players in the mobile segment have engaged in a price war since 2007 as voice costs have dropped precipitously, although forecasts expect them to grow on the strength of new subscribers. Future revenue growth will also rely on data and value-added services. These trends will be enhanced by the adoption of smartphones, which are out of reach cost-wise for most Indonesians at the moment, but an influx of cheaper Chinese phones should begin to bridge this gap. Meanwhile, low computer penetration is the primary issue facing the IT sector. Ownership grew from just 4% in 2006 to 8% in 2008, and the percent of the population with “access” to a computer is 20% at most. Providing access across the country will be especially challenging with Indonesia’s geography. Given physical and economic constraints, then, the government is placing its tech bet on the growth of mobile phones, to which far more people have access. E-government is also an emerging trend, and the state has adopted online systems for tasks such as procurement. This chapter features interviews with Rinaldi Firmansyah, President Director, Telkom; and a roundtable with Erik Aas, President Director & CEO, Axis; Hary Sasongko, President Director, Indosat; Sarwoto Atmosutarno, President Director, Telkomsel; and Hasnul Suhaimi, President Director, XL.

Plantations & Agriculture

Long a major exporter of raw natural resources, including agricultural products, Indonesia is looking to maintain its strengths in this sector while expanding downstream industries to fuel domestic industry. The country imports over 20m tonnes of food annually, but major investment plans are designed to mitigate the need for imports by boosting domestic output. Indonesia’s strengths are manifested in its palm oil sector, which was forecast to produce 23.5m tonnes for 2011, a world-leading total. One controversy arose in 2011 when the export tax on refined palm oil was decreased to nearly half that of CPO, which should boost downstream processing but may eat into upstream profits. This section features an interview with Franky Widjaja, Vice-Chairman for Agribusiness, Food and Livestock, Indonesian Chamber of Commerce and Industry (KADIN).

Tourism

Already known worldwide for the hugely popular island destination of Bali, Indonesia has been trying to market its full range of opportunities. At the same time, the country is hoping to build its profile as a business travel venue, a policy helped along by ongoing economic growth. 2011 tourist arrivals were up 7.5% year-on-year for the January-July period, well on their way to meeting the government’s target of 7.7m. The government is keen to promote the meetings, incentives, conventions, and exhibitions sector, with conference facilities being developed in Lombok and Jogjakarta. Finally, it’s looking to draw visitors beyond conventional destinations, highlighting islands like Lombok, which has direct ferry connections to Bali. This section features an interview with I Made Mangku Pastika, Governor of Bali.

Health and Education

Having already mandated basic education and made it accessible to all citizens, at least in theory, Indonesia’s next challenge is to boost access to, and quality of, secondary and higher education. Other goals include lowering illiteracy and decreasing disparities in quality of education nationwide. The government is hoping to address challenges like teacher absenteeism, and poor scientific and mathematical literacy, in which Indonesia ranked 50th out of 57 countries in international PISA testing. Indonesia’s health care indicators have improved gradually over the past decade, with reduced infant mortality and increased life expectancy. The decentralisation of the health care system has aided this process somewhat, helping halve the maternal death rate. New lifestyle illnesses derived from the increasing prevalence of calorie-rich Western diets are posing a new threat. In 2004, the government pledged to provide all citizens with universal health insurance, under a Ministry of Health scheme due to be completed by 2014. This chapter includes interviews with Ir Ciputra, Founder and Chairman, Ciputra Group; and Dr Endang Rahayu Sedyaningsih, Minister of Health.

Religious Affairs

While roughly 89% of the country’s citizens subscribe to Islamic beliefs, according to official government statistics, the country prides itself on its tolerance and diversity. There are six officially recognised religions in Indonesia according to the constitution, which guarantees the rights of citizens to practice their religion freely. The Ministry of Religious Affairs (MoRA) oversees not just issues relating to the majority religion of Islam, but of all officially recognised religions. For example, MoRA oversees religious schools, over 97.7% of which are madrassas and other Islamic learning facilities. This chapter contains an interview with Suryadharma Ali, Minister of Religious Affairs.

Media

Large conglomerates, often with ties to politics, dominate the media sector. Still, offerings have expanded in recent years to feed a population hungry for content, and Indonesians now have 10 free-to-air channels as well as a wide variety of pay-TV options. In 2010, advertising expenditure grew by 23% year-on-year to nearly $7.2bn, the sharpest rise since 2006. TV garnered most of this spending – 61.8% d – while newspapers took home 34.7% and magazines and tabloids accounted for a more 3.6%. Telecoms continue to be the main advertisers, along with politicians and local government, and consumer goods like tobacco. Looking down the road, Indonesia should see growth in the media and advertising sector when its pay-TV penetration – currently 3% – eventually expands.

Regions

With some 17,500 islands tied into a single political system, a centralised unitary government has not proved adaptable to Indonesia’s geography or society. Decentralisation, which began in 1999 and devolved power to local administrative units, has seen both successes and failures, but should hopefully prove more stable in the long run. Critics see the programme as multiplying local bureaucracies and putting power in the hands of inexperienced or corrupt politicians, while supporters point to the dissipation of violence in formerly restive areas. The government’s Grand Strategy for Implementation of Decentralisation would attempt to address the concerns, giving a supervisory role to provincial governors, and allowing the central government to overrule local laws that conflict with national laws. The Indonesia Investment Coordinating Board (BKPM) has also instituted a Regional Champions programme that highlights certain provinces with the institutional qualities required for quick impact projects. Projects that have been awarded to regional champions include toll roads, geothermal power plants, mining and airport projects. This chapter includes a viewpoint from Satish Mishra, Managing Director, Strategic Asia

Tax

In conjunction with PricewaterhouseCoopers, OBG explores the taxation system. This chapter includes a viewpoint from Irhoan Tanudiredja, Senior Partner, PricewaterhouseCoopers.

Legal Framework

In partnership with Lubis Santosa & Maramis, OBG takes a look at Indonesia's legal system. Important changes include new rules on cost recovery in the hydrocarbons sector, laws on investment. This chapter includes a viewpoint from Todung Mulya Lubis, Senior Partner, Lubis Santosa & Maramis.

The Guide

Table of Contents

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