The Report: Indonesia 2013

Economy

Indonesia’s place as the largest economy in ASEAN presents a strong value proposition for investors. Already achieving one of the world’s most consistent economic growth rates of above 6% since 2007, with only a minor dip to 4.6% in 2009, Indonesia has continued to impress global investors as more export-oriented economies have wavered. The BKPM has forecast that Indonesia will attract $40bn in total direct investment during 2013, having become the fourth-most-popular destination for FDI in 2012. This chapter contains interviews with M Hatta Rajasa, Coordinating Minister for Economic Affairs; M Chatib Basri, Chairman, Indonesia Investment Coordinating Board; Gita Wirjawan, Minister of Trade; Suryo Sulisto, Chairman, Indonesian Chamber of Commerce and Industry; Prijono Sugiarto, President Director, Astra International; and Edwin Soeryadjaya, Chairman and Co-founder, Saratoga Capital.

Banking

Banking institutions currently account for around 77% of financial sector assets, while the sector’s overall penetration rate remains among the region’s lowest. The banking market remains highly fragmented, with 120 commercial lenders in 2012, alongside a much larger number of smaller institutions. Amidst rapid loan growth, average default rates for the country have dropped to historically low levels, though some suspect they will rise again in 2013. Relatively insulated from the volatility of international markets and supported by strong domestic consumption and rising incomes, Indonesian banks stand on healthy footing with high profitability and sufficient liquidity to expand their physical presence and lending. This chapter contains an interview with Darmin Nasution, Governor, Bank Indonesia.

Capital Markets

Indonesia’s domestic exchange is dominated by foreign investors motivated by capital gains. Less than 1% of the local population invests in Indonesia’s exchange, and those that do tend to prefer buy-and-hold strategies. Corporations have expanded their bond offerings amid a favourable market of low interest rates, high demand and a risk-free government yield curve. While the government works to diversify the onshore dollar bond offering, new hedging instruments are gradually being developed for onshore futures markets. The scope for currency features, among other areas, is considerable. Despite the political uncertainty that has arisen in the run-up to the elections in 2014, brokerages are forecasting a rally in equities during the second half of 2013 that will be more significant that that achieved in the fourth quarter of 2012. Inflows into the bond and equity markets are likely to be sustained, given the loose monetary policies in Western economies. This chapter contains and interview with Eko Yuliantoro, President Director, Bahana Securities, and a viewpoint from Veronica Lukito, CEO, Ancora International.

Insurance

Indonesia’s insurance sector stands out as the fastest growing and most promising in South-east Asia, within a region that’s largely seen as the most attractive for the world’s major underwriters. Supported by rapid economic expansion spurred by domestic consumption in the past decade, the sector has averaged a compound annual growth rate of 20% in gross written premiums and 26% in assets since 2007. Islamic insurance is expanding rapidly, with a 10-fold increase in contributions reported since 2010. Strong regulatory enforcement will be crucial to addressing low-penetration. If the long-awaited consolidation into better-capitalised underwriters is able to aid greater innovation in products and distribution channels, Indonesia’s current rapid growth should rise exponentially. This chapter includes an interview with William Kuan, President Director, Prudential Indonesia.

Energy

Endowed with substantial energy reserves spread across its vast territory, Indonesia has been among the region’s largest producers and exporters of fossil fuels for decades. While this trend shows little sign of changing, the sector is in the midst of a dramatic shift in the composition of its resources. With crude production in decline, natural gas is taking on an increasingly important role in terms of exports and domestic use. Indonesia’s oil and gas sector will remain a strong contributor to the country’s economy in terms of its export revenue through increasing shipments of natural gas as well as domestically through its taxation and production-sharing agreements. This chapter contains an interview with Karen Agustiawen, President Director, Pertamina, and a roundtable with William Lin, President, BP Asia Pacific; Abdul Hamid Batubara, Deputy Managing Director, Chevron Indonesia; Richard Owen, President Director, ExxonMobil Indonesia; Lukman Mahfoedz, President Director, Medco Energi; and Roberto Lorato, President Director, Premier Oil Indonesia.

Mining

Long a stalwart of Indonesia’s economic development, particularly in terms of exports, the country’s mining and quarrying industry maintains a steady presence despite fluctuations in global commodity prices and domestic mining policies. Claiming some of the world’s most expansive reserves of valuable minerals and largest operational mines, the sector has seen some of the highest levels of investment of any industry in Indonesia’s economy in recent years. Uncertainties regarding legislation, along with the implausibility of the full implementation will likely remain after Indonesian elections in 2014 as the politically and socially sensitive ramifications of these issues give politicians little incentive to reform these policies ahead of a campaign. However, the country’s vast mineral reserves combined with an expected rebound in global demand and commodity prices should help to ensure that the current production downturn proves to be little more than a temporary blip. This chapter contains interviews with Rozik B Soetjipto, President Director, Freeport Indonesia; Alwinsyah Lubis, President Director, Antam; and a viewpoint from Colin Ong, Managing Partner, Dr Colin Ong Legal Services and President Arbitration Association Brunei Darussalam.

Industry

The economy is surging ahead and, as it expands, authorities are seeking to make the transition from low-cost production and supplying raw materials to more advanced nations to a high-value-added manufacturing industry. Low tariffs have led to more non-tariff barriers in the form of export bans and other incentives to encourage domestic industry. The government is pursuing initiatives to move up the value chain by emphasising higher-value-added products, such as green cars and design. The biggest challenge facing the sector is how best to manage the transition from low- to high-value-added production. Striking a balance between the needs of sunset industries and emerging ones will be tricky, but strong growth is almost guaranteed in the short to medium term for industry in Indonesia. Most of the proposed manufacturing investments should happen, and the simple maths of an expanding economy lead to an expanding industrial base. This chapter contains interviews with Purnomo Yusgiantoro, Minister of Defence; Johnny Darmawan, President Director, Toyota Astra Motor; and Vismay Sharma, President Director, L’Oreal Indonesia.

Retail

To say there has been a retail boom in Indonesia is an understatement. The people of the country have, over the course of a few years, become consummate shoppers staying up to date with the latest trends and spending freely. Indonesia’s economy has always been driven by the consumer, but now it is being taken to the next level as people now have more money to spend. Retail sales are likely to remain strong for the next year at least, partly on the back of the introduction of the minimum wage. As the sector develops, shopping is expected to become more convenient, with new brands entering the market. This chapter contains an interview with Henri Honoris, President Director, Modern Putra.

Construction & Real Estate

With foreign direct investment rising, factories being built and real estate booming, the construction sector in Indonesia is expanding rapidly. The government is undertaking programmes to improve infrastructure, building roads, airports, railways and ports. While Indonesia remains more consumption-oriented than places like China, investment is an increasingly important part of the mix. The construction sector is expected to continue to expand rapidly over the next few years as the property market sees further rapid growth. Unblocking bottlenecks, increasing capacity and improving efficiency are all vital tasks going forward as the sector evolves. This chapter contains interviews with Ketut Budi Wijaya, President Director, Lippo Karawaci; and Harun Hajadi, Managing Director, Ciputra

Infrastructure

With its low debt-to-GDP ratio and abundant resources, growing consumer demand, healthy political discourse and rising investment, Indonesia is set to lead the region and could become the world’s sixth-largest economy by 2030. The country has 11 commercial ports, more than 200 airports, an estimated 17,508 islands and around 245m people. The government is working to address the current lack of infrastructure with spending on roads, bridges, ports, airports and power stations, as well as by supporting public-private partnerships. If a few infrastructure deals get done in the next year, and if there is clear and verifiable progress and commitment of actual investment funds to these transactions, many more agreements could follow and a significant amount of infrastructure could be built. This chapter contains an interview with Ir. Hermanto Dardak, Vice-Minister of Public Works, and a roundtable with Arsjad Rasjid, President Director and Group Co-CEO, Indika Energy; Sinthya Rosely, CEO, Indonesia Infrastructure Guarantee Fund; and Raj Kannan, Managing Director, Tusk Advisory.

Transport & Logistics

Transportation and logistics in Indonesia are sectors of great opportunity, but also pose immense challenges. As the economy booms and travel increases, related businesses have grown and relevant infrastructure is being built. At the same time, the transportation networks and systems are put under stress as the economy expands rapidly. This is especially an issue in Indonesia, where existing infrastructure is often poor and the process of adding capacity can be slow and inconsistent. Over the next few years, transportation and logistics promise to develop quickly, although not always in a balanced way. Connectivity should improve, bringing some corridors up to international standard, though gaps may remain. This chapter contains interviews with Emirsyah Satar, President and CEO, Garuda Indonesia; and Richard Lino, President Director, IPC II.

Telecoms & IT

With one of the most competitive telecommunications markets in the world, prices have been dropping year after year as Indonesian operators fight for customers. The result has been rapid growth in subscriber numbers and especially high penetration rates in major cities such as Jakarta. The intense competition and falling prices have also led to under-investment in some parts of the network, inconsistent service quality, and a lack of commitment to research and development. However, economic realities are taking hold, and, as pricing stabilises, the market consolidates and leadership emerges, quality should improve as margins widen, and significant investments are likely to be made. Indeed, many of the weaknesses in the market are expected to be addressed as the business becomes more profitable and providers start to compete on quality.

Agriculture

The third-largest contributor to Indonesia’s national economy behind the oil and gas sector and industrial manufacturing, Indonesia’s agricultural sector maintains a crucial role in supplying the nation’s domestic market as well as providing an attractive supply of exports. As the country’s economy continues to expand and diversify, the agriculture industry is shifting away from being an exporter of principally raw material towards being a value-added base for global agro-industry. An integral part of the social and economic fabric, the agriculture sector should continue to play a role in the economy even as it continues to transform into an industry with a more value-added downstream-oriented focus.

Tourism

With some 17,500 islands featuring diverse landscapes that range from volcanoes to white sandy beaches, as well as major cities with international-standard conference and entertainment facilities and a highly hospitable population, Indonesia has much to offer its visitors. In recent years, the economy has experienced rapid growth leading to the emergence of a new middle class that is looking to travel, which has contributed to a dynamic and expanding domestic tourism sector. Figures from Statistics Indonesia indicate that in 2011 a total of 7.65m foreign visitors came into the country, spending an average of $1118 each per visit and staying an average of 7.84 days. Tourism development is a central plank of the government’s national development strategy. The challenge for sector professionals will be in creating a critical mass to help Indonesia realise its huge tourism potential. This chapter contains an interview with Sri Sultan Hamengku Buwono X, Governor, Yogyakarta Special Region.

Health & Education

With the country gearing up for the start of a universal health care coverage scheme, Indonesia has made great progress in addressing many of the historical issues concerning its public health sector. Major new developments in state and private health care are taking shape, with a number of new hospitals under construction and the prospect of a more open market for foreign health professionals also being discussed. Several challenges remain, however, if the sector is to be reformed in a speedy and effective manner. Education represents an opportunity and a challenge for educators, policymakers and investors alike, with the sector going through an overhaul and expansion. Indeed, major programmes of new school and college construction, new teaching requirements and a new outlook, aimed at bringing academia and business closer together, my transform the landscape over the next few years. There is a role for the private sector and for high-quality foreign education outfits. With an expanding population of 245m, future demand is also set to keep increasing. This chapter contains interviews with Dr Grace Frelita, Vice-Chairman, Strategic Health Care Committee, Indonesian Chamber of Commerce and Industry; and Nancy Soemawinata, Managing Director, Putera Sampoerna Foundation.

Media & Advertising

With a vibrant TV and print media sector, in addition to a growing online presence, Indonesia presents a wide spectrum of platforms and styles for advertisers and media investors. There is also an increasing sense of confidence and creativity in the industry, which is expanding on the back of robust economic performance and an increasingly wealthy, growing population, anxious to try out new products and lifestyles. As retail surges so too do media and advertising, with much to expect from both in the years to come. This chapter contains an interview with Rudy Tanoesoedibjo, President Director, MNC Skyvision; and a viewpoint from Shoeb K Zainuddin, Group Editor-In-Chief, BeritaSatu Media Holdings.

Regions

As a nation of 245m people, spread over three time zones and about 17,500 islands, Indonesia has always been a country of great diversity – economically, politically, culturally and ethnically. Since the return to democracy, this diversity has been increasingly recognised, with a policy of decentralisation handing more power to the regions. Redressing old imbalances between the centre and the outlying areas has taken on greater importance in recent times as well, with the government’s latest development plan based on six geographically defined economic corridors. Thus, Indonesia is very much a country of regions, with major implications for investors, foreign and local, given this decentralised approach. Now that the political agenda has given rise to an economic one, efforts to spread wealth around the nation are driven by the regions and by the central government. This chapter contains an interview with Oesman Sapta, Founder, OSO Group.

East Java

The province of East Java is governed from Surabya, a major industrial and port city, and is subdivided into nine cities and 29 regencies. It has a population of 37.5m and contributes around 15% of national GDP. With much infrastructure and economic muscle already in place, the potential for growth in East Java is great, as are the investment opportunities. The province is well positioned to take advantage of national economic master plan projects, as well as to capitalise on local organic development trends. With regulatory and infrastructure pieces falling into place, growth may be about to accelerate in many ways. East Java, then, has much success and prosperity to reward the efforts of its investors. This chapter contains an interview with H Soekarwo, Governor, East Java Province.

Tax

The Indonesia tax system continues to evolve, but, for several years, has been mainly based on three primary tax laws – the General Tax Provisions and Procedures Law, the Income Tax Law, and Luxury Sales Tax Law. These tax laws are routinely amended to accommodate the rapidly changing business environment and to support the government objectives of improving the investment climate while increasing tax revenues. This chapter contains a viewpoint from Irhoan Tanudiredja, Senior Partner, Pricewaterhouse Coopers.

Legal Framework

This chapter features an outline of the various government regulations and laws that govern business in Indonesia. Included is information about public-private partnership regulations, business permits, cooperation agreements, and definitions, objectives, scope, method of execution and form of cooperation. This chapter contains a viewpoint from Todung Mulya Lubis, Senior Partner, Lubis, Santosa & Maramis.

The Guide

This chapter includes useful information for business and leisure visitors, including accommodation options and unique activities that may be of interest to visitors, such as ecotourism. It also contains information vital to visitors, including transport, visa requirements, currency, and tips for maintaining good health and respecting local customs while experiencing Indonesia.

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