The Report: Indonesia 2017

The Indonesian government is in the midst of pursuing an ambitious new growth strategy, emphasizing investment over domestic consumption as a primary growth driver in the wake of depressed commodity prices, lagging household consumption and lower-than-anticipated government revenues.

Country Profile

With China and India seeing unprecedented growth over the past decade, global trade has increasingly pivoted towards Asia, putting ASEAN in a favourable position to capitalise on new regional opportunities. Official integration of the ASEAN Economic Community (AEC) is set to have a dramatic impact on future trade growth, both within ASEAN and beyond. Indonesia’s population and economy are the largest in the AEC, creating opportunities as regional integration unfolds. Investment is expected to rise as foreign companies seek to access the domestic consumer base, while export revenues could benefit from easier access to new markets.

This chapter contains a viewpoint from President Joko Widodo; and interviews with Vice-President Yusuf Kalla; and John Key, Prime Minister of New Zealand.

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Trade & Investment

As South-east Asia’s largest economy and the world’s fourth-most-populated country, Indonesia is an important trade partner within ASEAN, as well as for Japan, China and the US. The country has averaged more than 5% annual GDP growth over the past decade through sound macroeconomic policies, rising domestic demand driven by a burgeoning middle class and high commodity prices. However, a gradual slowdown brought on by a collapse in commodity prices in 2011 and 2012 has weighed on the economy, highlighting the country’s commodity export dependency and pushing trade and investment to the top of the growth agenda.

This chapter contains interviews with Thomas Lembong, Chairman, Indonesia Investment Coordinating Board; Lim Hng Kiang, Singapore Minister of Industry and Trade; and Hugo Swire, UK Member of Parliament.

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Long considered South-east Asia’s economic powerhouse, Indonesia has seen growth decelerate in recent years as commodities prices fall and demand in China weakens, while currency depreciation in light of US monetary easing has affected its manufacturing and industrial sectors, as well as small and medium-sized enterprises. Falling global oil prices led to a removal of oil subsidies, which freed up new fiscal space in 2015. However, a concurrent decline in prices for commodities such as palm oil and minerals brought growth to a six-year low that year, with forecasts for 2016 remaining subdued in the wake of ongoing global uncertainty.

This chapter contains an interview with Sri Mulyani Indrawati, Former Managing Director, World Bank.

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Emerging Cities

During the years of former President Suharto’s rule, Indonesia’s political and economic power was concentrated in Jakarta. But with democratisation has come decentralisation, a trend that has gathered momentum since direct local elections were introduced in 2005, in turn creating a new breed of grassroots politician. After all, it was President Joko Widodo’s success as a mayor, first in Solo and then in Jakarta, that set him on the path towards the presidency. In Indonesia today, local politicians are seen as emblematic of a more localised politics, implementing changes based on the needs of the cities they represent.

This chapter contains a dialogue with Ridwan Kamil, Mayor of Bandung, and Tri Rismaharini, Mayor of Surabaya.

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With rising levels of public participation, a robust regulatory framework and high profitability at most institutions, Indonesia’s banking sector performed strongly in 2015-16, building on nearly a decade of expansion and rapidly increasing returns. The sector comprises 118 commercial banks and more than 1600 rural regional banks – the latter of which are allowed to operate only in a relatively small, predetermined geographical area. The industry boasted combined assets of Rp6198.15trn ($452.5bn) at the end of January 2016, the majority of which were held in a handful of leading institutions.

This chapter contains interviews with Kartika Wirjoatmodjo, President-Director, Bank Mandiri; Asmawi Syam, President-Director, Bank Rakyat Indonesia; and Batari Sianturi, CEO, Citi Indonesia, and Chairman, International Banks Association of Indonesia.

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Capital Markets

While 2015 was widely regarded as a rough patch for Indonesia’s capital markets, on a medium- and long-term basis the market has posted significant growth. From 2005 through to the end of 2015, the Jakarta Composite Index (JCI) – the market benchmark for the Indonesia Stock Exchange – rose around four-fold, or 15% per annum, according to data provided by the exchange. Indeed, over the past decade the MSCI Indonesia has outperformed not only other ASEAN bourses, but emerging markets and MSCI World as well.

This chapter contains interviews with Muliaman Hadad, Chairman, Financial Services Authority; and Tito Sulisito, CEO, Indonesia Stock Exchange.

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With strong premiums growth in recent years, a liberal investment environment and a low penetration rate, Indonesia’s insurance sector is poised for a period of rapid expansion. A slight market slowdown in 2013-14 – due in large part to regional economic volatility – appears to have reversed course in the first half of 2016, with positive implications for the country’s insurers, particularly its major players. As of June 2015 – the most recent date for which data was available – Indonesia was home to 129 policy underwriters, including 50 life insurers and 79 non-life insurers. Additionally, at this time the market was made up of five reinsurance companies, 161 insurance brokers and 35 reinsurance brokers.

This chapter contains an interview with Yasril Rasyid, President-Director, Reasuransi MAIPARK Indonesia; and Chairman, Indonesian General Insurance Association.

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Development of Indonesia’s energy sector to meet rapidly rising demand and sustain economic growth is arguably the most daunting challenge facing the administration of President Joko Widodo. A combination of economic growth, increased urbanization and cheap energy supplies, resulting from fuel and electricity subsidies, has led to sharp demand growth. Total primary energy consumption has risen by 70% over the last decade, while electricity demand growth has exceeded annual GDP expansion over the same period. At the current rate of economic growth, demand for energy is forecast to rise by around 7% per year, while electricity demand is expected to grow by upwards of 8% per annum over the next decade, according to the Ministry of Energy and Mineral Resources.

This chapter contains an interview with Amien Sunaryadi, Chairman, SKK Migas; and a roundtable with Heru Dewanto, President-Director, Cirebon Power; Roberto Lorato, CEO, Medco Energi Internasional; and Garibaldi Thohir, President-Director, Adaro Energy.

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When Joko Widodo rode to power on a wave of pro-business rhetoric in Indonesia’s 2014 presidential election, a key plank of his economic development platform was rooted in shoring up the country’s outdated and inadequate infrastructure. Now firmly entrenched at the country’s helm, the Widodo administration is going to significant lengths to make good on these campaign promises by channelling an unprecedented amount of funds into domestic infrastructure projects. The spending spree began with the addition of Rp112.4trn ($8.2bn) in the 2015 supplementary national budget, which was earmarked specifically for infrastructure outlays. This represented a 39% increase over the 2014 budget, funded largely by fuel subsidy savings made possible in part by the drop in oil prices at the time. These additional funds are being dispersed far and wide, spread across projects in oil and gas, power, water supply and waste treatment, roads, urban transport, rail, ports and airports.

This chapter contains interviews with Basuki Hadimuljono, Minister of Public Works and Public Housing; and Emma Sri Martini, President-Director, PT Sarana Multi Infrastruktur.

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Transport & Logistics

Indonesia’s transport sector is in the midst of a major overhaul, with government investment in infrastructure set to hit an all-time high, driven by new projects. All segments in the sector are set to benefit from a far-reaching infrastructure development agenda, with plans to construct 2500 km of new highway to complement ongoing upgrades across Indonesia’s vast network of ports and airports. Perhaps most promisingly, 2015 saw solid progress towards the delivery of a national rail network, with the signing of a new agreement for a high-speed link on Java, although land acquisition continues to pose challenges, raising doubts as to whether the project will be completed on time and within budget. At the same time, public funding is still insufficient to meet its long-term infrastructure goals, opening a host of new opportunities to foreign investors, with the government moving to revise its negative investment list to permit increased foreign participation.

This chapter contains interviews with Elfen Goentoro, President-Director, PELNI; and Bambang Tjahjono, President-Director, AirNav Indonesia.

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Historically, Indonesia’s industrial sector has long been content to target the low-hanging fruit of its sizeable captive domestic market for much of its output, while exporting primarily raw materials or low-value-added products abroad. But in line with the evolution of the country’s economy, a strategic shift has been accelerating over the past decade, which is aimed at diversifying the industrial manufacturing sector and deriving greater value from domestic resources, in addition to providing more and higher-quality jobs for the growing population.

This chapter contains interviews with Ryamizard Ryacudu, Minister of Defence; Rosan Roeslani, Chairman, Indonesian Chamber of Commerce and Industry; Lee Kang Hyun, President, Korean Chamber of Commerce; and Simon Linge, President-Director, Bluescope Steel Indonesia.

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Retail & E-Commerce

Now comprising a mix of traditional markets and modern retail outlets, Indonesia’s retail sector has been swiftly evolving since the late 1990s, when the country’s economic development began to accelerate. Gross national income per capita at current prices grew from $570 1999 to $3440 in 2015, more than a 500% increase over 15-year period, according to World Bank data. Fuelled by this economic explosion, a large domestic consumer base, second to none in South-east Asia, and a burgeoning middle class, the retail sector has emerged over the same time as a force in its own right and as a result has attracted substantial investment from domestic and international sources over the past decade and a half.

This chapter contains an interview with Hadi Wenas, CEO, MatahariMall.com.

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In terms of ICT connectivity, Indonesia is currently in the midst of a national transformation. Over the past decade the country has seen dramatic improvements in telecommunications availability; technology awareness and usage; investment in digital infrastructure by both the government and private sector players; regulatory oversight; and development planning. These trends have been driven by rapidly expanding demand for ICT products and services among the large population and thriving business community. Following on the heels of a challenging year in 2014, the ICT sector recovered somewhat in 2015 and the first half of 2016, primarily on the back of rising investments in data hosting services and e-commerce. On the telecoms side, late-2015 saw the rollout of 4G LTE high-speed data services by the country’s mobile operators.

This chapter contains a viewpoint from Rudiantara, Minister of Communications and IT; and an interview with Nadiem Makarim, CEO, GO-JEK.

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Construction & Real Estate

The construction sector will likely be a bright spot in an otherwise subdued economic growth story in 2016, as the widening infrastructure gap and recent fuel subsidy reforms have driven a surge of new government spending into a massive public infrastructure programme. Despite recording moderate recent increases in sales and prices, residential growth has slowed from the double-digit heyday of 2011-13, while oversupply in the office market is beginning to weigh on prices and rental rates, particularly in Jakarta. A few bright spots stand out, however. The booming retail segment is expected to perform well in 2016 on the back of growing demand, while Indonesia’s secondary cities hold considerably high potential across all segments.

This chapter contains interviews with Rizkan Chandra, President-Director, Semen Indonesia; and Eddy Hussy, Chairman, Real Estate Indonesia.

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The world’s fourth-most-populous nation, Indonesia boasts unique cultures, World Heritage Sites, pristine beaches, unparalleled diving and some of the world’s rarest wildlife. Its tropical climate and balmy temperatures of between 28°C and 34°C in coastal areas with little variation from one season to the next, make the archipelagic nation an ideal beach holiday destination. Indeed, Indonesia should be one of the world’s leading tourist destinations, yet it has consistently ranked behind neighbouring Thailand and Malaysia in tourist arrivals. Since taking office in 2014, the government of President Joko Widodo has been working hard to change that. It has recognized tourism as a major pillar of economic growth and set a target of 20m foreign visitors by 2020, when the industry is expected to be Indonesia’s biggest source of foreign exchange earnings.

This chapter contains an interview with Arief Yahya, Minister of Tourism.

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As the top nickel producer globally in 2013, the second-biggest coal exporter in 2015 and host to one of the largest copper and gold mines in the world, Indonesia has the capacity to compete with the most prolific mining nations. However, this potential has not necessarily been translated into strong production figures in recent times, and the domestic mining sector has suffered markedly over the past three years due to deteriorating global commodity prices and, more specifically, slowing growth in China, the leading purchaser of Indonesia’s mineral and coal products. Efforts to increase downstream production should be supported by the state’s infrastructure investment programme, while any recovery in the current downturn in commodity prices will boost the industry’s outlook.

This chapter contains an interview with Pandu Sjahrir, Chairman, Indonesian Coal Mining Association.

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The year 2016 marks the second year of the rollout of universal health care, known locally as JKN, which aims to cover a population of approximately 260m by 2019. While millions have already been brought under coverage, reaching the whole population of an archipelago that contains 6000 inhabited islands will be no easy feat. Still, hopes are high for JKN. With greater access driving greater need for services, the government and its private sector partners are prioritising the expansion of health care infrastructure and the training and recruitment of medical professionals. Meanwhile, the country’s ageing population and shifting disease profile are triggering demand for specialised care and equipment in facilities. As the government works to offset the effects of global economic headwinds on its energy and industry sectors, health is increasingly viewed as an area that can help sustain growth and draw investor interest.

This chapter contains interviews with Nila Moeloek, Minister of Health; and Romeo Lledo, President-Director, Siloam Hospitals.

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In spite of a raft of strategic development plans laying out a path towards a more diversified, modern economy with greater contributions from high-value-added industries, agriculture remains a fundamental sector for the country in both financial and social terms. Indonesia’s expansive territory and favourable soil and climate have given rise to a host of homegrown agro-industrial giants as well as drawing the attention of some of the world’s largest international food processors. Valued at Rp1560trn ($113.9bn), the agriculture sector comprised 13.5% of Indonesia’s GDP in 2015, according to data from the Bank of Indonesia. Led by the palm oil segment, plantation crops accounted for the greatest percentage of this figure in 2015, being valued at Rp411.9trn ($30.1bn), and followed closely by food crops at Rp393.4trn ($28.7bn).

This chapter contains an interview with Arif Rachmat, CEO, Triputra Agro Persada.

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Over the past few decades, Indonesia has made enormous strides in ensuring most of its children get a basic education. Now the focus turns to quality, and preparing children and young adults for life in the 21st century. President Joko Widodo made education a key part of his election campaign and, after he took office in October 2014, embarked on a series of reforms designed not only to make the education system more appropriate for contemporary Indonesia, but also to help the government meet its goal of raising per capita incomes from $3500 in 2011 to $14,250-15,000 by 2025.

This chapter contains an interview with Djisman Simandjuntak, Rector, Prasetiya Mulya University.

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Legal Framework

This chapter gives an overview of Indonesia’s legal system, focusing primarily on new policies that aim to improve the business environment, processing time for investment licences, sectors opening to foreign investment, business start-up costs, and other subjects of interest to investors.

It also contains a viewpoint from Todung Mulya Lubis, Senior Partner, Lubis, Santosa & Maramis, on welcoming foreign direct investment.

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This chapter examines Indonesia’s tax regime, focusing on a newly improved amnesty facility, income tax breaks available for pioneer industries, a new effort to improve data collection and processing, and the reduction of luxury goods tax for certain products.

It also contains a viewpoint from Ay-Tjhing Phan, Tax Leader, PwC Indonesia.

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The Guide

This chapter contains listings for embassies, state ministries and other facilities, contacts for useful services and organisations, helpful tips and information for new travellers, and accommodation options around Indonesia.

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