The Report: Indonesia 2015

Trade & Investment

With full-year realised foreign direct investment (FDI) hitting a new record in 2014, Indonesia’s trade and investment flows have improved considerably over the last 10 years. The capital account deficit was brought back under 3% that year, and at the end of 2014 and in early 2015 the country reported a trade surplus after years in the red. Due to stronger economic growth and new policy initiatives, the uptick could become a sustained trend. However, risks remain. The government and monetary authorities need to keep a grip on policy, making sure they maintain discipline without being too strict. Early indications are that the new administration and the monetary authorities will work effectively towards achieving the right balance through consistent, steady improvements.

This chapter contains interviews with Franky Sibarani, Chairman, Indonesia Investment Coordinating Board; Ngalim Sawega, Chairman and Executive Director, Indonesia Eximbank; and SD Darmono, President Director, Jababeka.

Economy

Early moves made by the government of the new president, Joko Widodo, appear to be helping the economy considerably, especially on the FDI side. With the application of the right policies, the country could return to growth above 6%, and perhaps eventually reach the 7% target set by the new president. Indonesia is working off a sound economic base. The decline in GDP growth has been stopped, and the country is starting to make the transition from a consumption- and export-dependent economy to one that is more driven by investment, manufacturing and perhaps even the export of finished products. Risks remain, particularly in terms of overly aggressive policies on the one hand and implementation issues and protectionism on the other. If the right balance can be struck and the government’s plans can be translated into tangible projects, many see the possibility for growth to return to levels that are higher than regional and global averages.

This chapter contains interviews with Bambang Brodjonegoro, Minister of Finance; and Basuki “Ahok” Purnama, Governor of Jakarta.

Banking

The Indonesian banking sector continues to strengthen after a lengthy period of expansion. Business remains sound with sufficient capital to support credit growth, and the regulatory environment setting up the industry for further expansion. Questions about consolidation and foreign participation remain, and the structure of the sector going forward is a matter of debate. Economic concerns also hang over the banks, but participants are confident the institutions themselves are sound. As long as Indonesia continues to refine its laws to encourage competition, the sector should remain on the course it has charted for a decade and become more inclusive.

This chapter contains interviews with Sumit Dutta, CEO, HSBC Indonesia; Jahja Setiaatmadja, CEO, Bank BCA; and Budi G Sadikin, President-Director, Bank Mandiri.

Energy

After years of treading water, Indonesia’s energy sector is finding new optimism in the fresh faces being appointed to key government positions by the new president, Joko Widodo, with the hope that they will be able to renew investor interest in the industry and spur a wave of development. The changes at the top come at a critical time, as myriad factors continue to buffet the sector in Indonesia, which ranked among the world’s top-five liquid natural gas (LNG) exporters in 2013 and remains Asia’s second-largest natural gas producer despite continuing production declines. After years of halting progress in the power sector, the new energy strategy has the potential to add much-needed capacity to the domestic market, provided that policymakers can avoid some of the pitfalls that have affected similar rapid development programmes in the past. A concentration on building coal-fired power plants, designed to run on inexpensive, domestically produced coal, should help smooth out the process. In the meantime, the strategy’s emphasis on boosting efficiency and reducing Indonesia’s high energy intensity levels should also help to rein in the country’s domestic consumption.

This chapter contains an interview with Dwi Soetjipto, President-Director, Pertamina; and an Energy roundtable with Lukman Mahfoedz, President-Director and CEO, PT Medco Energi Internasional; Roberto Lorato, President, Premier Oil Indonesia; Craig Stewart, President, Indonesian Petroleum Association and President, Salamander Energy; and Hardy Pramono, President-Director, Total E&P Indonesia.

Infrastructure

In its first year in power, Indonesia’s new government has launched a major drive to boost the nation’s transport, power and water infrastructure. The administration in Jakarta is taking a leading role in helping to overcome the challenges facing the industry, and the private sector has been given a clearer, more efficient legal and administrative framework within which to operate. Many of the projects on the agenda are in the midst of securing financing, while others are still being planned or debated. The new public-private partnership (PPP) unit is expected to publish a PPP book during 2015 that will outline the projects that are open to investment and their expected timelines. This will create significant opportunities for private investors to get involved in the early stages of the country’s massive infrastructure overhaul.

This chapter contains an interview with Adrinof Chaniago, Minister of the National Development Planning Agency.

Transport

With the new administration under Joko Widodo committed to spending a greater share of the budget on improving the nation’s transport infrastructure and moves under way to provide an enhanced organisational and administrative framework for the sector, there is a new sense of energy with regards to transport in Indonesia. Indeed, with logistics costs equivalent to around 27% of GDP, efforts to reduce this by boosting the efficiency of the transport sector could make a real difference to the country’s economic growth, in turn translating into increases in per capita incomes. Much remains to be done and greater private involvement will be needed, but there is significant optimism about current sector plans.

This chapter contains an interview with Djarwo Surjanto, President-Director, Pelindo III.

Industry

Industrial development is perhaps the most important pillar of Indonesia’s long-term economic expansion strategy, and the nation has made significant economic strides in recent years as a result of its fast-expanding industrial sector. The country is now poised to outpace Thailand and Malaysia as a major regional manufacturing and export hub, and investors are increasingly choosing Indonesia over China, Thailand and Malaysia, drawn in by the country’s relative stability, sizeable low-cost labour pool and large domestic market. While it will make Indonesian exports more attractive to the global market, many of Indonesia’s major industries remain import-dependent, and rising input costs represent the most significant challenge facing operators. Industry and manufacturing are nonetheless poised to continue on an upwards trajectory, with major sectors – including pharmaceuticals, automotive manufacturing, textiles and metals – all projected to expand on the back of solid macroeconomic fundamentals.

This chapter contains interviews with Suryo Sulisto, Chairman, Indonesian Chamber of Commerce and Industry; Sudirman MR, Chairman, Association of Indonesian Automotive Industries; Eddy K Logam, Chairman, Indonesia Ship Building and Offshore Association; and Iwan S Lukminto, President, Sri Rejeki Isman.

Retail

Home to a growing base of consumers, Indonesia has seen the rising purchasing power of its fast-expanding middle class drive the retail industry to new highs in recent years. Foreign and domestic retailers alike are investing heavily in new construction and expansion projects that will see traditional retail models increasingly supplanted by modern franchises and chains. Although retail could be set for a volatile year, with the rupiah’s depreciation expected to cut into purchasing power and increase pressure on retailers, lower inflation and rising wages should help offset this. The market remains highly attractive to foreign investors despite its stringent regulatory environment, and growth is expected in 2015 as a result of rising domestic consumption and e-commerce expansion. While retail space in Jakarta will remain limited in the medium term, rising rents will help spread industry growth across the nation. This will keep the sector robust and dynamic into 2016, as well as present lucrative opportunities to foreign and local investors.

This chapter contains an interview with Irwan Danny Mussry, President and CEO, Time International.

Telecoms & IT

2014 was a challenging year for Indonesia’s telecommunications sector, as operators faced fierce competition and market saturation, and average revenue per user (ARPU) continued to decline. The IT sector, however, showed promising growth, which is expected to continue on the back of the burgeoning data centre, cloud computing and e-commerce segments, with an increasing number of private players benefitting from a tech-savvy consumer base. Although the mobile market faces considerable challenges in adapting to shifting consumer trends, Indonesia’s solid economic fundamentals and thriving digital marketplace have created lucrative opportunities for private players of all sizes.

This chapter contains interviews with Alex Sinaga, President-Director, Telekomunikasi Indonesia; and Dian Siswarini, President-Director and CEO, XL Axiata.

Construction & Real Estate

As a major contributor to the country’s economy as well as a vital part of Indonesia’s future development, the construction sector today faces some major responsibilities and challenges. The segment has experienced continuous growth in recent years on the back of economic and population expansion, while also seeing an enlargement of its expertise and overall capability, with foreign partnerships often helping this growth in capacity. The real estate market began a period of consolidation in late 2014 that is likely to last through 2015. This slowdown in price rises has been welcomed, however, as indicative of a maturing of the sector as it heads off previous fears of overheating. Despite the slower pace overall, residential and industrial real estate continue to show healthy growth, with Jakarta also continuing to be the most active and international market.

This chapter contains a dialogue with Harun Hajadi, Managing Director, Ciputra, and Ervan Adi Nugroho, President-Director, Paramount Enterprise.

Insurance

Given Indonesia’s large population of nearly 220m – which is expanding by more than 1% per annum – its growing middle class and a GDP rising at about 6% a year, the insurance sector stands to benefit from these fundamentals in the years ahead. Overall insurance company assets increased by 14.5% in 2014, according to preliminary statistics from the Financial Services Authority (OJK), and total assets have more than doubled in the five years to 2014. However, even as insurers garner more business, there will be challenges for the OJK, as it works to achieve the right balance of regulation to ensure long-term sustainability without limiting growth or worrying investors.

This chapter contains an interview with Rinaldi Mudahar, President-Director, Prudential Indonesia.

Capital Markets

The number of listed companies on the Indonesian Stock Exchange (IDX) increased by 50% in the decade to 2014, and market capitalisation was up five-fold in that period. In terms of the exchange’s performance, the index has risen far more than those of its regional peers and international benchmarks. Still, the capital markets are in need further development. For the nation to grow as it hopes and plans, the IMF and others have said that it must endeavour to create markets that are larger and more sophisticated. If the capital markets continue to improve and evolve, and if the authorities are able to get more firms listed and increase the number of shareholders, volatility and risk can be greatly reduced and the markets can play a more significant role in the transformation of the economy.

This chapter contains interviews with Muliaman D Hadad, Chairman, Financial Services Authority; and Michael Steven, President-Director, Kresna Securities.

Emerging Cities

Since the policy of decentralisation was enacted in 2011, the country’s central government has ceded increasing amounts of control, both budgetary and political, to its provinces. However, the island of Java and the country’s metropolitan capital, Jakarta, remain the main source of Indonesia’s economic power. As a result, efforts are being made to equalise and support growth and investment in the country’s regions and cities. As the decentralisation process has unfolded, several “second cities” have shown a particular ability to thrive in this autonomous system, namely, Surabaya, Bandung and Medan.

This chapter contains an interview with M Ridwan Kamil, Mayor, Bandung.

Mining

Endowed with ample mineral and coal resources that have yielded some of the most productive mines in the world, Indonesia’s mining sector continues to exert substantial influence on both the domestic economy and global markets. The world’s largest coal exporter, Indonesia continues to lead the seaborne market despite several leaner years due to weaker demand and softer prices. Local demand is also projected to expand significantly through the end of the decade with a new wave of coal-fired power plants slated for construction over the next five years. The mining sector looks likely to remain in flux over the next few years as policymakers continue to hash out tough compromises in implementing evolving mining regulations. The market for mineral commodities, however, provides for ample investment opportunities in light of positive economic projections for the Asia-Pacific region.

This chapter contains an interview with Garibaldi Thohir, President-Director, Adaro Energy.

Tourism

Since the 1930s, the unique cultural and picturesque landscape of Indonesia’s island of Bali has lured millions of visitors. But even as Bali has boomed, the delights from the rest of Indonesia’s archipelago of more than 17,000 Islands have often been overlooked. The new government of President Joko Widodo has vowed to change that. With a goal of attracting 20m visitors by 2020, it is urging tourists to travel beyond Bali and experience the country’s myriad cultures and cuisines, as well as the stunning natural beauty of its more than 54,000 km of beach and coast. While tourism is currently the fourth-largest source of foreign exchange after oil and gas, coal, and palm oil, some industry leaders predict that it could take the lead by 2018 if the government’s initiatives pay off.

This chapter contains an interview with Budi Tirtawisata, CEO, Panorama Group.

Agriculture

Pervading nearly every level of the country’s social, geographic and economic strata, Indonesia’s agrarian roots run deep. The sector provides a livelihood for the majority of households ranging from small family subsistence plots to multinational agribusiness giants, all of whom contribute to supplying sustenance to the world’s fourth-largest population as well as growing cash crops to be shipped out to the far corners of the globe to bring in foreign currency. Perhaps the country’s best-known cash crop export, palm oil has risen to prominence over the past few decades to take on a major role in not only Indonesia, but the world’s, edible oils trade. Public and private efforts to nudge Indonesia closer to food self-sufficiency should continue to pay dividends in staples, particularly rice, which is likely to see continued rises in production with increased hectarage and more efficient farming practices.

This chapter contains an interview with Susi Pudjiastuti, Minister of Maritime Affairs and Fisheries.

Health

The year 2015 marks the second year of the roll out of universal health care in Indonesia. The plan saw a challenging launch in 2014, but administrators and lawmakers are continuing to work toward the target of full implementation by 2019. As more people seek health care because they have coverage, more hospitals are needed, as are more medical staff. Analysts blame regulation disparities, poor health care infrastructure and an urban-rural gap in the number of medical staff attending to each region for the potential difficulty in meeting the 2019 deadline. However, having made universal health care a top priority, the government is determined to overcome these challenges.

This chapter contains a dialogue with Jorge Wagner, President-Director, Boehringer Ingelheim Indonesia, and Bernadette Ruth Irawati Setiady, President-Director, Kalbe Pharma; and an interview with Andi Wijaya, Chairman, Prodia.

Education

Ranking fourth globally in size after China, India and the US, Indonesia’s education system is large and varied, a complex interweaving of public and private systems all governed to some extent by centralised and decentralised government oversight. A succession of governments has seen education as one of the country’s most powerful economic levers and has formulated plans to exploit it by providing road maps for excellence in education, both public and private. Although the education system faces challenges all along the line, the reasons to continue to strive for academic excellence are many. This means introducing and promoting entrepreneurship, championing excellence in teacher training, changing the national exams system where necessary, encouraging vocational training to close the skills gap and ramping up innovation to compete in a knowledge-based economy within the AEC.

This chapter contains interviews with Anies Baswedan, Minister of Primary and Secondary Education and Culture; and Nenny Soemawinata, Managing Director, Putera Sampoerna Foundation.

Tax

This chapter examines Indonesia’s tax environment, focusing on changes to the tax system and regulations for potential investors. It also contains a viewpoint from Ay Tjhing Phan, Tax Leader, PwC.

Legal Framework

This chapter examines Indonesia’s legal framework, focusing on the new land management policy that has been introduced as a solution to issues with overlapping land claims. It also contains a viewpoint from Todung Mulya Lubis, Senior Partner, Lubis, Santosa & Maramis.

The Guide

This chapter contains useful information for visitors to Indonesia, including a listing of recommended hotels, phone numbers for foreign missions, chambers of commerce, national press, and other important contacts, as well as tips for etiquette, transport, and how to obtain an Indonesian visa.

Table of Contents

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