Boasting the world’s largest tropical coastline and renowned cultural heritage sites across more than 17,000 islands, Indonesia is becoming a leading tourism destination in South-east Asia. Strong gains have been noted internationally, with the World Economic Forum (WEF) declaring Indonesia as the region’s fourth-most competitive destination after Singapore, Malaysia and Thailand in its most recent “Travel and Tourism Competitiveness Report” for 2017. Globally, Indonesia ranked 42nd out of 136 economies, an increase of eight spots over 2016.
Tourist arrivals have recorded gradual growth in recent years – with 14m and 15.8m in 2017 and 2018, respectively, according the Ministry of Tourism (MoT) – but a string of natural disasters and other challenges have impacted the achievement of certain targets. “The 2018 objective was to attract some 17m visitors, but this goal was not met, partly due to the recent natural disasters in Bali and Lombok and travel warnings,” Abdulbar Mansoer, president director of the Indonesia Tourism Development Corporation, told OBG. “Once the right infrastructure is in place, human capital development then has to be the top priority. Tourism is very labour intensive, and creates a vast range of both direct and indirect jobs.”
Oversight & Policy
Tourism policy is formulated and implemented by the MoT, which has been headed by Arief Yahya since President Joko Widodo was first elected to office in 2014. Kick-starting the tourism sector has been one of the top priorities of the Widodo administration, and industry development is expected to remain a priority regardless of the outcome of the 2019 general elections.
In 2015 the authorities unveiled Rencana Strategis Kementerian Pariwisata 2015-19 (Strategic Plan of the Ministry of Tourism), which sought to attract 20m foreign visitors and have tourism account for 8% of GDP by 2019. The plan is supported by a $300m loan granted by the World Bank in May 2018 for the Indonesia Tourism Development Project, which aims to ensure roads and basic services are present in all tourist areas. According to the “Travel & Tourism Economic Impact 2018 Indonesia” report, published by the World Travel & Tourism Council (WTTC), tourism directly contributed $19.4bn in 2017, or 1.9% of GDP, with this forecast to increase by 5.2% in 2018. Total contribution to GDP, including wider effects from the supply chain, investment and income generation, was estimated at 5.8% in 2017.
One area of concern for the government is the over-reliance on Bali to attract increased international arrivals, with fears that the island destination is nearing saturation. To address this, the 10 New Balis strategy was rolled out in 2016, which identified 10 non-traditional destinations to draw visitors into new areas of the country. Part of this effort involved significantly increasing the national budget for tourism development through promotions that include television advertisements and international roadshows. The results have been favourable, and tourism is now the country’s fourth-largest source of foreign exchange after oil and gas, coal and palm oil.
The push to develop the tourism sector is demonstrated by state spending. According to the WEF, Indonesia spent 9% of its national budget on travel and tourism in 2017, with the sector representing 6% of exports. The government is also investing in training and skills development for young people planning to work in the sector.
Infrastructure
As part of the 10 New Balis programme, focus has been placed on infrastructure development. Unlike its regional peers Thailand and Vietnam, which are contiguous landmasses, Indonesia is an archipelago that spans four time zones, sometimes making travel between different islands difficult and expensive. Some 70% of Indonesian territory consists of remote islands, many of which are either home to small populations or are entirely unpopulated, and have little to no infrastructure. Ferries to these islands are often unreliable and uncomfortable, and domestic flights to isolated locations like West Timor can be more expensive than international ones. Visitors to these destinations are often confronted with poor roads and unreliable electricity, especially in provinces in Indonesia’s east.
In the past Indonesia managed this challenge by promoting the tourist destination of Bali, an island with good connectivity to its main source markets of China and Australia. Now, even with the government’s diversification efforts, 42% of international arrivals visited Bali in 2018, as it remains Indonesia’s most popular tourism destination.
New Locations
The destinations selected under the 10 New Balis plan 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 – 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 Southeast Sulawesi.
To support these offerings, the authorities have embarked on an airport expansion drive. Boosting the number of international visitors can be a first step towards additional infrastructure investment: with more visitors comes the need for better roads and facilities. This generates jobs and focuses policymakers’ attention on areas that may have fallen outside the government’s priorities. Even within Bali, efforts are in place to divert tourists north, which is less visited than the southern hub of Kuta.
The small, provincial Silangit Airport in North Sumatra was upgraded and expanded in 2017, which resulted in it gaining international status. Additional planned works should see a second runway extension and terminal expansion project. More visitors from China are beginning to travel to North Sumatra after marketing roadshows began in 2016. Belitung Island also saw its small airport upgraded to international status in 2017. The island now caters to the lucrative Singaporean market, which is just a 90-minute flight away. Overall, Indonesia has 11 international airports spread across the archipelago.
Furthermore, Indonesia enjoys a number of inherent advantages over regional peers. Its equatorial climate means temperatures are generally milder than in Thailand and Vietnam, and rains are predictable and steady. It is also more cost effective to holiday in Indonesia than in Thailand or Malaysia, in part because the value of the rupiah has declined considerably in recent years, from about Rp8000:$1 in 2012 to approximately Rp15,000:$1 in January 2019.
Source Markets
Despite falling short of the government target of 15m international tourists in 2017, the number of such arrivals grew from 11.5m in 2016 to 14m that year, and then to 15.8m in 2018. The MoT has been running the Wonderful Indonesia promotional campaign since 2011, targeting both emerging and developed markets around the world to reach arrival goals. Although Malaysia was the largest source market in 2018, accounting for 2.5m arrivals, the number of Chinese tourists is growing at a steady rate, from 1.05m in 2014 to 1.25m in 2015, 1.56m in 2016, 2.09m in 2017 and 2.14m in 2018.
There is potential for the number of Chinese tourist arrivals to grow, as less than 10% of Chinese citizens currently own passports (see regional analysis). In 2015 Indonesia dropped its visa requirement for Chinese citizens and embarked on promotional roadshows in the world’s most populous country. However, while over 2.1m Chinese visitors arrived in Indonesia in 2018, this fell short of the 2.6m targeted by the MoT. Nonetheless, Chinese tourists are fast embracing Indonesia as one of their top global destinations, increasingly opting for the archipelago over other regional tourism hotspots such as Thailand.
At the same time, the growth in Chinese arrivals brings additional challenges for regulators. These groups are increasingly arriving on so-called zero-dollar packages – ultra-cheap holidays where organisers shepherd tourists to designated souvenir stores, hotels and attractions. The businesses are often Chinese-owned, with prices denominated in yuan, resulting in little benefit to the local economy. Thailand faced the same issue, and in 2016 the Thai authorities banned zero-dollar tours.
The Wonderful Indonesia campaign also has India in its sights, viewing the country as a major future force of outbound tourism. A drive to promote Indonesia as a halal tourism destination to Islamic travellers is under way as well. As the country with the world’s largest Muslim population, Indonesia is aggressively marketing itself in Middle East and North African countries. The authorities have set an ambitious target of welcoming 5m halal tourists in 2019, an increase of 42% over 2018. Halal tourism is considered a lucrative segment because it taps the high spending power of visitors from the Arabian Gulf.
Domestic Tourism
While international tourism is the government’s main focus, domestic travel is also growing strongly under the five-year plan. To supplement the Wonderful Indonesia campaign, in 2017 the MoT announced the Pesona Indonesia initiative, which encourages Indonesians to travel their country. Some 264m domestic trips were made in 2016, and 200m between January and August 2017, driven by better domestic air service, improved infrastructure and a weaker rupiah that discouraged locals from travelling abroad. According to the WTTC, domestic spending increased from $17.6bn in 2016 to $20.5bn in 2017. “The sector will continue to rely on domestic tourists for a stable supply of visitors, but it has to be the right mix with foreign tourists who usually stay longer and spend more,” Mansoer told OBG.
Employment
Another government priority in the sector is to generate jobs for the millions of young Indonesians entering the labour market. In this regard the five-year plan aimed to see the sector employ 13m people by 2019. Tourism directly supported 4.6m jobs in 2017, or 3.7% of the workforce, with the WTTC forecasting the industry will directly employ 6.3m people by 2028. When jobs indirectly supported by travel and tourism were assessed, the WTTC estimated the number of employed at 12.5m in 2018, rising to 17m, or 11.4% of the workforce, by 2028.
Sourcing human resources is difficult outside of Bali, thus officials are expanding efforts to train staff for the hospitality industry elsewhere. “Human capital challenges are prevalent in the hospitality sector behind the dynamic in the market driven by continuous technology adoption by wider population,” Kevin Sandjaja, CEO of travel booking platform PegiPegi, told OBG. “Better leadership is required and Indonesia needs more people with a strong background in hospitality to drive growth in the market.”
Investment & Hotels
The tourism industry is also set to benefit from the government’s deregulation drive aimed at increasing foreign investment. The country’s previously protectionist foreign ownership laws were loosened in 2016 to encourage investors from abroad to build up hotel and restaurant offerings, among other businesses, in a move that has attracted a lot of international attention. The government has also made strides in easing its cumbersome employment laws, reducing bureaucratic hurdles to construction and simplifying taxation.
The 2017 tourism report by the WEF noted significant improvements in Indonesia’s international openness, ranking it 17th out of 136 countries, up 38 spots over the previous year. Jakarta has been refining its image and boosting its offerings of luxury hotels, driven to some extent by its hosting duties for the 2018 Asian Games. According to real estate consultancy Colliers, Jakarta was expected to have added some 2065 hotel rooms in 2018, including 804 three-star hotel rooms, 375 four-star rooms and 885 five-star rooms. Occupancy rates vary across the archipelago, but figures for Jakarta sat at around 65% in 2018. That year in the capital alone, eight new five-star hotels were either under construction or planned for completion by 2020. The mid-range market will also see a large number of projects come on-line by 2020. Some 16 hotels in Jakarta classified as either three or four stars were under construction or in the advanced stages of planning in end 2018.
Positive Moves
The capital city is still primarily a business travel destination, but more global promotion is expected to attract a wider variety of tourists to Jakarta. Central Jakarta is developing itself into a street-food destination that may one day rival Bangkok, and the city’s up-scale bars and nightlife counter the image of religious conservatism sometimes associated with it. Jakarta also aims to tackle its notorious traffic congestion with a more efficient public transport system, along with moves to reduce chronic air pollution. “Kuala Lumpur is a lot smaller than Jakarta but attracts more international visitors,” Bram Hendrata, managing director of Ismaya Group, a lifestyle and hospitality company, told OBG. “The meetings and events segment continues to offer great potential for Jakarta, and may help put the city on the map as a regional tourist destination.”
However, perhaps Indonesia’s most noticeable achievement in improving tourists’ experiences is its success in reducing wait times at the arrivals terminal of Jakarta’s Soekarno-Hatta International Airport through removing visa requirements. In 2016 the government eliminated the visa fee for tourists from 169 countries, cutting down the associated paperwork and processing time. This move saw the WEF rank Indonesia second globally in terms of visa policy in 2017. The reduced wait times are facilitating the increased number of arrivals resulting from a large-scale expansion of the airport.
Terminal 3, valued at $341m, was completed in August 2016 and serves as the new domestic flight terminal for the national carrier, Garuda Indonesia, creating more space for international flights. In 2017 the airport catered to the country’s international arrivals through expanded facilities, which include approximately 70,000 sq metres of multi-use commercial space and two hotels.
MICE
Indonesia is making progress in the meetings, incentives, conferences and exhibitions (MICE) segment, and in October 2018 it hosted the annual IMF and World Bank meeting in Bali. The event was attended by delegates from around the world, along with a following of press and observers.
“Bali has established itself as a MICE hub because events have been part of the local tourism industry for quite some time,” Riyanti Handayani, president director of Nusa Dua Indonesia, the Bali Convention Centre, told OBG in 2018. “Most events in Bali are corporate, and 2017 saw 96 events with more than 100,000 attendees.” Jakarta, for its part, hosted the Asian Games in 2018, as well as numerous other corporate and political events.
“The government has been working diligently to promote large projects and events, such as the Asian Games,” Aldo Susanto, director of business development at Nayati, a foodservice equipment manufacturer, told OBG. “Efforts like these are not only making Indonesia a rising hub for the MICE segment in the ASEAN region, but are also providing more opportunities for local businesses to expand.”
Challenges
Even with determined efforts to boost tourism growth, significant challenges remain for Indonesia. In 2018 social media was buzzing with videos of divers swimming in Bali and Java amid plastic rubbish; indeed, Kuta beach in Bali is often afflicted by city run-off, and its shores are frequently clogged with plastic bags and other refuse. In 2016 the World Bank identified Indonesia as the world’s second-largest plastic polluter behind China.
The authorities are mulling strategies to tackle this problem, including needed clean-up programmes in key destinations. Deforestation is another concern, which was noted by the WEF report. It is hoped that steadily growing eco-tourism will contribute to incentivising the protection of the country’s rain forests and further improve its treatment of wastewater.
In addition to pollution and deforestation, Indonesia was afflicted by natural and man-made disasters in 2018, including in places earmarked under the 10 New Balis project. For example, a ferry crossing Lake Toba sank in June, taking the lives of an estimated 167 people. The incident shone a harsh light on Indonesia’s safety standards, as the ferry was licensed to carry a maximum of 60 passengers. Not long afterwards, in August, an earthquake in Lombok measuring about 6.9 on the Richter scale resulted in the evacuation of tourists from the island.
Moreover, the Tanjung Lesung beach town and special economic zone – a major beneficiary of the 10 New Balis initiative – was heavily damaged in December 2018. The eruption of the Anak Krakatau volcano caused a landslide and tsunami that hit the area without warning, killing over 100 people. Although Indonesia had developed early-warning systems after the 2004 tsunami that killed hundreds of thousands of people regionally, experts found that budget cuts led the systems to fall into disrepair, leaving locals unaware of the impending disasters in 2018. That year also saw an airline tragedy in October, when the country’s budget carrier Lion Air crashed shortly after take-off in Jakarta, killing all 189 passengers. At the time of writing, investigators looking into the accident suspected a software design fault.
Outlook
Despite falling short of some targets, Indonesia has made impressive strides in terms of increasing visitor arrivals and broadening its appeal away from Bali. A combination of streamlined administration and liberalised rules on visas and foreign investment have helped to develop tourism into a dependable revenue stream.
Dulling these achievements, however, were a string of natural disasters and accidents that occurred throughout 2018, which indicates that Indonesia must improve its public safety standards and enforce strict environmental protection rules.
Nevertheless, as the general elections take place in April 2019, tourism is all but assured to retain its status as a top development priority for the country.
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