Economic Analysis
Indonesia

Indonesia

Population 262.0 million
GDP per capita 3,876 US$
A4
Country risk assessment
A4
Business Climate
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Synthesis

major macro economic indicators

  2016 2017 2018 (e) 2019 (f)
GDP growth (%) 5.0 5.1 5.3 5.4
Inflation (yearly average, %) 3.5 3.8 3.5 3.8
Budget balance (% GDP) -2.5 -1.7 -2.5 -2.7
Current account balance (% GDP) -1.8 -1.7 -2.3 -2.1
Public debt (% GDP) 27.9 28.8 30.0 30.0

(e): Estimate. (f): Forecast.

STRENGTHS

  • Diverse natural resources (agriculture, energy, mining)
  • Highly competitive thanks to low labour costs
  • Growing tourism industry (5.8% of GDP)
  • Huge internal market
  • Strong banking sector
  • Sovereign bonds rated “Investment Grade” by the three main rating agencies

WEAKNESSES

  • Large infrastructure investment gap
  • Exports of commodities dependent on Chinese demand
  • Market fragmentation: extensive archipelago with numerous islands and diverse ethnic groups
  • High unemployment and poverty rates sharpening inter-ethnic tensions
  • Persistent corruption and lack of transparency

Risk assessment

Growth buoyed by internal demand

Growth will remain strong in 2019, driven mostly by private consumption (56% of GDP). Consumption is fostered by population growth, ever growing urbanisation, and a rise in per capita GDP, enabling the emergence of a middle class. In 2019, the adverse effects of high inflation on consumption should be mitigated by measures to keep food and energy prices in check, and public spending associated with the election campaigns. Inflation growth stems from higher oil prices, a weaker rupiah, and impacts from natural disasters. It is nonetheless expected to remain within Bank Indonesia (BI)’s target range (4±1%). Private investment will be deterred by rising interest rates combined with worsening investor sentiment, stemming from global protectionism and slower demand from China. Investment growth (32% of GDP) shall nonetheless hold steady thanks to government support for infrastructure projects. Through the infrastructure development program launched by President Joko Widowo’s government in 2016 (225 priority infrastructure projects), projects are financed both publically and via PPP, attracting foreign investors. Moreover, the President’s reform agenda successfully improved the still poor business climate, with Indonesia jumping 33 places in the Doing Business Index since 2016 to reach the 73rd rank in 2019. However, reforms are not complete and some projects have struggled to secure financing (only 26 of 225 were completed as of March 2018 and half of the required USD 327 billion had been collected). The mining sector will contribute positively to growth thanks to the pick-up in crude oil prices after several years of stalling performance. Manufacturing will continue to grow steadily, albeit less vigorously due to dimmer Chinese and global demand. Moreover, exports (23.4% of GDP) of manufactured goods and commodities (oil and gas, palm oil, copra, lignite, and copper) are dynamic, but they are offset by a faster increase in imports. The tourism sector will continue to underperform due to the lack of infrastructure in most regions of thecountry.

 

Budget balance under control, moderate pressure on current account, and capital outflow risk

The budget deficit is constrained by a constitutional limit of 3%. The government has embarked on reforms meant to increase tax collection, repatriate capital kept in foreign accounts (including tax havens), and control expenditure. These will compensate the increase in spending associated with the coming elections, with the control of fuel prices, and with reconstruction efforts in the aftermath of the 2018 tsunami – although spending cuts could be announced after the elections in April 2019. Curtailing of the deficit will maintain public debt at low levels. Nevertheless, the government may encounter financing challenges in a context of global monetary policy normalisation associated with higher interest rates and lower liquidity.

The current account deficit will remain high. The higher oil bill will not be compensated by the increased price of exported crude oil and gas. In addition, capital goods import growth, linked to the government’s investment program, will be not compensated by the steady growth of merchandise exports. To mitigate the trade deficit, the government will continue to curb import growth via import permits or import centralisation. All in all, the main cause of the current account deficit will continue to lie in the income account because of debt interest payments and the repatriation of dividends. In addition, the context of global monetary tightening induces risk of outflows, as, over the past few years, the current account deficit was financed by FDI inflows and portfolio investments, and public debt was largely funded by international investors. Moreover, the deterioration of the external position further strengthens depreciation pressures on the rupiah. In this context, and although inflation is contained, BI will continue to hike interest rates in 2019 to defend the currency and limit outflows. Although foreign reserves remain at an adequate level, they will be reduced by BI intervention on forex markets.

 

Popular Joko Widowo on track to secure the presidential election

In power since 2014, Joko “Jokowi” Widowo enjoys great popularity thanks to the economic progress achieved, his extensive infrastructure program, and his reform agenda. Polls present him as frontrunner for the April 2019presidential elections. For the first time, these elections are concurrent with those of Parliament, which should ensure more collaboration in reforms for the next mandate. All the same, Mr Jokowi will have to contend with a growingly polarised electorate. A climate of civil insecurity, following several suicide bomb attacks in 2018, is certainly not helping. Meanwhile, measures to keep food prices in check are not resonating well with the rural population, many of which are dependent on revenues from the sale of agricultural crops. This part of the electorate is in fact already tilting towards the opposition candidate, Prabowo Subianto (Gerindra Party), a businessman and former commander of Indonesia Special Forces. Previously a contender in 2014, he is supported by ultra-conservative Muslims.

 

Last update : February 2019

Payment

Cash, cheques, and bank transfers are each popular means of payment in Indonesia. SWIFT bank transfers are becoming more popular as an instrument of payment for both international and domestic transactions due to the well-developed banking network in Indonesia.

Standby Letters of Credit constitute a reliable means of payment because a bank guarantees the debtor’s quality and repayment abilities. Furthermore, the Confirmed Documentary Letters of Credit are also considered reliable, as a certain amount of money is made available to a beneficiary through a bank.

 

Debt collection

Amicable phase

The first step to recovering a debt is to negotiate the issue with the debtor to attempt to resolve the issue amicably. There is an inherent Indonesian culture and ideology (Pancasila) where amicable settlement is encouraged. Creditors usually issue a summon/warning letter to the debtor, which outlines a statement concerning the debtor’s breach of commitment. The letter also calls for a discussion to determine whether the dispute should be settled through the court system. If the amicable phrase does not result in a settlement, the parties may trigger legal action.

 

Legal proceedings

The Indonesian judicial system comprises several types of courts under the oversight of the Supreme Court. Most disputes appear before the courts of general jurisdiction, with the Court of First Instance being the State Court. Appeals from these courts are heard before the High Court (a district court of appeal). Appeal from the High Court, and in some instances from the State Court, may be made to the Supreme Court.

 

Ordinary proceedings

Ordinary legal action may commence when the parties have been unable to reach a compromise during the amicable phase. The creditor may file a claim with the District Court, who is subsequently responsible for serving the debtor with a Writ of Summons. If the debtor fails to appear at the hearing to lodge a statement of defence, the court has discretion to organize a second hearing or to release a default judgment (Verstekvonnis).

Prior to considering the debtor’s defence, as previously mentioned, the court must first verify whether the parties have tried to reach an agreement or amicable settlement through mediation). If the parties have undergone the mediation process, the panel of judges will continue the hearings and the parties’ evidence will be examined. The judge will render a decision and may award remedies in the form of compensatory or punitive damages.

District Court will usually take from six months to a year before rendering a decision in the first instance. The proceedings may take longer when a case involves a foreign party.

 

Enforcement of a legal decision

When all appeal venues have been exhausted, a domestic judgment becomes final and enforceable. If the debtor does not comply with the judge decision, the creditor may request the District Court to commend execution by way of attachment and sale of the debtor’s assets through public action.

Indonesia is not part to any treaty concerning reciprocal enforcement of judgments, making it highly difficult to enforce foreign judgments in Indonesia, or to enforce Indonesian court decisions abroad. Because foreign judgements cannot be enforced by Indonesian courts within the territory of Indonesia, foreign cases must therefore be re-litigated in the competent Indonesian courts. In such a case, the foreign court judgment may serve as evidence, but this is subject to certain exceptions as regulated by other Indonesian regulations.

 

Insolvency proceedings

There are two main procedures for companies who are experiencing financial difficulties:

 

Suspension of payments proceedings

This procedure is aimed at companies that are facing temporary liquidity problems and are unable to pay their debts, but may be able to do so at some point in the future. It provides debtors with the temporary relief to reorganize and continue their business, and to ultimately satisfy their creditors’ claims. The company continues its business activities under the management of its directors, accompanied by a court-appointed administrator under the supervision of a judge. The company must submit a composition plan for the creditors’ approval and for ratification by the court. The rejection of the plan by the creditors or the court will result in the debtor’s liquidation.

 

Liquidation

The objective of liquidation is to impose a general attachment over the assets of bankrupt debtors for the purpose of satisfying the claims of their creditors. It can be initiated by either the debtor or its creditors before the Commercial Court. Following the submission of the petition, the court will summon the debtor and its creditors to attend a court hearing. Once bankruptcy has been declared, the directors of the debtor company lose the power to manage the company, which is transferred to the court-appointed receiver who then manage the bankruptcy estate and the settlement of the debts. The debtor’s assets will be sold by way of public auction by the appointed receiver.

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