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Wednesday, October 19, 2011
Latest report on Advanced-Country; Indonesia
Part 1
Global Insight
01/03/2011
Executive Summary: Key Issues to Watch
Steady, Though Not Spectacular, Growth: Indonesia was one of the few Asian economies to avoid recession in 2009, due to its lesser export dependence and comparatively robust domestic demand. This also means that the country will trail many of its regional peers in terms of growth performance in 2010 as it does not benefit from the same sort of pent-up demand boost available elsewhere. Nonetheless, economic performance will remain solid, with real GDP expected to grow 6.0% in 2010 and by a similar rate in 2011.
Tame Inflation Will Allow Policy Makers to Delay Start of Tightening:
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| Photo Copyright Imas Kurniawati-Finnegan 2009 |
The downturn in Indonesia's business cycle during the global recession has been far milder than seen in most other Asian economies. Indeed, its economy never experienced a contraction, while monetary easing continued until August 2009, whereas such policies had been completed by the Spring of 2009 elsewhere in the region.
This same pattern is being observed on the tightening side. With inflation still under control, economic growth now lagging relative to regional peers, and a currency that continues to appreciate, Indonesia's central bank will seek to delay tightening for as long as possible. Although most other countries in the region have by now initiated monetary tightening, Indonesia will wait until the first quarter of 2011 to do so.
New Policies Aimed at Deepening Financial Markets Will Also Support the Rupiah:
Indonesia is still perceived as one of the higher risk countries in Asia and its currency often falls prey to speculative attacks. Historically, such episodes of depreciation have been short-lived, but they are augmented by the country's underdeveloped financial markets and thin offshore rupiah trading. This summer, Bank Indonesia implemented a series of measures aimed at creating a secondary market for government bonds, and took additional measures to develop the country's financial markets. By creating a bigger market for rupiah-denominated assets, this should boost demand for the currency and help contain excessive exchange-rate volatility in the long term. For the time being, however, the rupiah remains at higher risk of sudden capital-outflow-induced depreciation than many other regional currencies.
Terrorist Threat Remains Present:
The killing of one of South-East Asia's most-wanted terrorist masterminds, Noordin Mohammed Top, by Indonesian counter-terrorism forces in September 2009, and the subsequent killings of two other Islamist militants in October have provided a major confidence boost for Indonesia's security outlook.
2007 2008 2009 2010 2011 2012 2013 2014 2015
Real GDP (% change)
6.3 6.1 4.5 6.0 5.9 6.1 5.9 5.8 5.8
Nominal GDP (US$bil.)
432.0 510.5 540.3 699.7 786.7 872.7 957.8 1,051.4 1,154.4
Nominal GDP Per Capita (US$)
1,923 2,246 2,349 3,009 3,348 3,676 3,995 4,344 4,727
Consumer Price Index (% change)
6.3 10.1 6.4 5.1 5.8 5.2 5.5 5.4 5.4
Exchange Rate (LCU/US$, end of period)
9,419.00 10,950.00 9,400.00 9,051.07 9,183.56 9,322.64 9,481.27 9,619.76 9,751.80
Source: Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated on the 15th of each month from monthly forecast update bank (GIIF). Written analysis may include references to data made available after the release of the GIIF bank.
Challenges Set to Remain Entrenched in Indonesia's Political and Security Environment:
Following President Yudhoyono's first cabinet's positive steps to address key issues, such as enhancing civilian control of the powerful military, reining in separatist forces, and containing terrorism, the new government continues to face a number of political and security challenges. One of these is pushing for further military reform in order to break up the armed forces' extensive commercial base. A plan to transfer all of the military businesses to the civilian-run Indonesian Military Management Body moved forward in October 2009, when a presidential decree was passed making this move legally possible.
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| Photo Robert S. Finnegan 2001 |
The process is expected to be concluded by August 2010. Following the successful culmination of the Aceh peace process leading to local elections in December 2006, the security situation there has stabilized, but separatism remains a more significant problem in Papua. While terrorism remains a challenge for the Indonesian government, it has nevertheless achieved notable success in rounding up terror suspects in the aftermath of the 2002 Bali bomb attacks, and more recently after the 17 July 2009 bombings, with the security forces detaining key members of the main terrorist organization Jemaah Islamiyah (JI). The JI network has, however, recently been in the process of consolidating itself, and smaller splinter groups of the organization remain a threat in the medium term.
The Association of Southeast Asian Nations (ASEAN) Will Remain at the Heart of Indonesia's Foreign Policy:
The political leadership is, however, increasingly trying to carve out a role for itself as an important international player beyond this.
Indonesia has long sought to take on an important role in the Islamic and developing world as an active member of the Organisation of Islamic Conference (OIC) and the Non-Aligned Movement. Following the institution of democracy in 2004, making it the largest Muslim democracy in the world, Indonesia has nurtured closer bonds with the United States, set to deepen considerably under the Obama administration. The United States has sought to establish "an arc of democracies" including Japan, Australia, and Indonesia to balance the influence of a fast-rising China.
Steady growth will continue in 2011 and beyond. We estimate economic growth in Indonesia to have reached 6.0% in 2010 and anticipate a similar pace in 2011. Domestic demand, particularly investment, remains well supported by improved macroeconomic conditions and increased foreign investor interest in the country. Private consumption is also benefiting from rising incomes, relatively low inflation, and declining (although still high) unemployment. Government spending, which is estimated to have contracted in 2010, will likely accelerate modestly during 2011, although the boost will likely be limited and the magnitude of the gains constrained by lower corporate tax rates and still-low tax penetration.
Monetary tightening delayed amid mild inflation. Given still-low headline inflation and delays in electricity-tariff increases, we have pushed back the timing of the first interest-rate hike until 2011. Comments from Bank Indonesia remain quite dovish for the time being, and as long as the rupiah does not succumb to renewed investor fears surrounding the Eurozone's sovereign problems, inflation should remain in check. Indonesia's business cycle has been much milder than elsewhere in the region, and much less "emergency" support had been injected into the system by the central bank during the crisis. This also means there is less immediacy for removing that emergency component in the early stages of the recovery. Nonetheless, a surge in food prices in recent weeks highlights risks, as evidenced elsewhere in the region.
Reform efforts will pay off over medium term via higher foreign direct investment (FDI). Quietly and without fanfare, Indonesia has taken important steps to improve its business climate over the last few years. Given reduced corporate tax rates, less red tape, and an improved reputation as a favorable investment destination, Indonesia is well positioned to benefit from the increase in global direct investment flows associated with the global economic recovery in 2010 and beyond. We anticipate a steady increase in FDI inflows to Indonesia over the medium term, particularly in areas such as mining and hydrocarbons, infrastructure development, and manufacturing.
Executive Summary: Key Regulatory Issue to Watch
President Launches Free-Trade Zone in Riau Islands: In January 2009, President Yudhoyono officially launched the long-anticipated free-trade zone for Batam, Bintan, and Karimun in the Riau Islands. Companies operating on the islands will no longer need to pay value-added tax (VAT), import duties, or luxury tax, in the hope that more foreign businesses will invest to take advantage of the comparatively low production costs. The government will impose harsh penalties on any local officials or businesses aiming to circumvent the regulations or hinder foreign investors in any way. However, under the new regulations, imports and exports can only be loaded and unloaded in five ports: Batu Ampar, Kabil, and Sekupang in Batam; Loban in Bintan; and Parit Rompak in Karimun. Patrol boats will be monitoring any activity that occurs outside these ports and will impose penalties where necessary. Investment in the Riau Islands totals around US$11 billion from over 1,000 foreign companies, with new investment totalling US$1 billion in 2008. Singapore is set to become a major investor, with the islands just 30 minutes by ferry from the Singapore mainland. Investors from the city state are keen to take advantage of the proximity of the islands, but were hesitant to proceed until legal matters were clarified. The main industries on the Riau Islands are garment production, electronics manufacturing, and shipbuilding.
Executive Summary: Legal Environment Overview
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| Photo Robert S. Finnegan 2003 |
To be Continued: Indonesia Intelligence Report, Part 2; Corruption Eradication Commission Expands Regional Ties
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