Indonesia Economy and Business – Risk Assessment

As the main source of growth in the economy, private consumption (57% of GDP in 2016) is stimulated by an increasing population, an increasing urbanization, and a rise in GDP per capita allowing the emergence of a middle class. The moderation of inflation, contained in the lower portion of the target of 4 ± 1% of the central bank, should support this private demand. The infrastructure development Programme launched by the Government of President Widodo in 2016 (225 priority infrastructure projects), as well as the recent reforms to simplify administrative procedures, should Boost investment (32% of GDP).

Finally, exports (19% of GDP) of raw materials (oil and gas, palm and copra oils, lignite, copper), as well as electrical and computer components, automobiles, paper, clothing and goldsmiths’ products, will be Dynamic but offset by the vigour of imports linked to domestic demand.

Master deficits

Constrained by a constitutional limit of 3% annual deficit, the Indonesian government has undertaken tax reforms to control its spending and increase its revenue. Subsidies (including energy) have been reduced to reorient public spending towards infrastructure investments. On the revenue side, the increase linked to remittances following the tax amnesty set up in 2016 (+ 3.6% of Revenues end 2015 and 2016) should not allow the Government to achieve its objectives. This lack of income is likely to lead to a reduction in spending. In this context of controlled public deficit, the public debt should remain low, with interest rates declining following the new “investment grade” ranking of Business in Indonesia by the three major rating agencies. From the point of view of the current account, the trade balance is surplus (1.6% of GDP in 2016), thanks to the lightening of the oil bill, constituting 14% of imports in 2016. The balance of services is low in deficit (-0.8% of GDP) but the main cause of the current deficit is the revenue shortfall (-3.3% of GDP), linked to the repatriation of dividends and the payment of interest on debt. This current deficit is largely financed by FDI flows (1.7% of GDP) and portfolio investment (2.0% of GDP), allowing the Indonesian central bank to accumulate reserves. The latter leads a policy of monetary easing illustrated by the surprise drop in its reference rates in August 2017 in order to stimulate activity. The rupee remains dependent on short-term capital flows with 39.5% of sovereign bonds denominated in rupee held by foreigners.

Joko Widodo to the test of religious and ethnic tensions

In power since 2014, Joko Widodo, aka Jokowi, enjoys a high popularity in view of the economic progress made since the beginning of his mandate. However, his re-election to the next presidential election of 2019 is not yet assured, in the face of the rise of the opposition candidate, Prabowo Subianto (Gerindra Party), supported by the ultra-conservative Muslims. The municipal elections in Jakarta in April 2017 brought to light an exacerbation of ethnic and religious tensions in the country. Basuki Tjahja Purnama (aka Ahok), the candidate supported by Jokowi and from the Chinese Christian community, was accused of blasphemy by ultra-conservative Muslim groups, décrédibilisant heavily to his opponent Anies Baswedan, Supported by P. Subianto, who finally prevailed. The local elections in June 2018 will mark a new test for the president, in regions with a total of 43% of the population. Based on local issues, these elections will be decisive for political parties for the presidential election, support for the “right” candidate determining the future loyalty of voters. Finally, the Indonesian political landscape is dominated by a hardening of the anti-terrorism policy, in order to limit the expansion of religious fundamentalism in the country.

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