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Indonesia

Indonesia

Population 258.7 million
GDP 3604 US$
A4
Country risk assessment
B
Business Climate
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Synthesis

major macro economic indicators

  2015 2016 2017(f) 2018(f)
GDP growth (%) 4.9 5.0 5.2 5.3
Inflation (yearly average, %) 6.4 3.5 3.7 3.6
Budget balance (% GDP) -2.5 -2.5 -2.7 -2.5
Current account balance (% GDP) -2.0 -1.8 -1.7 -1.9
Public debt (% GDP) 26.9 27.9 28.7 29.2

(f): forecast

STRENGTHS

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

WEAKNESSES

  • Low investment rate
  • Exports of commodities increasingly dependent on Chinese demand
  • Infrastructure shortcomings
  • Persistent corruption and lack of transparency
  • Very extensive archipelago with numerous islands and diverse ethnic groups and religions
  • High unemployment and poverty rates sharpening inter-ethnic tensions

Risk assessment

Growth buoyed by internal demand

Growth is expected to remain lively in 2018, driven by dynamic internal and external demand. Private consumption (57% of GDP in 2016), the main source of economic growth, is stimulated by a growing population, ever growing urbanisation and a rise in per capita GDP enabling the emergence of a middle class. The moderation of inflation, now in the lower tranche of the central bank target of 4±1%, should sustain this private demand. Meanwhile, the infrastructure development programme launched by President Widowo’s government in 2016 (225 priority infrastructure projects), as well as recent reforms to simplify administrative procedures, are expected to boost investment (32% of GDP). These reforms, aimed at improving the still poor business climate, have enabled Indonesia to jump 19 places in the Doing Business 2018 Index to occupy 72nd place. However, there is still a long way to go on the path to reform and conclusion of the projects remains uncertain (only 20 projects completed out of 225 in July 2017) for administrative reasons and because of a lack of finance (only half the projects were financed in autumn 2017). In addition, growth will remain constrained by a sluggish mining sector, which is yet to recover, despite the lifting of the ban on exporting unrefined ore in January 2017 (in place since 2014). This is partially explained by unrest at the Grasberg gold and copper mine in Papua. In conflict with the Indonesian government over the terms of a mining licence, the US company Freeport faced protests lasting over four months in 2017, then security threats from separatist rebels – 2 police officers killed in autumn 2017 - some of the many factors affecting production.

Finally, exports (19% of GDP) of commodities (oil and gas, palm oil, copra, lignite, and copper), as well as of electrical and IT components, automotives, paper, clothing, and jewellery are dynamic, but are offset by imports to meet internal demand.

 

Deficits under control

Constrained by a constitutional limit of 3% of the annual deficit, the Indonesian government has embarked on tax reforms aimed at controlling expenditure and increasing revenues. Subsidies (particularly on energy) have been cut so as to redirect public spending to infrastructure investments. On the income side, the increase associated with the repatriation of funds following the tax amnesty introduced in 2016 (+3.6% of income between 2015 and 2016) is unlikely to enable the government to achieve its aims. This shortage of income could lead to spending cuts. In this context of a controlled public deficit, the public debt is expected to remain low with interest rates falling after the three main rating agencies raised Indonesia’s credit rating to Investment Grade. From the perspective of the current account, the trade balance shows a surplus (at 1.6% of GDP in 2016), thanks to the lowering of the oil bill, with oil making up 14% of imports in 2016. The balance of services shows a small deficit (-0.8% of GDP) but the main cause of the current account deficit lies in the income deficit (-3.3% of GDP), associated with the repatriation of dividends and debt interest payments. This current account deficit is largely financed by FDI flows (1.7% of GDP) and portfolio investments (2.0% of GDP), allowing the Indonesian Central bank to accumulate reserves. The latter conducts a monetary easing policy as illustrated by the surprise cut in the key rate in August 2017 to stimulate activity. The rupiah remains dependent on the influx of short-term capital, with 39.5% of rupiah-denominated sovereign bonds held abroad.

 

Joko Widowo put to the test by religious and ethnic tensions

In power since 2014, Joko Widowo, known as Jokowi, enjoys great popularity thanks to the economic progress made since the start of his term in office. However, his re-election at the next presidential election in 2019 is not yet assured, due to growing challenge from the opposition candidate, Prabowo Subianto (Gerindra Party), supported by ultra-conservative Muslims. The municipal elections in Jakarta in April 2017 highlighted the country’s worsening religious and ethnic tensions. Basuka Tjahja Purnama (known as Ahok), the candidate supported by Jokowi and from the Chinese Christian population, was accused of blasphemy by the ultra-conservative Muslims, strongly discrediting him in favour of his rival Anis Basedwan, supported by Prabowo Subianto, who ultimately won through. The June 2018 local elections will be a new test for the president in regions accounting for 43% of the total population. Based on local issues, these elections are crucial for the political parties in the run-up to the presidential elections, with support for the “right” candidate determining voters’ future loyalty. Finally, Indonesia’s political landscape is dominated by a hardening anti-terror policy aimed at curtailing the spread of religious fundamentalism in the country.

 

Last update : January 2018

Payment

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.

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.

 

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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