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Indonesia

Indonesia

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

major macro economic indicators

  2016 2017 2018 2019 (f)
GDP growth (%) 5.0 5.1 5.2 5.2
Inflation (yearly average, %) 3.5 3.8 3.2 3.0
Budget balance (% GDP) -2.6 -2.5 -2.9 -2.5
Current account balance (% GDP) -1.8 -1.6 -3.0 -2.1
Public debt (% GDP) 27.9 28.8 30.0 30.0

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

STRENGTHS

  • Diverse natural resources (agriculture, energy, mining)
  • Low labour costs and demographic dividend
  • Growing tourism industry (5.8% of GDP)
  • Huge internal market
  • Sovereign bonds rated “Investment Grade” by the three main rating agencies

WEAKNESSES

  • Large infrastructure investment gap
  • Exposure to shifts in Chinese demand
  • Market fragmentation: extensive archipelago with numerous islands and ethnic diversity
  • Persistent corruption and lack of transparency

Risk assessment

Slow but steady growth, with some challenges

Growth is facing headwinds, but will likely remain strong in 2019. GDP growth slowed to 5.07% year-on-year in the first quarter of 2019, below the official 5.40% growth target for the year. Consumption (55% of GDP) is benefitting from population growth, urbanisation, and a rise in per capita GDP; interconnected factors that are leading to the emergence of a growing middle class. Inflation remained below Bank Indonesia (BI)’s target range (4±1%) in the first half of 2019, thanks to efforts to contain Indonesian rupiah depreciation and lower oil prices. This has also benefitted consumers, enabling BI to cut the policy interest rate by 25 basis points to 5.75% in July. This rate cut could provide additional support to consumption and private investment, which has been deterred by high interest rates and worsening investor sentiment because of global protectionism and slower demand from China. Investment (32% of GDP) should nonetheless contribute to growth thanks to government support via the infrastructure development program launched in 2016. On May 2019, Minister of National Development Planning Bambang Brodjonegoro proposed a record IDR 5,957 trillion (USD 412 billion) in investments from 2020 to 2024. However, this will not be enough to plug the infrastructure gap, meaning President Joko Widodo (Jokowi) will have to implement structural reforms to boost foreign direct investment (FDI).

 

Indonesia jumped 33 places in the Ease of Doing Business Index, ranking in 2019 thanks to previous reforms. Standard & Poor’s upgrade of Indonesia’s rating to BBB following Jokowi’s victory in April 2019. Nevertheless, reforms are ongoing and some projects remain stalled due to inadequate financing. Mining is benefitting from sustained investments in coal and mineral mining, while manufacturing is expected to expand (albeit less vigorously than in previous years) due to weaker Chinese demand and other external headwinds. Exports (23.4% of GDP) of manufactured goods and commodities (oil and gas, palm oil, copra, lignite and copper) are set to decline, while imports continue to grow due to policy stimulus, weakening the contribution of net exports. The tourism sector will continue to underperform due to the lack of infrastructure in most regions.

 

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 designed 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 elections, fuel subsidies, and reconstruction efforts in the aftermath of the 2018 tsunami. Although the constitutional limit ensures that public debt levels remain low, some pressures might emerge if global monetary tightening resumes, as foreigners own a large proportion of the short-term external debt.

 

The current account deficit will likely widen. Exports remain sluggish, both in terms of volume and value, as energy prices and palm oil prices remain subdued. Meanwhile, import growth will grow on the back of demand linked to the public investment program. The government is likely to resort to import control measures – such as import permits, centralisation and tariffs – in case the deficit widens substantially. On the positive front, this risk appears contained for the time being, as pressures on the rupiah appear to have eased notably since the Fed took on a more dovish stance in 2019. The main driver of the current account deficit will continue to lie in the income account, because of debt interest payments and the repatriation of dividends. However, the current account deficit is financed by FDI inflows and portfolio investments. Foreign reserves remain at an adequate level.

 

Jokowi secures a second term in office

President Jokowi won the April 2019 general election, capitalizing on his track record on reforms despite missing the growth target of 7%. He focused on a more nationalist stance and identity politics to capture a larger share of votes, especially amongst conservative Muslims. For example, he chose Islamic scholar and cleric Ma’ruf Aminas as his running partner. This has triggered fears that policymaking might turn away from secularism. This turn was previously anticipated when the incumbent Christian Governor of Jakarta lost at the elections in 2017, and was later imprisoned on blasphemy charges. On the other hand, the decision to run alongside Ma’ruf Aminas, considered as a hardliner by some factions, offered Jokowi a stronger platform to compete against former Army lieutenant General Prabowo Subianto. Elections results were highly contested, sparking violent protests. The opposition camp challenged the results in court, but ruling was in favour of Jokowi.

 

Last update : August 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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