With a population of 222m and over 17,000 islands, 300 ethnicities and 250 languages, Indonesia is one of the world's most diverse countries. Since November 2004, Susilo Bambang Yudhoyono, the first president chosen in direct elections, has set out to tackle the challenges facing the country. His goal is to encourage foreign investment by stimulating economic growth. Fuel subsidies have been cut to ease pressure on the budget; the subsequent inflation has been curbed; macroeconomic stability has been retained through a vigilant monetary policy; the country's police force has been overhauled; the judiciary reformed, along with the tax system; and an anti-corruption campaign launched.
TABLE OF CONTENTS
Indonesia is steadily recovering from the economic and political collapse of 1998, when the country underwent a huge economic recession and transformed itself from dictatorship to democracy. It has embarked on a radical decentralisation programme, with 33 provinces and 444 regencies being given jurisdiction over their natural resources, granting them leverage in negotiations with investors, including foreign entities, and central government. President Yudhoyono, who captured 60% of the vote in the 2004 elections, is a popular leader, regarded as business friendly and favouring consensus over confrontation: he was nominated for the Nobel peace prize for his work in bringing peace to the Aceh region. The secular-versus-sharia debate continues, while economically the slow process of liberalisation is ongoing. In terms of foreign affairs, Indonesia's traditional policy of non-intervention is changing, due to regional energy and investment debates and the government is taking steps to address the issue of terrorism.
The chapter includes interviews with President Susilo Bambang Yudhoyono; Hassan Wirajuda, Minister of Foreign Affairs; Lord Powell of Bayswater and David Katz, Director, Office of the US Trade Representative, South-east Asia and Pacific Affairs.
Despite the challenges provided by a quickly changing political scene and a series of natural disasters, the economy is staging a recovery. The government is proposing pro-business reforms, and efforts are in place to crack down on corruption with a specialised Anti-Corruption Committee. Three special economic zones have been set up in conjunction with Singapore, while the number of state-owned firms will be reduced from the current 139 to 50 by 2015. Efforts have been made to improve social welfare with the introduction of the unconditional cash transfer (UCT) programme; the government is now devising a more targeted poverty initiative. Meanwhile the new Investment Law has opened up the economy to foreign investors, making land transfers easier, taxes simpler and investments more secure. Indonesia must achieve at least 7% annual growth to tackle its huge unemployment problem. Infrastructure remains a challenge, but private sector involvement should assist.
The chapter includes interviews with Boediono, Coordinating Minister for the Economy; Sri Mulyani Indrawati, Minister of Finance and Bobby Umar, President Director, Bakrie & Brothers. Viewpoints are provided by Steve Hanke, Professor of Applied Economics, Johns Hopkins University and former Special Counsellor to the Economic and Monetary Resilience Council of Indonesia; and James Castle, Chief Executive, CastleAsia.
The banking sector is in good health. In the past three years, local banks have enjoyed double-digit expansion, largely due to a fast uptake in retail credit. Bank Indonesia, the central bank, has introduced a single-presence policy, meaning that investors who own shares in more than one bank will have to divest their holdings, merge their assets or set up a holding unit. State-owned banks such as Bank Mandiri, Bank Rakyat Indonesia (BRI) and Bank Negara Indonesia (BNI) continue to play an important role in advancing the government's economic agenda, while foreign players, such as Citibank and HSBC are arriving. In 2007, the challenges facing the sector are: the sell-offs of state owned banks; the need for a tighter regulatory framework and further consolidation. Sharia banking is likely to become more popular with changes to the legal and taxation framework, while micro lending is expected to develop. Commercial loans are predicted to achieve a growth rate of 20%.
The chapter includes an interview with Burhanuddin Abdullah, Governor, Bank Indonesia and Mervyn Davies, Chairman, Standard Chartered. Darren Stubing, Senior Adviser, Capital Intelligence offers a viewpoint.
The Indonesian market is one of the most successful in the region. Indeed, in 2004 the Jakarta Stock Exchange was the region's best performer with a 45% rise in its benchmark index. Its greatest drawback is that it is small when compared with the size of the economy and, while foreign investment pours in, it has failed to capture domestic savings, with locals preferring the security of bank deposits. The Indonesian Capital Markets Master Plan is underway, covering 2005-2009. Key elements include the establishment of an independent regulator before 2008 and the introduction of risk based supervision. With the economy stabilising and Bank Indonesia announcing an interest rate cut, analysts expect good returns in 2007.
Share analysis and data on ASTRA International, Bank Mandiri, Bank Central Asia, Bank Rakyat Indonesia, Telekomunikasi Indonesia and Perusahaan Gas Negara are provided by SCB in partnership with Danareska.
Gita Wirjawan, Managing Director, JP Morgan Indonesia and Simon Morris, Country Chief Executive Officer, Standard Chartered Bank offer viewpoints while Erry Firmansyah, President-Director, Jakarta Stock Exchange gives an interview.
Led by a strong life sector, insurance is set to bounce back from a relatively sluggish 2006, when it was hit by poor car sales and rising inflation. The sector is fairly crowded, although it is estimated that 80% of all business is carried out by the top-15 companies. Prudential dominates the life segment while Jasa, Sinar Mas, Tugu Pratama and Astra Buana claim the top four spots in non-life. The Ministry of Finance has to clarify and strengthen the legal framework to attract more investment, both local and foreign. There is a skills gap in the distribution network, which often relies on untrained agents. Property and cargo insurance are both popular, while takaful is growing fast. Taken as a whole, there is plenty of room for growth as the nation's GDP rises.
Infrastructure is a key tenet in government plans to develop Indonesia. The state owns many of the key enterprises, but the sector is opening up, in air travel, for example, with the arrival of Adam and Lion Air, which are competing with state airline Garuda. Tough moves have been made to enforce shipping regulations, and several ferry disasters in 2006 have led to calls for the reform of the way domestic sea transport operates. Meanwhile port capacity is being expanded, with Batam, gifted with some $250m of investment, being mooted as a possible regional hub. The rail network is being upgraded and expanded, with new lines to be constructed on Kalimantan, Sulawesi and Papua, and the entrance of the privately funded Jakarta monorail. Safety in the sector has become a government priority.
The chapter includes interviews with Hatta Radjasa, Minister of Transportation and Emirsyah Satar, President & CEO, Garuda Indonesia.
Indonesia's energy sector is one of the world's most important. Indeed it is the world's number one provider of liquefied natural gas (LNG). Yet there are hurdles to be crossed to crank it up to full power: widening electricity availability; keeping fuel prices affordable; marrying the needs of the domestic industry with the bounty available through selling abroad and balancing regional needs, company profit and central policy. Pertamina, which was the sector's regulator, was reclassified as a limited liability company under a 2001 oil and gas law, and many of its activities have been hived off to the private sector. Oil and gas production are declining, renewed exploration is taking place to maximise reserves, and coal output is being increased. Market liberalisation is encouraging investment and international players like ExxonMobil, Chevron and BP have had a presence for some time. However some see domestic fuel subsidies as discouraging private investment and distorting the industry. The government is planning a number of incentives to increase investor interest in renewable energy: solar power, biofuels and geothermal.
Purnomo Yusigiantoro, Minister of Energy and Natural Resources and Ari H Soemarno, Director, Pertamina provide interviews.
“Ultimate in diversity” is the slogan of the tourism sector, which is Indonesia's second largest source of foreign capital, after hydrocarbons. Indeed the country does possess a host of natural advantages and spectacular locations. However, due to natural disasters and security concerns, visitor numbers have dropped of late. The government is aiming to address this with the introduction of visas on arrival to residents of many countries. Another boost has been the arrival of low-cost airlines, such as Air Asia. Bali remains the most popular destination, while Jakarta is looking at staking its place in the meetings, incentives, conferences and exhibitions (MICE) market. Overall the sector has great potential, yet investment is key and poor infrastructure remains a significant challenge.
Jero Wacik, Minister of Tourism, offers an interview.
CONSTRUCTION & REAL ESTATE
Real estate construction is desperately needed to lift living standards for Indonesia's dense and rapidly growing population. Despite the regionalisation movement, construction is still very much centred around Jakarta. Total Bangun Persada is the largest listed ex-government contractor to date with an 850m-share IPO worth Rp293bn ($29.3m) on the Jakarta Stock Market in July 2006. Remaining state-owned contractors will, the government has announced, be sold or merged. Private sector participation in infrastructure building should be encouraged by the Jakarta Monorail scheme and 10 projects earmarked to be constructed on the build-operate-transfer (BOT) model. Laws on foreigners buying property may be set to relax, according to the National Land Agency. Meanwhile Indonesian companies, such as Ciputra Group, Salim Group and Sinar Mas are investing overseas.
Gordon G Benton, Senior Executive, Lippo Karawaci provides a viewpoint.
TELECOMS & IT
The sector is ringing the changes with the deregulation process that began in 2001 and the phasing out of exclusivity rights for Telkom Indonesia (TI) and Indosat. Although the telecoms market is growing overall, the fixed-line market is stagnating at the expense of fixed-wireless and mobile, which are successful at reaching remote areas. As the customer base expands, CDMA technology is becoming popular in the mobile segment among companies such as Bakrie Telecom, Flexi, Star One and Mobile-8, offering the opportunity to raise average revenue per user. The market is attracting overseas players, such as Hong Kong-based Hutchinson Telecom. Internet penetration rates are low, around 10% of the population, and encouraging businesses, particularly small-and medium-sized enterprises, to embrace new technology remains a challenge. More police time is being allocated to deal with piracy. Java is being mooted as the site for the proposed Bandung High-technology Valley.
The chapter includes interviews with Kusmayanto Kadiman, Minister of Research & Technology and Rinaldi Firmansyah, CEO, Telkom Indonesia.
Manufactured goods account for more than 60% of total exports. The apparel industry, including shoes, has been hit hard by cheaper exports from China and Vietnam, as has the textiles segment. However EU tariffs on cheap clothes imports from Asia could assist in this regard. The government hopes that a move away from a logging concessions system to an industrial plantations model will invigorate the forestry segment. The Ministry of Industry is looking to continue steel's upward trajectory by entering production of specialised steel and examining the opportunities in iron ore development, while the domestic petrochemicals market is displaying potential. The government is establishing special economic zones (SEZs), the first of which has been set up in the Riau Islands, next to Singapore. A further three are to be located in North Sumatra, South Sulawesi and Bojonegara in Banten.
Muhammad Hidayat, Chairman, KADIN; Muhammad Lutfi, Chairman, Investment Coordinating Board and Mostafa Widjaja, Chairman, Batam Industrial Development Authority provide interviews.
Mining contributed 2% of GDP in 2005. Indeed, Indonesia is one of the world's top ten mineral producers and the world's largest exporter of tin. The sector is almost entirely in foreign hands, with global majors such as Antam, Freeport and Koba Tin making their mark. There are only two state-run mines. Legal reforms due to be passed in 2007, including the scrapping of the Contract of Work system of governance – which dates back to 1967 and is popular with foreign investors – have caused controversy and a lull in investment. More stringent environmental regulations are being introduced, along with more efficient delegation from national to local level. A hike in coal production is needed to assist the government in boosting electricity production by some 10,000MW in the next few years. The biggest issue facing the coal industry is that of moving it from mine to power plant, given an often inadequate infrastructure.
Noke Kiroyan, President, International Chamber of Commerce, Indonesia National Committee offers a viewpoint.
Indonesia is set to overtake Malaysia as the world's number-one palm oil producer in the near future. Indeed, it may have already claimed top spot, with India, China and the Netherlands its main export markets and worldwide demand high. It is becoming more involved in downstream palm oil products, such as soaps and pharmaceuticals. The Indonesian Palm Oil Association (GAPKI) is promoting this, while clamping down on unethical environmental practices. Palm oil could be helped by a 2006 US Food and Drug Administration ruling making it compulsory to label trans fatty acid content of all foods; palm oil contains none. Rubber, the second biggest player in the sector, is bouncing back; its competitiveness increased by the high price of mineral oil, the basis of synthetic rubber, making the genuine variety the natural choice.
Derom Bangun, Executive Chairman, Indonesian Palm Oil Association offers a viewpoint.
MEDIA & ADVERTISING
The dust is now settling following the end of press censorship in 1998 and the consequent flurry of activity and the number of newspapers stands at 250, many decentralised in regional capitals. The largest newspaper conglomerate is Jawa Pos Group, with nearly 90 publications. Magazine publication is similarly competitive, and advertising revenues are high, particularly in the women's sector. Viewers have a choice of 11 television channels and insiders believe that eventually only three big players will remain: MNC, Trans TV and the News International-affiliated Star TV. Meanwhile, the Indonesian edition of Playboy magazine, which hit top shelves in April 2006, has sparked a heated debate on freedom of speech. Ad spend has grown by 16% year-on-year since 1998 to an estimated $3bn by the end of 2006, with banks and telecoms the biggest spenders.
Jusuf Wanandi, Chairman, The Jakarta Post, shares his view on the industry.
Since 2001, and what the World Bank described as “the Big Bang”, the regions have been responsible for a third of total government expenditure – the figure has now risen to 40%. The process is ongoing and problems remain. There is some debate over whether public services have improved. Yet, for regions such as Papua, Indonesia's least developed, the process is reaping rewards, with improving education standards and infrastructure, including the construction of the 300km Trans-Papua Highway. Sleman is using its newfound authority to spur economic growth. A new inter-governmental unit, the Home Ministry and Ministry of Finance, was established in 2006 to monitor local legislation on taxation.
As an export earner, agriculture has grown eight-fold since the mid-1990s. Employing half the nation's workforce, it helped Indonesia ride out the hard years after the 1997 financial crisis, even increasing its share of GDP. Now revitalising the sector is one of six key economic development priorities adopted by the cabinet, with strategies set out in the National Medium-term Development Plan, running from 2004 until 2009. Modernising the sector and improving management practices are key, as is improving infrastructure; creating bigger margins by growing agribusiness and increasing rice production, the nation's staple diet, by at least 2m tones per annum; and boosting the fishing industry. The poultry sub-sector has been badly hit by the H5N1 virus, or avian flu, but the government has chosen vaccination over culling, and so far this appears a successful policy.
Ernst&Young provides an overview of the taxation system, which is based on a worldwide-income concept, and will, the Indonesia government hopes, bring in investment, particularly foreign. SSEK provides an overview on the country's legal system, which is modelled on European civil law, examining in particular its implications for foreign firms operating in Indonesia.
Giuseppe Nicolosi, CEO, Ernst & Young Indonesia, provides an interview and Darrell R Johnson, Senior Legal Advisor, SSEK, shares his legal knowledge.
This section takes the reader on a tour of Bali, which has beguiled visitors since tourists started arriving in the 1920s. It also includes hotel, government and other listings, including health, and useful tips for visitors, on topics like currency, visas, language, communications, dress, business hours and electricity.