Economic studies
Indonesia

Indonesia

Population 264.2 million
GDP per capita 3,871 US$
A4
Country risk assessment
A4
Business Climate
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Synthesis

major macro economic indicators

  2017 2018 2019 (e) 2020 (f)
GDP growth (%) 5.1 5.2 5.0 -2.0
Inflation (yearly average, %) 3.8 3.2 3.2 2.7
Budget balance (% GDP) -2.5 -1.8 -1.9 -6.0
Current account balance (% GDP) -1.6 -3.0 -2.9 -1.8
Public debt (% GDP) 29.4 30.1 30.2 35.0

(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
  • Exchange rate flexibility

WEAKNESSES

  • Large infrastructure investment gap / low fiscal revenues (15% of GDP)
  • Exposure to shifts in Chinese demand
  • Market fragmentation: extensive archipelago with numerous islands and ethnic diversity potentially leading to unrest (Papua)
  • Highly exposed to natural disasters (volcanic eruptions, hurricanes and earthquakes)
  • Persistent corruption and lack of transparency

Risk assessment

The COVID-19 pandemic has fuelled existing external headwinds on growth

Growth is expected to contract, as the effects of social-distancing measures implemented since March have debilitated the main drivers of growth. Domestic consumption (55% of GDP), which had benefited from a growing middle class, has been hit by the COVID-19 pandemic as the population was encouraged to stay at home, especially in cities on Java. Inflation decreased and remained below Bank Indonesia’s (BI) target band of 4% since 2019, as Indonesians postponed their spending, particularly in non-essential needs due to a rise in unemployment. This has paved the way for BI to ease further, in order to support growth. BI slashed   the policy interest rate by 25 basis points to 4% in July, the fifth time since January 2020. Tourism (10.3% of GDP), which was already underperforming because of the lack of infrastructure, has been severely affected, as international borders remain closed. Investments (32% of GDP) were weak, as a series of infrastructure projects was postponed in light of the COVID-19 pandemic, despite government support through the ongoing Indonesia Infrastructure program (USD 30.2 billion budget for 2020) launched in 2016. Investors would rather delay their business decisions, which led to a drop in FDI in the first half of the year (9.2% YoY in Q1 and -6.9% YoY in Q2). The pandemic has also exacerbated existing external headwinds, such as weak Chinese demand. Exports of manufactured goods and commodities (23.4% of GDP) are expected to remain sluggish this year, though they have been slightly and gradually improving since the social-distancing measures were eased in June.

 

Budget deficit set to widen

Higher government expenditure and lower revenue due to the slowdown should increase the budget deficit. The parliament is expected to widen the 2020 budget deficit to 6.34% of GDP, from an initial 1.8%. This would help to accommodate the USD 43 billion “National economic recovery” program (4.4% of GDP), which includes tax breaks and subsidies for small and medium enterprises. The budget deficit ceiling of 3% of GDP is suspended until 2023.The existing low revenue base will further intensify the challenges to finance the large spending caused by the pandemic. In response, the government implemented a “burden-sharing” agreement that involves BI buying bonds that the government is planning to issue, in order to finance the COVID-19 related expenditures. This agreement would not exert any inflationary pressures, as inflation is currently lower than the central bank’s target band. If this agreement is extended, it would raise concerns over government interference in monetary policies, in other words, over the central bank’s independent role, which would deteriorate investors’ confidence.

 

The current account should remain in deficit, though it could narrow as imports fell at a faster pace than exports in the first half of the year, while domestic demand was weak due to the COVID-19 pandemic and social-distancing measures, and oil prices remain subdued. The current account deficit remains adequately financed by FDI inflows and portfolio investments, although hit by the pandemic’s shockwave. The issuance of foreign-currency government bonds and a stabilization of the global financial situation helped BI to increase its reserves, which now cover 7.1 months of imports.

 

Seeking political stability through a large coalition

President Jokowi was elected for a second five-year term in April 2019, capitalizing on his track record on reforms and despite missing the growth target of 7%. With a focus on domestic issues during his second term, he reaffirmed the reform agenda, particularly regarding labour, healthcare and infrastructure, in order to lure foreign investments and bolster growth. That said, his victory was highly contested by Prabowo’s opposition camp, which resulted in violent protests. Given that Jokowi is seeking to push forward the reform agenda with ease, he brought Prabowo and key opponents into his cabinet in October 2019 to form a broad coalition, hoping that it would weaken critics over the government. This might pave the way for more political stability and help to mitigate risks of political Islam, as it would conciliate Islamist groups that expressed support for Prabowo and Jokowi’s pluralism.

 

Last updated: September 2020

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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