Country Analysis Report Indonesia in Depth Pestle Insights 26008 [PDF]

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Indonesia In-depth PESTLE insights



Country Profile Series



Report Code:



ML00002-041



Published:



April 2021



1.



Overview



1.1.



Catalyst



This profile analyzes the political, economic, social, technological, legal and environmental (PESTLE) structure in Indonesia. Each of the PESTLE factors is explored in terms of four parameters: current strengths, current challenges, future prospects and future risks.



1.2. 1.2.1.



Summary Key findings



Although Indonesia has successfully transitioned into a democracy, corruption is a major concern Indonesia witnessed a successful transition from authoritarian rule to democracy in 2004 after it held its first-ever direct presidential elections. Since its transition to a democracy, a system of checks and balances has been brought in between the executive and the legislative branches of government and the armed forces have been depoliticized. The election of Joko Widodo as the Indonesian president in the 2014 presidential elections marked the first time a twiceelected president handed over power to a successor directly elected by the people. Although administrative flaws characterized the legislative and presidential elections that were held in 2014, they were assessed to be transparent and broadly fair. Widodo was re-elected in the elections held in April 2019 and took office by defeating Prabowo Subianto Djojohadikusumo with a win of 55.5% of the seats against Subianto’s 44.5%. In 2019, Indonesia ranked in the 52.71 percentile on the voice and accountability parameter, which measures the extent to which citizens can participate in selecting their government, as well as freedom of expression, freedom of association, and freedom of the media. Its rank has improved significantly from 48.8 in 2011. Like other countries with an authoritarian history, Indonesia continues to face problems relating to a high level of corruption. The prevalence of corruption is perceived as a major problematic factor for doing business in Indonesia, according to the Global Competitiveness Index 2019, published by the World Economic Forum. The country has witnessed various instances of corruption involving politicians, bureaucrats, policemen and members of the judiciary. Similarly, it is alleged that Basuki Tjahaja Purnama, the former governor of Jakarta from November 2014 to May 2017, was sentenced to jail in 2017 on blasphemy charges because of political rivalry and the corrupt judiciary. The Corruption Perceptions Index 2020 report, published by Transparency International, ranked Indonesia 102nd among 180 nations, with a score of 37 on a scale of 0 (highly corrupt) to 100 (no corruption).



Indonesia’s GDP growth fell in 2020 amid the pandemic, but with effective fiscal stimulus, economic recovery is forecast in 2021 COVID-19 has disrupted economic activity worldwide and reduced trade volumes in 2020. According to MarketLine, Indonesia’s real GDP contracted by -1.84% in 2020 due to lockdowns and businesses being shut. Most industrial sectors have been hit hard by the outbreak. The unemployment rate shot up as businesses laid off many employees. Southeast Asia’s largest economy shrunk by 2.19% (Y-o-Y) in the October-December quarter of 2020. The contraction in Q4 2020 was more than expected due to the rise in unemployment and delays to the vaccine rollout program. According to MarketLine, household expenditure growth slowed down to 4.4% in 2020, compared to 8.48% in 2019.



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Meanwhile, the Indonesian government increased its allocations to help curb the COVID-19 outbreak as a part of its 2020 state budget and intends to strengthen its economic recovery and structural reforms in the social sector as part of its 2021 state budget. The country’s total COVID-19 stimulus currently accounts for 4.9% of GDP, as of March 2021, according to the government. The stimulus packages include measures to lift restrictions on imports and exports and ease the global supply-chain disruptions caused by the virus.



Unemployment benefits to increase; however, there are concerns around growing poverty levels due to the pandemic in 2020 Due to the pandemic, around 2.8 million people have lost their jobs as a result of the closure of businesses. Indonesia’s preemployment card program witnessed a hike in April 2020. According to data from the office of the coordinating economic minister, around 1.4 million people applied for benefits worth US$223m in April 2020. The government will add 300,000+ workers to the register to get unemployment benefits in 2021, as they have been displaced due to the pandemic in 2020. Amid the pandemic, economic growth in Indonesia slipped to -1.84% in 2020 from 5.02% real GDP growth in 2019, according to MarketLine. However, unemployment and poverty levels are expected to rise in 2021 due to the displacement of jobs and livelihoods amid pandemic-related lockdowns. As the procurement and distribution of vaccines will be better from H2 2021, economic recovery in the meantime is expected to be slow. Increases in household spending and business investments are expected to put Indonesia back on the path to positive growth in 2021. However, the closure of businesses resulted in a 7% hike in the unemployment rate in August 2020, according to Statistics Indonesia (BPS). Poverty levels shot up, with 1.63 million Indonesians falling into poverty in March 2020. The poverty rate increased by 9.78% in September 2020, compared to September 2019.



Marked improvement in technological and innovation parameters, but poor R&D investment is impeding further technological progress Indonesia has recorded a marked improvement in its technological and innovation parameters, albeit from a low base. The country was ranked 45th out of 141 nations on the prominence of research institutions, according to the Global Competitiveness Report 2019. The proportion of the population using the internet has increased considerably from 10.9% in 2010 to 44.8% in 2020, according to MarketLine. Indonesia spent less than half a percentage point of its GDP on R&D (0.23%) in 2019, which is expected to impede innovation. Low R&D expenditure indicates that the government has to do a lot more in terms of fostering innovation. Poor funding of R&D has weighed upon the country’s patent count. According to the United States Patent and Trademark Office (USPTO), Indonesia managed to get only 17 patents in 2020 – a very poor performance compared to Malaysia (310) and Thailand (138).



Despite competition law, foreign firms might continue to suffer from restrictiveness regarding foreign flows An effective competition law is a vital tool for attaining and maintaining sound economic performance in any country, and Indonesia is no exception. The country’s first competition law, Concerning Prohibition of Monopolistic Practices and Unfair Business Competition was enacted on March 5, 1999, and came into force a year later. The law, which has been in effect since February 2000, prohibits any single domestic company from controlling more than 50% of the market. The Commission for the Supervision of Business Competition (Komisi Pengawas Persaingan Usaha [KPPU]) was established immediately after the passage of the law. Although it has been criticized on various occasions, the KPPU has been credited with countering a large number of cartels. In 2019, Indonesia was one of the most restrictive economies among 70 nations, as per the OECD’s ‘FDI Regulatory Restrictiveness Index’. FDI inflows have continued to grow over time, due to the country’s strong growth prospects. Despite this, there are many sectors that are shielded from foreign competition. This restrictiveness is higher than other emerging markets. Moreover, according to the Global Competitiveness Report 2019, the country is ranked 101st out of 141 nations on the freedom of press indicator.



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Indonesia benefits from rich biodiversity, but reducing forest area is a cause for concern Indonesia is one of the 17 mega diverse countries in the world, having 515 species of mammals (second on the world mammal list behind Brazil), 1,539 bird species, and it accounts for 45% of the world’s total fish. The country has about 259 endemic mammals, 382 endemic birds, and 172 endemic amphibians, as per IUCN, 2011. About 184 mammals, 119 birds, 32 reptiles, 32 amphibians, and 140 fish form the country’s total number of threatened species. 68 species are critically endangered, 69 are endangered and 517 are vulnerable. According to the World Bank, Indonesia’s forest area as a percentage of land area reduced from 53.26% in 2007 to 49.86% in 2016. It is astonishing that the country – known as one of the lungs of the earth – is being allowed to deteriorate so quickly and has reached a situation where forest area has reduced to less than half the area of the land.



1.2.2.



PESTLE highlights



Political landscape •



President Widodo was re-elected as president in the elections held in April 2019, defeating Prabowo Subianto Djojohadikusumo by winning 55.5% of the seats compared to Subianto’s 44.5%.



•



Indonesia ranked in the 37.98 percentile on the control of corruption parameter in 2019. Control of corruption measures the extent to which public power is exercised for private gain, especially corruption, as well as the private and elite influence on the state. Malaysia ranked higher in the 62.5 percentile.



Economic landscape •



In August 2020, credit rating agency Fitch changed Indonesia’s long-term foreign currency issuer default ratings to ‘BBB with a stable outlook’, from ‘BBB-’, mainly due to the government’s policy measures and low government to debt ratio against a high dependence on external financing.



•



Indonesia’s unemployment rate declined substantially from 5.56% in 2016 to 5.23% in 2019, which was mainly a consequence of the economic growth the country witnessed during that period. Furthermore, due to the COVID-19 pandemic, businesses were shut, which raised the unemployment rate to 7.07% in 2020. MarketLine predicts a fall in the unemployment rate from 2021 due the easing of restrictions.



Social landscape •



According to MarketLine, an estimated 56.64% of the total population lived in urban areas in 2020, compared to just 30.58% in 1990. The total population in urban areas is forecast to increase to 59.82% in 2025.



•



According to the government’s 2021 state budget bill, it will focus on providing higher expenditure to healthcare to enhance the procurement and delivery of vaccines and ramp up infrastructure. The government plans to allocate US$11.45bn to its healthcare budget for 2021, which includes vaccine procurement and its national healthcare insurance program.



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Technological landscape •



In February 2021, the ministry laid down a digital roadmap for Indonesia from 2021 to 2024, which aims to transform four strategic sectors in Indonesia through digital innovations.



•



Indonesia spends less than half a percentage point of its GDP on R&D; low R&D spending is expected to impede innovation.



Legal landscape •



The standard corporate tax rate is 25%, as of 2019. However, Widodo plans to reduce the corporate tax rates to 22% for 2020 and 2021. The corporate taxes will be further reduced to 20% in 2022.



•



In the World Bank’s 2020 Doing Business Report, the country was placed 73rd out of 190 countries. The country was ranked 140th on the ‘starting a business’ parameter and 110th in terms of ‘dealing with construction permits.’ This reflects the regulatory hassles that entrepreneurs face.



Environmental landscape •



The Indonesian government aims to have 23% of its energy coming from renewable sources by 2025 and it has finalized new rules to regulate the usage of renewable energy. The new rules will include simpler pricing, including a feed-in tariff system for certain plants. Furthermore, the government will focus on boosting solar power due to the big potential of renewable energy sources in places such as its North Kalimantan province.



•



Indonesia’s CO2 emissions increased to 632.1 million metric tons in 2019 from 428 million metric tons in 2010. Indonesia was ranked 116th out of 180 countries in the ‘2020 Environmental Performance Index’, published by Yale University, while its neighbors Malaysia (68th) and Singapore (39th) were ranked much better.



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1.3.



Impact of COVID-19 on Indonesia’s economy 1.3.1.



Snapshot



As of February 17, 2021, the country has had 1,233,959 confirmed cases and 33,596 deaths, with a fatality rate of 2.7% and a recovery rate of 84.3%. The first two phases of vaccination started in Indonesia on January 13, 2021, where the first shots are earmarked for health workers and frontline workers. As Indonesia is one of the hardest hit countries in Southeast Asia, the government will prioritize its vaccination drive throughout 2021. To aid economic growth, younger people (18–59 years) will be vaccinated first as they constitute a major part of the workforce.



1.3.2. •



Government measures The Bank of Indonesia (BI) initiated measures such as the reduction of its policy interest rates and banks’ reserve requirement (CRR) and started purchasing government bonds in the primary market.



•



The Indonesian government increased its allocation to curb the COVID-19 outbreak as a part of its 2020 state budget. Import tax payments have been deferred for six months for 19 manufacturing industries.



•



Total stimulus worth 4.45% of GDP was announced by the government. The stimulus packages also include measures to lift restrictions on imports and exports, aiming to ease the global supplychain disruptions caused by the virus.



•



1.3.3.



The Bank of Indonesia reduced its policy rate by 25 bps to 4.00% in July 2020.



Lockdown measures



Banned •



February 22, 2021: The Indonesian government extended its restriction on public activities in parts of Java and Bali through to March 8, 2021.



•



February 8, 2021: Authorities extended public activity restrictions in parts of Java and Bali amid rising coronavirus cases in the country.



•



January 11, 2021: Some parts of Indonesia, Java and Bali were placed under a two-week partial lockdown to curb the third wave of the pandemic.



•



December 29, 2020: Due to the emergence of a new variant of COVID-19, the government enforced a temporary closure of entrances for foreign nationals from all countries during January 1–14, 2021.



•



December 29, 2020: The government reduced its year-end holidays and imposed tighter restrictions in several provinces in a bid to contain another surge in COVID-19 cases.



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•



December 21, 2020: Indonesia’s capital Jakarta extended lockdown restrictions by another two weeks starting December 21, 2020 to curb the spread of COVID-19.



•



December 7, 2020: Authorities enforced restrictions and social distancing rules were extended in Jakarta.



•



September 24, 2020: Authorities extended a partial lockdown in Jakarta for another two weeks starting Monday 28, 2020.



•



September 10, 2020: COVID-19 restrictions imposed in Jakarta from September 14, 2020.



•



August 28, 2020: Indonesian authorities extended COVID restrictions in Jakarta until September 10, 2020.



•



August 22, 2020: Bali postponed reopening of island to international tourism as of August 22, 2020.



•



August 15, 2020: Indonesian authorities extended social restrictions until August 27, 2020.



•



May 27, 2020: Lion Air Group in Indonesia suspended all domestic flights over issues related to pre-flight documents required to travel due to COVID-19.



•



May 21, 2020: Indonesian authorities made health certificates mandatory for people arriving in the country.



•



May 18, 2020: The government ruled out immediate easing of social restrictions and enforced a ban on travel due to the rise in cases.



•



May 7, 2020: The government postponed regional elections to curb COVID-19. (May 7, 2020)



•



April 27, 2020: Partial lockdown was imposed in East Java for two-weeks amid COVID-19 pandemic from April 28, 2020.



•



April 24, 2020: The country extended its lockdown to May 15, 2020.



•



April 22, 2020: The country extended lockdown measures in Jakarta till May 22, 2020 with limited public transport services and mandatory work-from-home order.



•



April 7, 2020: The government introduced lockdown measures in Jakarta.



•



March 30, 2020: The government also issued a temporary ban on foreigners entering the country. The curbs did not apply to holders of work permits, diplomats or other official visitors.



•



March 27, 2020: The country announced “local lockdowns”.



•



March 27, 2020: Spas, restaurants and entertainment spots were told to remain closed until further notice.



•



March 23, 2020: Offices closed and there was a ban on gatherings of more than five people to prevent the spread of coronavirus.



•



March 20, 2020: Governor introduced state of emergency in Jakarta.



•



March 16, 2020: Several universities and schools opted for online classes.



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Exempted •



July 10, 2020: The country’s island Bali reopened after three months to allow local people and stranded tourists to resume activities. The island announced it would be open to other parts of the country from July 31, 2020.



•



June 13, 2020: The country announced it was involved in drawing up a plan to restart travel to and from Japan, China, Australia, and South Korea to boost the tourism sector. (June 13, 2020)



•



May 7, 2020: On May 7, 2020, government buses, planes, ships, and trains were allowed to resume domestic passenger transportation following the easing of measures to limit the spread of COVID-19.



•



March 27, 2020: The central government allowed regional lockdowns and instructed people to follow social distancing measures.



•



March 27, 2020: Permitted essential services such as supermarkets, hospitals, banks, gas stations, and drug stores were allowed to remain open in areas under local lockdown.



1.3.4. •



Travel restrictions



March 18, 2021: Foreign tourists may be able to visit Bali again in June 2021 under a travel corridor program.



•



March 4, 2021: Travelers from Indonesia will now be able to visit the UAE under the Safe Travel Corridor Arrangement (STCA) between the two nations.



•



January 11, 2020: Indonesia extended a ban on foreign nationals until January 28, 2021 due to a surge in COVID-19 cases.



•



December 28, 2020: Indonesia's foreign minister Retno Marsudi announced that the country was closing its borders to foreign travelers for the first two weeks of January 2021.



•



December 24, 2020: Indonesia changed its health protocol for incoming international travelers. This amended regulation was valid from December 22, 2020 – January 8, 2021. Under the changes, visitors from the UK were denied entry and others travelling from Australia and Europe were only allowed in if they had a negative PCR test result and they quarantined for five days. If they tested negative again after the five days, they would be allowed to continue on their journey.



•



November 22, 2020: Bali announced it was to remain closed to international tourists until the end of 2020.



•



October 12, 2020: Indonesia and Singapore agreed to launch a reciprocal green lane (RGL) for essential business and official travel between both the countries. Applications for the RGL opened on October 26, 2020.



•



July 31, 2020: Indonesia agreed on a travel corridor arrangement with the UAE for essential business trips, which include official and diplomatic visits.



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•



July 26, 2020: Bali announced that the resort island would reopen its borders for international tourists from September 11, 2020 but with strict health protocols.



•



June 14, 2020: Indonesia announced it was designing travel bubble arrangements with China, South Korea, Japan and Australia.



•



June 9, 2020: AirAsia Indonesia resumed flights from June 15, 2020.



•



May 7, 2020: Indonesia authorized buses, planes, ships, and trains to resume domestic passenger transportation for certain individuals. Individuals seeking medical assistance or visiting dying relatives were permitted to travel domestically. Civil servants, army personnel, police officers, employees of stateowned enterprises, businesspeople, and staff of non-governmental organizations related to COVID-19 management were also permitted to travel. Repatriation of migrant workers, students, and Indonesian citizens from abroad was also enabled.



•



April 24, 2020: Temporary bans domestic and international air and sea travel were announced, with cargo being exempted, starting April 24, 2020.



1.3.5.



Stimulus measures



Fiscal stimulus •



October 27, 2020: The transport ministry agreed to provide the aviation sector with a stimulus package of IDR216.5bn (US$14.86m) in order to cut costs and boost demand during the pandemic.



•



August 11, 2020: The government accelerated the disbursement of US$50bn in fiscal stimulus to give a boost to consumer spending and avoid a recession.



•



June 3, 2020: The government expanded the IDR405tn (US$26.52bn) to a stimulus package of IDR677.2tn (US$48bn) to help the country recover from the economic fallout during the coronavirus outbreak. It will help to strengthen the healthcare system, social protection and improve consumption.



•



March 31, 2020: In addition to the first two fiscal packages amounting to IDR33.2tn (US$2.17bn), the government announced a major stimulus package of IDR405tn (US$26.52bn) on March 31, 2020, including IDR255tn (US$16.70bn) in additional spending and tax reliefs.



•



March 18, 2020: In total, the government announced two fiscal stimulus packages amounting to IDR33.2tn (US$2.1bn). To support the tourism industry, along with consumer spending, a support package worth US$727m was announced. Exemption for manufacturing sector workers with income below IDR200m (US$13,097.58) over the following six months. Rescue package was allocated for social welfare and rural development, as well as on measures to boost household expenditure. US$70m was channeled through the health ministry to contain the COVID-19 outbreak and care for patients already infected with the coronavirus. Import tax payments deferred for six months for 19 manufacturing industries. A support package of US$727m was



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announced to support consumer spending. To support the economy, an additional package of US$8.1bn was announced. •



March 18, 2020: Package worth IDR22.9tn (US$1.50bn) was allocated to aid loan disbursement towards affected businesses. A discount of 30% in corporate tax was applied for the following six months. Provisions were made in the budget to buy disinfectants for public places, along with the purchase of facemasks and medicines. Tax incentives were applied. The national economic recovery program has been continuously refined and currently stands at IDR695.2tn (US$47.51bn). The fiscal packages comprise (i) support to the healthcare sector to boost testing and treatment capacity for COVID-19 cases; (ii) increased benefits and broader coverage of existing social assistance schemes to low-income households such as food aid, conditional cash transfers, and electricity subsidies; (iii) expanded unemployment benefits, including for workers in the informal sector, (iv) tax relief, including for the tourism sector and individuals (with an income ceiling); and (v) permanent reductions of the corporate income tax rate from 25% to 22% in 2020– 2021 and 20% starting in 2022. In addition to tax and spending measures, the fiscal packages include capital injections into state-owned enterprises and interest subsidies, credit guarantees, and loan restructuring funds for micro, small, and medium enterprises.



Monetary stimulus •



November 19, 2020: The central bank reduced the repo rate from 4% to 3.75%.



•



August 6, 2020: The government issued the first bond under the burden sharing scheme.



•



July 16, 2020: The Bank of Indonesia reduced the policy rate by 25 bps to 4.00%.



•



July 6, 2020: The government announced a burden sharing scheme to help finance the economic response to the pandemic. The scheme, expected to be implemented only in 2020, covers (i) BI’s purchases of government bonds with coupons at the BI’s policy rate to finance priority spending on public goods such health and social protection; (ii) the budgetary interest cost of spending support to firms will be subsidized by BI transfers to the budget; and (iii) BI will act as buyer of last resort for long-term local-currency bonds to finance other spending.



•



June 18, 2020: The Bank of Indonesia reduced the policy rate by 25 bps to 4.25%.



•



March 19, 2020: The Bank of Indonesia reduced the policy rate by another 25 bps to 4.5%.



•



March 9, 2020: To ease stock market volatility, the regulator Financial Services Authority (Otoritas Jasa Keuangan [OJK]) introduced a new share buyback policy (allowing listed companies to repurchase their shares without a prior shareholders’ meeting) and introduced limits on stock price declines.



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•



March 1, 2020: OJK also relaxed loan classification and loan restructuring procedures for banks to encourage loan restructuring and extended the deadline – by two months – for publicly listed companies to release their annual financial reports and hold annual shareholders meetings.



•



1.3.6.



February 20, 2020: The Bank of Indonesia reduced the policy rate by 25 bps to 4.75%.



Key fundamentals



Table 1: Indonesia – Key Fundamentals, 2018–2025f 2018



2019



2020e



2021f



2022f



2023f



2024f



2025f



GDP, constant 2010 prices (US$ tn)



1.14



1.20



1.18



1.24



1.30



1.36



1.42



1.49



GDP growth rate (%)



5.17



5.02



-1.84



5.51



5.01



5.00



4.98



4.99



GDP, constant 2010 prices, per capita



4,341.49



4,512.65



4,385.18



4,569.90



4,741.87



4,920.88



5,106.95



5,301.64



Inflation (%)



3.20



3.03



2.18



2.33



3.20



3.13



3.13



3.11



Volume of exports growth (%)



6.18



-6.25



-10.61



18.41



5.08



8.31



9.60



9.89



Volume of imports growth (%)



14.14



-9.12



-14.95



23.48



4.56



6.41



7.60



7.95



Mid-year population, total (million)



264.16



266.91



269.60



272.25



274.86



277.43



279.97



282.45



Unemployment rate (%)



5.24



5.23



7.07



6.36



5.80



5.49



5.39



5.36



Mobile penetration (per 100 people)



119.34



121.21



122.81



124.20



125.39



126.41



127.29



128.05



(US$)



Source: Country Statistics, MarketLine



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MARKETLINE



ML00002-041/Published 04/2021 Page 11



Table of Contents 1.



OVERVIEW



2



1.1.



Catalyst



2



1.2.



Summary



2



1.3.



1.2.1.



Key findings



2



1.2.2.



PESTLE highlights



4



Impact of COVID-19 on Indonesia’s economy



6



1.3.1.



Snapshot



6



1.3.2.



Government Measures



6



1.3.3.



Lockdown Measures



6



1.3.4.



Travel Restrictions



8



1.3.5.



Stimulus Measures



9



1.3.6.



Key fundamentals



11



2.



KEY FACTS



19



3.



GEOGRAPHICAL LOCATION



20



4.



PESTLE ANALYSIS



21



4.1.



Summary



21



4.2.



Political analysis



23



4.3.



4.2.1.



Overview



23



4.2.2.



Current strengths



23



4.2.3.



Current challenges



24



4.2.4.



Future prospects



25



4.2.5.



Future risks



25



Economic analysis



27



4.3.1.



Overview



27



4.3.2.



Current strengths



27



4.3.3.



Current challenges



28



4.3.4.



Future prospects



29



4.3.5.



Future risks



30



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4.4.



4.5.



4.6.



4.7.



5. 5.1. 5.2.



Social analysis



33



4.4.1.



Overview



33



4.4.2.



Current strengths



33



4.4.3.



Current challenges



34



4.4.4.



Future prospects



34



4.4.5.



Future risks



34



Technological analysis



36



4.5.1.



Overview



36



4.5.2.



Current strengths



36



4.5.3.



Current challenges



36



4.5.4.



Future prospects



38



4.5.5.



Future risks



39



Legal analysis



40



4.6.1.



Overview



40



4.6.2.



Current strengths



40



4.6.3.



Current challenges



41



4.6.4.



Future prospects



42



4.6.5.



Future risks



42



Environmental analysis



44



4.7.1.



Overview



44



4.7.2.



Current strengths



44



4.7.3.



Current challenges



45



4.7.4.



Future prospects



45



4.7.5.



Future risks



45



POLITICAL LANDSCAPE



47



Summary



47



Evolution



47



5.2.1.



Pre-1950s



47



5.2.2.



1950–1998



47



5.2.3.



1998–2004



48



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5.2.4. 5.3.



5.4.



6. 6.1. 6.2.



6.3.



6.4.



48



Structure and policies



51



5.3.1.



Key political figures



51



5.3.2.



Provincial setup



51



5.3.3.



Structure of legislature



51



5.3.4.



Key political parties



51



5.3.5.



Composition of Parliament



53



5.3.6.



Key policies



54



Performance 5.4.1.



5.5.



2004 onwards



55



Governance indicators



55



Outlook



56



ECONOMIC LANDSCAPE



57



Summary



57



Evolution



57



6.2.1.



Pre-1997



57



6.2.2.



1997–2020



57



Structure and policies



58



6.3.1.



Financial system



58



6.3.2.



Financial authorities and regulators



59



Performance



59



6.4.1.



GDP and growth rate



59



6.4.2.



GDP composition by sector



61



6.4.3.



Fiscal situation



64



6.4.4.



Exports and imports



65



6.4.5.



International investment position



65



6.4.6.



Credit rating



66



6.4.7.



Monetary



66



6.4.8.



Inflation



66



6.4.9.



Interest Rate



67



6.4.10.



Unemployment



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67



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6.5. 7. 7.1.



Outlook



68



SOCIAL LANDSCAPE



69



Summary



69



7.2.



Evolution



69



7.3.



Structure and policies



69



7.4.



7.5. 8.



7.3.1.



Demographic composition



69



7.3.2.



Urban/rural composition



70



7.3.3.



Religious composition



70



7.3.4.



Education



71



7.3.5.



System of education



71



7.3.6.



Higher education



72



7.3.7.



Healthcare



72



Performance



73



7.4.1.



Healthcare



73



7.4.2.



Education



74



Outlook



74



TECHNOLOGICAL LANDSCAPE



75



8.1.



Summary



75



8.2.



Evolution



75



8.3.



Structure and policies



75



8.4.



8.3.1.



Intellectual property



75



8.3.2.



Copyrights



75



8.3.3.



Research and development



76



Performance 8.4.1.



8.5. 9. 9.1.



76



Research and development



77



Outlook



77



LEGAL LANDSCAPE



78



Summary



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9.2.



Evolution



78



9.3.



Structure and policies



78



9.4.



9.3.1.



Judicial system



78



9.3.2.



Tax regulations



80



Performance 9.4.1.



9.5. 10.



80



Effectiveness of the legal system



80



Outlook



81



ENVIRONMENTAL LANDSCAPE



82



10.1.



Summary



82



10.2.



Evolution



82



10.3.



Structure and policies



82



10.3.1. 10.4.



11.



82



Performance 10.4.1.



10.5.



Environmental regulations



83



Environmental impact



83



Outlook



84



APPENDIX



85



11.1.



Ask the analyst



85



11.2.



Disclaimer



85



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List of figures Figure 1: Map of Indonesia, 2021



20



Figure 2: Indonesia’s Economic Indicators



29



Figure 3: Indonesia’s Demographic Advantage (Million Persons/%), 2016–2021f



30



Figure 4: Indonesia’s government revenue, expenditure, and net lending/bowing (Billions/% of GDP), 2016–2025f



31



Figure 5: Tax Ratio (% of GDP), 2008–2019



32



Figure 6: High Technology Exports (% of Manufactured Exports), 2010–2019



37



Figure 7: Research and Development Expenditure (% of GDP), 2019



38



Figure 8: FDI Regulatory Restrictiveness Index, Selected Countries, 2019 (Closed =1 and Open = 0)



41



Figure 9: Percentage of Renewables in Total Primary Energy Supply, 2010–2018



46



Figure 10: Indonesia – Political Events Timeline



50



Figure 11: Indonesia – Key Political Figures



51



Figure 12: Indonesia – Composition of Parliament, 2019



53



Figure 13: Evolution of GDP in Indonesia (%), 2011–2020e



58



Figure 14: Real GDP and Growth Rate in Indonesia (US$ Tn/%), 2016–2025f



60



Figure 15: Composition of GDP by Sector in Indonesia, 2020e



61



Figure 16: Indonesia’s Agricultural Output (IDR Tn/%), 2016–2020e



62



Figure 17: Indonesia’s Industrial Output (IDR Tn/%), 2016–2021f



63



Figure 18: Indonesia’s Service Output (IDR Tn/%), 2016–2021f



64



Figure 19: Indonesia’s External Trade (%), 2016–2025f



65



Figure 20: Consumer Price Index and CPI Based Inflation in Indonesia, 2016–2025f



66



Figure 21: Indonesia’s Unemployment Rate (%), 2016–2025f



67



Figure 22: Major Religions in Indonesia (%), 2010 Census



71



Figure 23: Healthcare Expenditure in Indonesia (US$ Bn/%), 2009–2018



73



Figure 24: Expenditure on Education in Indonesia (US$ Bn/%), 2010–2019



74



Figure 25: Internet Users in Indonesia (Millions/%), 2016–2020e



77



Figure 26: Carbon Dioxide Emissions in Indonesia (Billion Metric Tons/%), 2010–2019



84



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List of Tables Table 1: Indonesia – Key Fundamentals, 2018–2025f



11



Table 2: Indonesia – Key Facts, 2021



19



Table 3: Analysis of Indonesia’s Political Landscape



23



Table 4: Analysis of Indonesia’s Economic Landscape



27



Table 5: Analysis of Indonesia’s Social Landscape



33



Table 6: Analysis of Indonesia’s Technological Landscape



36



Table 7: Patents Granted by USPTO, 2014–2020



38



Table 8: Analysis of Indonesia’s Legal Landscape



40



Table 9: Analysis of Indonesia’s Environmental Landscape



44



Table 10: Mid-year Population by Age (Percentage of Population), 2020e



70



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2.



Key Facts Table 2: Indonesia – Key Facts, 2021 Country and capital Full name Capital city



Republic of Indonesia Jakarta



Government Government type Head of state and government



Presidential Republic President Joko Widodo (since October 2014)



Population (2020 est.)



269.6 million



Currency



Indonesian rupiah (IDR)



GDP per capita PPP (2020 est.)



US$12,345.12



Internet domain



.id



Demographic details Life expectancy (2020 est.)



73.7 years (total population) 71.1 years (men) 76.5 years (women)



Ethnic composition (2010 est.)



Javanese (40.1%), Sundanese (15.5%), Malay (3.7%), Batak (3.6%), Madurese (3%), Betawi (2.9%), Minangkabau (2.7%), Buginese (2.7%), Bantenese (2%), Banjarese (1.7%), Balinese (1.7%), Acehnese (1.4%), Dayak (1.4%), Sasak (1.3%), Chinese (1.2%), other (15%)



Major religions (2010 est.)



Muslim (87.2%), Protestant (7%), Roman Catholic (2.9%), Hindu (1.7%), other (0.9%) (includes Buddhist and Confucian), unspecified (0.4%)



Country area



1.90 million sq. km



Exports



mineral fuels, animal or vegetable fats (includes palm oil), electrical machinery, rubber, machinery and mechanical appliance parts



Imports



mineral fuels, boilers, machinery, and mechanical parts, electric machinery, iron and steel and foodstuffs



Source: The CIA World Factbook



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MARKETLINE



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3.



Geographical Location



Indonesia is located in Southeastern Asia, an archipelago between the Indian Ocean and the Pacific Ocean.



Figure 1: Map of Indonesia, 2021



Source: CIA – The World Factbook



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4.



PESTLE Analysis



4.1.



Summary



Joko Widodo winning the 2014 presidential elections was a strong testament to Indonesia’s democratic values, as it marked the first time a twice-elected president handed over power to a successor directly elected by the people. Though there was a move to scrap the direct elections for regional heads in favor of indirect elections held by regional assemblies in 2014, the incumbent parliament voted to retain direct elections for mayors and regional governors in 2015 amidst the strong opposition of the Red and White coalition in the legislative assembly. Previous President Susilo Bambang Yudhoyono was also in favor of direct elections. These developments are helping Indonesia to grow strong democratically and implement reform measures that will help the country’s prosperity. Widodo was re-elected as president of the country in April 2019, winning 55.5% of the seats. A problem faced by Indonesia is that a number of politicians, bureaucrats, policemen and members of the judiciary have been tainted by corruption scandals. The country faces terrorism threats from both domestic and international militant groups. As of May 2018, around 600 previous IS fighters are considered to have returned to Indonesia. Such a phenomenon was previously seen in the 1980s and 1990s, when returning jihadists from Afghanistan brought back new terrorist associations, improved funding and ammunition expertise. As of February 2021, the government has brought in new stringent measures to counter terrorism funding. Providers of peer-to-peer (P2P) lending, equity crowdfunding and other financial technology services will have to report such transactions to the Financial Transaction Reports and Analysis Centre (PPATK) under the new regulation. On the economic front, the Indonesian economy saw a recession in 2020 due to the pandemic. According to MarketLine, real GDP contracted by -1.84% in 2020 due to lockdowns and the shutdown of businesses. The Indonesian government increased its allocations to curb the COVID-19 outbreak as part of its 2020 state budget and intends to strengthen the economy’s recovery and structural reforms in the social sector as part of its 2021 state budget. Total stimulus worth 4.55% of GDP was announced by the government. The stimulus packages include measures to lift restrictions on imports and exports, aiming to ease the global supply-chain disruptions caused by the virus. Amidst the increasing spending on infrastructure development, the country still severely lags in terms of its infrastructure facilities. According to the Global Competitiveness Index 2019, published by the World Economic Forum, the country ranks 72nd out of 141 nations in terms of infrastructure. Indonesia is mostly surrounded by seas and oceans, yet it ranks 61st in terms of its efficiency of seaport services. For its quality of road infrastructure, Indonesia is ranked 60th. In terms of road connectivity, the country is ranked 109th. On the social front, Indonesia has implemented cash transfer programs for poor households to mitigate the impact of fuel subsidy reductions, and to provide them with healthcare and education facilities, effectively raising their standard of living. The government is also playing its part by aiming to provide social insurance to the entire population by 2029. However, rising ethnic violence and religious intolerance could pose a risk to social harmony in Indonesia. The country has low R&D expenditure, accounting for less than 1% of its GDP. The low R&D expenditure has taken a toll on the number of patents granted. Indonesia’s proportion of high technology exports in terms of manufactured exports is also way below peers such as the Philippines, Malaysia, China and Thailand. However, despite low R&D expenditure, certain segments of the Indonesian medical field are expected to witness robust growth. Indonesia is a pioneer in stem cell research and stem cell therapy. The country has an effective competition law, restraining the formation of extreme business cartels. However, the country’s legal environment remains affected by an inefficient bureaucracy, rigid labor laws and a weak judicial system, which can easily be influenced and manipulated by the political and business elite. Furthermore, foreign companies face risks from the arbitrary intervention of the Indonesian government, which has often created problems for foreign entities by either not honoring deals or imposing new conditions after an agreement has been signed. PESTLE Country Analysis Report: Indonesia © MarketLine. This report is a licensed product and is not to be photocopied



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Indonesia’s biodiversity is one of its greatest assets. The country is among the top five in the world in terms of plant diversity, with an estimated 38,000 higher plant species. Indonesia leads the world in terms of palm diversity. However, large tracts of Sumatra's forests have been destroyed to make way for palm oil plantations, with companies clearing trees and burning the stumps that remain. Furthermore, the government’s energy subsidies have been contrary to its environmental initiatives, causing problems when trying to implement green technology.



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4.2. Political analysis 4.2.1.



Overview



The election of Joko Widodo in the 2014 presidential elections was a strong testament to Indonesia’s democratic values, as it marked the first time a twice-elected president handed over power to a successor directly elected by the people. Core areas of focus during the incumbent Widodo’s administration include the reduction of corruption and red tape, improvements to infrastructure and strengthening the economy. Widodo emerged victorious in the elections held in April 2019 and was re-elected as president of the country, defeating Prabowo Subianto Djojohadikusumo with a win of 55.5% of the seats compared to Subianto’s 44.5%. A major problem faced by Indonesia is that of corruption, with a number of politicians, bureaucrats, policemen and members of the judiciary all tainted by corruption scandals. The country faces terrorism threats from both domestic and international militant groups. The latter could be a consequence of the reawakening of dormant networks, as more than 100 Indonesians are suspected of fighting for the radical Sunni cause of IS in Iraq and Syria. To tackle terrorism, Indonesia has improved its security ties with the likes of the US, Russia, China and South Korea.



Table 3: Analysis of Indonesia’s Political Landscape



Current strengths ▪ Transition to democracy ▪ Strong cooperation and defense collaboration with major global powers



Current challenges ▪ Corruption



Future prospects ▪ Strengthening ties with neighboring countries



Future risks ▪ Terrorism threats ▪ Rising Islamic extremism



Source: MarketLine



4.2.2.



MARKETLINE



Current strengths



Transition to democracy Indonesia made a successful transition from authoritarian rule to democracy in 2004 after it held its first-ever direct presidential elections. Indonesia has since built an institutional framework capable of forming the basis of a successful and eventually thriving democracy. Since its transition to democracy, most Indonesians have enjoyed freedom of expression. A system of checks and balances has been brought between the executive and the legislative branches of the government and the armed forces have been depoliticized. In the years following the fall of President Suharto, Indonesia has had five presidents: B.J. Habibie, Abdurrahman Wahid, Megawati Sukarnoputri, Susilo Bambang Yudhoyono and the incumbent Joko Widodo, all of whom assumed power by democratic means. In fact, the election of Joko Widodo as the Indonesian president in 2014 presidential elections marked the first time a twice-elected president handed over power to a successor directly elected by the people. Although administrative flaws characterized the legislative and presidential elections in 2014, they were assessed to be transparent and broadly fair. Widodo emerged victorious in the elections held in April 2019 and was reelected as president. In 2019, Indonesia ranked in the 52.71 percentile on the voice and accountability parameter,



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which measures the extent to which citizens can participate in selecting their government, as well as freedom of expression, freedom of association, and freedom of the media. The rank has improved significantly from 51.72 in 2014. Malaysia placed lower than Indonesia, with a percentile rank of 43.35.



Strong cooperation and defense collaboration with major global powers The country is pursuing strong, bilateral cooperation with many major countries around the world, especially in the form of defense ties. In order to strengthen its military prowess, Indonesia has improved its security ties with the likes of the US, Russia and South Korea. In late 2009, the US Pacific Command (USPACOM) was installed in Indonesia. In 2011, the US also agreed to deliver 24 used F-16 fighter jets to Indonesia. Deliveries began in 2014 and were completed in 2017. In addition to the US, the country also has strong military ties with Russia, from which it has received more than 15 Sukhoi fighters since 2003. In February 2018, a US$1.1bn deal was signed by Indonesia with Russia for 11 Sukhoi jets. Amidst the conflict happening over the South China Sea, the country’s military ties with China are largely focused on obtaining the technology that the C-802 missile is based on. The two countries are also negotiating a technology transfer mechanism for the C-705 missiles, to be used by the Indonesian Navy. Indonesia also signed a US$1.1bn contract with South Korea for three Chang Bogo-class diesel-electric submarines in December 2011. The first submarine was transferred to Indonesia in 2017. Indonesia is also engaged in a technology transfer agreement with South Korea to build its first indigenously built Chang Bogo-class diesel-electric submarine. In addition to these countries, Indonesia has cooperation agreements with the UK, India, Saudi Arabia and the Netherlands. Two MoUs were signed between Indonesia and India in July 2018 relating to deeper cooperation regarding the areas of energy and cultural affairs. India is also exploring the possibility of deepening its military ties with Indonesia in the near feature. Since January 2021, bilateral talks have begun between Canada and Indonesia regarding a Comprehensive Economic Partnership Agreement. Canada is a major exporter of wheat and meslin products to Indonesia, and although demand dipped in 2020 due to COVID-19, it is expected to regain momentum in 2021. This will provide more business opportunities for Canadian suppliers. In March 2021, the government intends to sign a MoU with Thailand to sell as much as 1 million metric tons of rice each year. According to government data, Thailand had sold a total of 925,000 metric tons of rice under government-to-government (G2G) contracts to Indonesia from 2012 to 2016. At the UAEIndonesia Business forum entitled ‘Amazing Week 2021’ in March 2021, a MoU was signed between the two countries to strengthen their cooperation regarding the creative economy, tourism, and environmental conservation.



4.2.3.



Current challenges



Corruption Like other countries with an authoritarian history, Indonesia continues to have problems with high levels of corruption. The country has witnessed various instances of corruption involving politicians, bureaucrats, policemen and members of the judiciary. In the political arena, the Democratic Party (PD) was tainted with corruption issues in 2013–2014 as a number of its high-profile members, such as Anas Urbaningrum, Andi Mallarangeng, Angelina Sondakh and Jero Wacik, were either convicted or arrested for involvement in bribery scandals. Even though the government of incumbent President Joko Widodo is not tarnished with any corruption allegations, corruption at the regional level and in the judiciary is considered to be high. For instance, the regional public bodies are alleged to have paired with illegal loggers, leading to widespread illegal logging in Indonesia's rainforests in Sumatra and Kalimantan. Similarly, it is alleged that Basuki Tjahaja Purnama, the former governor of Jakarta from November 2014 to May 2017, was sentenced to jail in 2017 on blasphemy charges because of political rivalry and the corrupt judiciary. Another cabinet minister was arrested for corruption charges in December 2020.



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Judicial independence in Indonesia is ranked 50th among 141 nations, while the reliability of police services was ranked 68th, according to the Global Competitiveness Index 2019. The country needs to adopt stronger anticorruption legislation to weed out corrupt officials from the administrative and political machinery; this will also enhance its business environment. According to the Corruption Perceptions Index 2020 report, published by Transparency International, Indonesia was ranked 102nd out of 180 nations, with a score of 37 on a scale of 0 (highly corrupt) to 100 (no corruption).



4.2.4. Future prospects Strengthening ties with neighboring countries Indonesia has great scope to improve its relationship with neighboring nations, such as Australia and Singapore, and regional nations, such as India. Indonesia’s relationship with Australia is often troublesome. In 2014, relations between the two neighbors began to sour following a diplomatic spying incident in which Australian intelligence was accused of spying on senior Indonesian politicians and their families. In 2015, the Indonesian denial of Australia’s request to release two convicted Australian drug traffickers and their consequent execution by the Indonesian government further worsened ties between the two countries. However, there are official discussions from both sides regarding improving bilateral and diplomatic relations between the countries. Though officially not a part of Australia’s South China policy, Indonesia is exploring cooperation with Australia regarding patrolling activities in the South China Sea, against the unilateral geographical expansion and control measures of China. The Australian Defense Force (ADF) and Indonesian Armed Forces (TNI) are also collaborating regarding the joint patrol of their countries’ borders, which aims to enhance maritime security in the region. The eighth iteration of the join patrol exercise, Ausindo Corpat 2018, was concluded in April 2018. An improved relationship with Australia could result in larger trade prospects and improved prosperity in the region. Similarly, a stronger relationship with Singapore and India will also help to improve Indonesia’s regional trade prospects amidst Indonesia’s increasing conflict with China. In May 2018, Indonesia and India signed 15 bilateral agreements aiming to establish a comprehensive strategic partnership between the nations in the areas of economic, maritime and defense cooperation. These collaborations and improved bilateral relations are expected to help Indonesia expand its economy and growth and strengthen its position as a major power in the ASEAN region. In November 2020, the Regional Comprehensive Economic Partnership (RCEP) was signed. It is a free trade agreement among 15 nations, which also includes the ASEAN nations. The RCEP will facilitate free trade among these nations to bolster trade and commerce by lessening tariffs and standardizing rules and procedures regarding customs to expand the countries’ access to a bigger market. Indonesia will benefit from increased opportunities in the global market through the signing of this agreement.



4.2.5.



Future risks



Terrorism threats Although terrorist attacks in Indonesia have largely subsided in terms of casualties since the major attacks against the JW Marriot and Ritz-Carlton hotels in Jakarta in 2009, the country still faces risks from renewed terrorism threats. In 2016, at the Sari Pan Pacific Hotel and Sarinah Plaza in Central Jakarta, eight people died and many were injured in the midst of bomb explosions and gun battles. May 2017 witnessed an explosion at the Malyung bus stop, in which three police officers were killed. Multiple deaths and casualties occurred in 2018 due to three explosions at a church and an explosion at a police security post in Surabya. Police headquarters were attacked by a suicide bomber, injuring four police officers and two civilians, in Sumatra in 2019. On the international front, Indonesia faces threats from the underground networks of IS. Jamaah Ansharut Daulah (JAD), an Indonesian group identified as a terrorist organization both by the US and Indonesia, still targets police and other state authorities. Moreover, 74 people were arrested on



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the suspicion of being linked to the JAD. Due to massive job losses during the pandemic in 2020, terrorist organizations are exploiting people’s angst and desperation. The country’s terrorism cells continue to spread radical messages and are seen actively seeking new recruits and plotting their next attacks. Recently, in March 2021, antiterror police in Indonesia arrested 20 suspected terrorists with alleged ties to global terror network in separate operations in East Java province. The country is ranked 110th out of 141 countries on the terrorism incidence indicator of the Global Competitiveness Report 2019. The country’s counter-terrorism unit must counter both international and local threats to maintain the country’s long-term stability and prospects.



Rising Islamic extremism Indonesia is home to the largest Muslim population in the world. It has been struggling with issues related to extremism since its independence from the Netherlands. After Suharto’s tyrannical rule ended in 1998, continuous attempts have been made by the government to suppress extremism. There is a trend of deepening Islamic extremism in Indonesia, which is capable of derailing the democratic process the country has achieved so far. In 2017, the former governor of Jakarta, Basuki Tjahaja Purnama (a double minority due to his descent (Chinese) and religion (Christian)) was imprisoned by the Indonesian courts on the grounds of blasphemy, even though it is alleged that the charges were made in relation to an edited and manipulated video recording of his speech. During his tenure itself, there were protests from various orthodox groups, such as the Islamic Defenders Front (FPI) against a non-Muslim holding the office of governor in Indonesia. A 2017 survey by the ISEAS Yusof Ishak Institute indicated that 58% of the respondents felt that the leader of the country should be a Muslim. The Indonesian Survey Institute (LSI) survey in 2018 also showed a high number of cases of intolerance among majority groups in any given community, whether they are Muslim or non-Muslim. The survey also showed that 63% of the respondents felt that blasphemy against Islam should be punished more severely. Almost half of the respondents also felt it was right to prioritize Islam over other religions. If extremism trends continue, it may increase terrorism and dilute the democratic success the country achieved since the early 2000s.



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4.3. Economic analysis 4.3.1.



Overview



The COVID-19 pandemic has resulted in a recession in Indonesia. According to MarketLine, real GDP contracted by 1.84% in 2020 due to lockdowns and the shutting down of businesses. The Bank of Indonesia (BI) initiated measures such as the reduction of its policy interest rates and banks’ reserve requirement (CRR) and started purchasing government bonds in the primary market. The Indonesian government increased its allocation to curb the COVID-19 outbreak as part of its 2020 state budget. Import tax payments were deferred for six months for 19 manufacturing industries. Total stimulus worth 4.55% of GDP was announced by the government. The stimulus packages also include measures to lift restrictions on imports and exports, aiming to ease the global supply-chain disruptions caused by the virus. Major challenges affecting economic growth continue to be underinvestment in infrastructure and over-reliance on commodity exports. Another major hindrance to economic growth could be the possible slowdown in the global economy due to increasing trade wars and protectionist measures followed by Indonesia’s trading partner countries, such as the US and China. The Indonesia Investment Authority (INA) has unveiled its strategy to attract more FDI in domestic national development projects. The government will provide US$5.4bn to the INA until the end of 2021. The INA will receive a huge capital injection, which will be deducted from the 2020 and 2021 state budgets.



Table 4: Analysis of Indonesia’s Economic Landscape



Current strengths ▪ Diverse natural resources



Current challenges ▪ Insufficiency in terms of infrastructure ▪ Impact of coronavirus outbreak



Future prospects ▪ Huge fiscal stimulus to help economic recovery in 2021 ▪ Indonesia to enter fourth generation industrial revolution ▪ Demographic dividends of a vast labor pool



Future risks ▪ Low tax base ▪ Rising debt and deficit levels



Source: MarketLine



4.3.2.



MARKETLINE



Current strengths



Diverse natural resources Indonesia has large mineral deposits. Mining, including the extraction of oil and natural gas, accounts for roughly one10th of the country’s GDP, and through exports and taxation it contributes substantially to foreign-exchange earnings. However, employment in the mining sector is very low in Indonesia. Other resources such as fossil fuels, including petroleum and coal, constitute a major source of revenue for the government. They are produced primarily in Sumatra and Kalimantan and from offshore sites in the Java and South China seas. During the past few years, Indonesia has expanded its coal mining activity to become one of the leading exporters in the world. Furthermore, the majority of Indonesia’s electrical power is generated from fossil fuels. The government aims to maximize its utility of electric power generated from coal production.



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4.3.3. Current challenges Insufficiency in terms of infrastructure Despite increasing spending on infrastructure development, the country severely lags in terms of its infrastructure facilities. According to the Global Competitiveness Index 2019, published by the World Economic Forum, the country ranks 72nd out of 141 countries in terms of infrastructure. Indonesia is mostly surrounded by seas and oceans, yet it ranks 61st in terms of its efficiency of seaport services. For its quality of road infrastructure, Indonesia is ranked 60th. In terms of road connectivity, the country is ranked 109th. Similarly, in terms of the reliability of water supply indicator, the country is ranked 74th and about 98% of the population has exposure to unsafe drinking water. Overall, utility infrastructure is also moderately poor, with it ranking 89th out of 141 nations. According to MarketLine, PMI manufacturing recovered in February 2021 at 52.5, which signals a strong recovery for the manufacturing sector. Policy makers focused on sustained improvements to manufacturing operating conditions during February 2021.



Impact of coronavirus outbreak The pandemic in 2020 led to the disruption of supply chains, huge job losses, increased poverty, a fall in production, and with a huge fiscal deficit. According to MarketLine, 4.45% of GDP has been allocated to stimulus packages. COVID19 continues to pose a threat to the manufacturing sector and services sector as businesses are shut and unable to cope with the losses they incurred during lockdowns in 2020. According to MarketLine, GDP contracted by -1.84% in 2020 due to lockdowns and businesses being shut. The Bank of Indonesia (BI) initiated measures such as the reduction of its policy interest rates and banks’ reserve requirement (CRR) and started purchasing government bonds in the primary market. The Indonesian government increased its allocation to help curb the COVID-19 outbreak as part of its 2020 state budget. Import tax payments were deferred for six months for 19 manufacturing industries. The stimulus packages also include measures to lift restrictions on imports and exports, aiming to ease the global supply-chain disruptions caused by the virus. The Bank of Indonesia reduced the policy rate by 25 bps to 4.00% in July 2020. Given the procurement of vaccines in 2021, and the slow recovery in inflation rates and global demand, MarketLine forecasts 5.51% growth in 2021. PMI Manufacturing has exhibited a speedy recovery since November 2020. As part of the Industrial Revolution 4.0 scheme, business confidence among investors is growing, which is reflected in the increasing trend shown by the business confidence index since August 2020.



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Figure 2: Indonesia – Economic Indicators



Source: Country Statistics, MarketLine



MARKETLINE



4.3.4. Future prospects Huge fiscal stimulus to help economic recovery in 2021 To contain the spread of COVID-19 and help the economy recover from the crisis, 4.55% of GDP was diverted to stimulus packages in 2020. As of August 2020, the government accelerated the disbursement of US$50bn worth of fiscal stimulus to boost to consumer spending and avoid a recession. On the monetary side, the government announced a burden sharing scheme to help finance the economic response to the pandemic. The scheme was implemented in 2020, which covers (i) BI’s purchases of government bonds with coupons at the BI’s policy rate to finance priority spending on public goods such health and social protection; (ii) the budgetary interest cost of spending support to firms will be subsidized by BI transfers to the budget; and (iii) BI will act as buyer of last resort for long-term local-currency bonds to finance other spending. The central bank reduced the repo rate from 4% to 3.75% in November 2020 to encourage investment, spending and aid trade. According to MarketLine, real GDP growth will increase to 5.51% in 2021, based on the effective rollout of the vaccine and generous fiscal stimulus packages.



Indonesia to enter the fourth generation of industrial revolution The Indonesia’s Ministry of Industry has designed an integrated roadmap to enter the industry 4.0 era and become one of the top 10 biggest economies in the world by 2030. The Making Indonesia 4.0 initiative will have strategies to



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improve investment and the business climate through collaboration with multi-stakeholders, including the government and public institutions. In this stage of the industrial revolution, it will take a major leap forward in the industrial sector, where information and communication technology will have to be fully utilized. The government has recognized five technologies that will drive this change: the Internet of Things, artificial intelligence, robotic and sensor technology, 3D printing and human machine interfaces. The initiatives will support both large and small scale industries by helping them to achieve maximum production with minimal errors.



Demographic dividends of a vast labor pool Indonesia, being the fourth most populous country in the world, enjoys a demographic advantage in terms of abundant labor. The country’s working age population (15–64) is expected to increase to more than 184.39 million in 2021, from 179.7 million in 2019. Moreover, a stable labor force participation rate (which will remain more or less at 69.2%) and a relatively young population (median age of 31.1 years) as of 2020 will accentuate this advantage. A vast pool of labor is important to containing wages and improving competitiveness in the international market.



Figure 3: Indonesia’s Demographic Advantage (Million Persons/%), 2016–2021f



Source: Country Statistics, MarketLine



MARKETLINE



4.3.5. Future risks Rising debt and deficit levels The size of the government’s gross debt is increasing. According to the IMF, gross debt increased from 30.4% of the country’s GDP in 2019 to 38.4% in 2020 amid the pandemic. Due to huge fiscal stimulus measures to revive the economy, total expenditure of the government increased by 11.2% (Y-o-Y) and total government revenue declined by 16.1% (Y-o-Y) in 2020, according to the IMF.



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Figure 4: Indonesia – Government Revenue, Expenditure, and Net Lending/Borrowing (Billions/% of GDP), 2016–2025f



Source: Country Statistics, MarketLine



MARKETLINE



Low tax base The size of the government’s budget continues to be small compared to its peer countries. According to the ‘Paying Taxes 2020’ report by the World Bank, the total tax and contribution rate (TTCR) in Indonesia was 30.1%, while the Asia-Pacific regional average was 36.6%, and globally it was 40.5% in 2018. In terms of paying taxes, Indonesia ranked 81st among 189 nations in 2018, according to the Paying Taxes 2020 report. As a resource rich country, it relies heavily on the corporate tax raised from the mining and exploration sector. Personal taxes also have a lower share in terms of total revenues. Increasing the tax base is crucial in order to finance development activities and incorporate the vast informal sector into the tax base required for the same. If the country does not do this, the problems caused by not doing it will hamper its plans to sustainably finance its expenditures.



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Figure 5: Indonesia – Tax Ratio (% of GDP), 2008–2019



Source: OECD



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4.4. Social analysis 4.4.1.



Overview



Indonesia has various social assistance programs in place to improve its population’s standard of living. Cash transfer programs such as the Family Hope Program (Program Keluarga Harapan, or PKH) and social assistance programs such as the “cheap rice assistance program" (Beras Sejahtera, or Rastra) are the two major assistance programs. The government also aims to provide social insurance to the entire population by 2029. However, the country has witnessed many instances of human trafficking since 1991, which is a cause for concern. Rising ethnic violence and religious intolerance could pose a risk to the social harmony of Indonesian society. Due to the pandemic, around 2.8 million people have lost their jobs due to closure of businesses and Indonesia’s preemployment card program witnessed a hike in April 2020. According to data from the office of the coordinating economic minister, around 1.4 million people applied for benefits worth US$223m in April 2020.



Table 5: Analysis of Indonesia’s Social Landscape



Current strengths ▪ Social assistance and cash transfer programs



Current challenges ▪ Poor social development indicators



Future prospects ▪ Proper social security system and empower farmers



Future risks ▪ Rising poverty and unemployment levels in 2021 ▪ Religious intolerance



Source: MarketLine



MARKETLINE



4.4.2. Current strengths Social assistance and cash transfer programs Indonesia has implemented various social assistance programs, including cash transfer programs, to raise the income levels of poor households, consequently reducing poverty levels. The government runs a conditional cash transfer scheme, Program Keluarga Harapan (PKH), and non-cash assistance programs such as the “cheap rice assistance program (Rastra)”. The PKH was started as a pilot scheme in 2007 and provided cash transfers to more than 10 million low-income households as of 2018. Indonesia successfully reduced poverty by more than 9% in 2019 through social protection schemes and its family welfare program (PKH). Due to the pandemic, hunger and deteriorating health among children below the poverty line is a cause for concern for the country. Another non-cash food assistance program, BPNT, distributes eggs and rice worth IDR110,000 (US$7.8) per month to those enrolled under the program. Up until November 2018, 10 million households in 219 districts and cities benefited from the BPNT program. Similarly, under the Rastra program, 10kg of rice per month is distributed to eligible households. In fact, spending on social welfare programs reached IDR60.33tn (US$4.3bn) at the end of May 2019, which was an increase of around 53.7% (Y-o-Y).



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4.4.3. Current challenges Poor social development indicators Indonesia’s performance in terms of social parameters has been poor. Indonesia ranked 107th out of 189 countries in the ‘2020 Human Development Index’ update published by the United Nations, which is lower than many of its neighbors, including Singapore (11th), Malaysia (62nd) and Thailand (79th). In terms of life expectancy, the country ranked 95th amongst 141 nations, according to the ‘Global Competitiveness Index 2019’. It is ranked 92nd out of 141 nations on the mean year of schooling indicator and ranked 80th on the school life expectancy indicator. These indicate that the government has much to do in order to improve the country’s social landscape.



4.4.4. Future prospects Proper social security system and empower farmers In 2004, the National Social Security Reform Act (SJSN) was introduced; this aimed to enhance social security measures such as pensions, national health insurance, work injury insurance, death benefits, and severance payments for laid-off workers. The new system (implementation began in 2014) intends to cover all Indonesian residents under a universal healthcare system by 2019 and a common employment benefits system by 2029. Two new non-profit public agencies, which were created in 2011, namely BPJS Health Care (BPJS Kesehatan) and BPJS Employment (BPJS Ketenagakarjaan), will be responsible for the administration of this system. While the former will administer healthcare benefits, the latter will be responsible for employment benefits, which include old age, pension, workplace injury and death benefits. The government aims to follow a staircase approach to finance the new schemes. While it will fully pay for the social protection of the poor, it will employ contributory schemes for the workers in the informal sector, who will pay a fixed monthly contribution based on their declared earnings. Moreover, the 2020 state budget offered an increase in the allocation for farmers, low-income households and selective families based on their electricity connection. The government, in this way, is trying to help low-income households build and boost basic consumption needs like that of agricultural products. These schemes fit well with the government’s aim to boost agricultural productivity. The 2021 state budget increased the social security premium. The government raised the taxable wage cap for the national pension plan program from March 2020 and the premiums for the universal healthcare program from July 2020.



4.4.5. Future risks Rising levels of poverty and unemployment in 2021 Amid the pandemic, economic growth in Indonesia slipped to -1.84% in 2020 from 5.02% real GDP growth in 2019, according to MarketLine. However, unemployment and poverty levels are expected to rise in 2021 due to the displacement of jobs and livelihoods amid pandemic-related lockdowns. As vaccine procurement and distribution is expected function better from H2 2021, economic recovery is forecast to be slow. Increasing household spending and business investments are expected to help boost growth in 2021. However, the closure of businesses resulted in a hike in the unemployment rate to 7% in August 2020, according to Statistics Indonesia (BPS). Poverty levels shot up as 1.63 million Indonesians fell into poverty in March 2020. The poverty rate increased by 9.78% in September 2020, compared to September 2019.



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Religious intolerance Although the country’s population is moderate and for the most part avoids combining politics with religion, there is a radicalized fringe that seems to be endangering the country’s pluralism, which is a dangerous state of affairs for minorities. In recent years, the Ahmadiyya Muslims (Muslims who do not comply with conservative teachings), Christian congregations and the Shiites have all been targets of hardline Islamist groups who consider most nonMuslims as “infidels” and Muslims who do not adhere to Sunni orthodoxy as “blasphemers”. According to the Setara Institute for Democracy and Peace, an Indonesia-based religious freedom group, Jakarta was the most intolerant city in the country in 2017. According to the Indonesia 2018 International Religious Freedom report, punishments ranging from 16 months to five years were given to four people who violated blasphemy laws. In August 2018, a Chinese woman was imprisoned for 18 months because she kept complaining about the loud volume at the mosque in her neighborhood. Some local governments also imposed regulations that restricted religious freedom. In September 2018, protests took place in Jambi in retaliation for officials’ decision to close three churches for not obtaining permits.



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4.5. Technological analysis 4.5.1.



Overview



Indonesia has recorded marked improvement in its technological and innovation parameters, albeit from a low base. The country has a comparatively high level of technology absorption at the firm level. The country ranks 74th out of 141 nations in terms of innovation capability, according to the ‘Global Competitiveness Index 2019’. Moreover, low R&D expenditure has taken a toll on the number of patents granted. It is ranked 116th among 141 nations on the R&D expenditures as a percentage of GDP indicator and 101st on the patents granted parameter. In addition, the country has high levels of software piracy, and while the government has initiated measures to reduce the problem, there is still much work to be done.



Table 6: Analysis of Indonesia’s Technological Landscape



Current strengths ▪ Improving technological landscape



Current challenges ▪ Declining share of high-technology products exports ▪ Poor R&D spending



Future prospects ▪ Digital economy growth in Indonesia



Future risks ▪ Increasing software piracy



Source: MarketLine



4.5.2.



MARKETLINE



Current strengths



Improving technological landscape Indonesia has recorded a marked improvement in its technological and innovation parameters, albeit from a low base. The country was ranked 45th out of 141 nations on the prominence of its research institutions, according to the ‘Global Competitiveness Report 2019’. The proportion of the population using the internet has increased considerably from 10.9% in 2010 to 44.8% in 2020, according to MarketLine. In order to improve innovation output, the government has also increased the amount it spends on higher education. Although Indonesia lags behind other ASEAN nations in terms of technological infrastructure, the government is making efforts to innovate more.



4.5.3. Current challenges Declining share of high-technology products exports According to the World Bank, Indonesia’s high technology exports (as a percentage of manufactured exports) stood at a dismal 8.1% in 2019, way below peers such as the Philippines (62.2%) and Malaysia (51.8%) during the same year. During 2010–2019, Indonesian high technology exports as a percentage of manufactured exports declined from 12.1% in 2010 to 8.1% in 2019. High technology exports are products with high R&D intensity, such as aerospace products, computers, pharmaceuticals, scientific instruments, and electrical machinery. High-end technological innovation would make Indonesia’s exports less vulnerable to price competition. The country needs to focus on increasing its



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share of high-tech exports as low and medium technology exports are likely to suffer from high competition and price pressures from other emerging markets.



Figure 6: Indonesia – High Technology Exports (% of Manufactured Exports), 2010–2019



Source: The World Bank



MARKETLINE



Poor R&D spending Indonesia spends less than half a percentage point of its GDP on R&D (0.23%) in 2019, which is expected to impede innovation. Low R&D expenditure indicates that the government has to do a lot more in terms of fostering innovation. Poor funding of R&D has weighed upon the country’s patent count. According to the United States Patent and Trademark Office (USPTO), Indonesia managed to get only 17 patents in 2020 – a very poor performance compared to Malaysia (310) and Thailand (138).



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Figure 7: Research and Development Expenditure (% of GDP), 2019



Source: Country Statistics, MarketLine



MARKETLINE



Table 7: Patents Granted by USPTO, 2014–2020 Year 2014 2015 2016 2017 2018 2019 2020



China 7,715 8,598 10,993 14,154 16,315



Indonesia 10 25 24 22 9



Malaysia 242 266 301 270 239



Philippines 45 43 46 66 82



Thailand 121 129 106 113 114



20,836 26,176



13 17



296 310



88 71



128 138



Source: USPTO



MARKETLINE



4.5.4. Future prospects Digital economy growth in Indonesia Despite low R&D expenditure in general, fields such as fin-tech and digital economy are expected to lead the country’s development. E-commerce will support the economy, with the three major players in the region – Lazada, Shopee and Tokopedia – all present in Indonesia. Other smaller players such as BukaLapak and BliBli are also building their consumer bases and working on their development. Commodities unavailable in local stores are sold over the internet



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through the digital route on these e-commerce platforms. The target for these companies will be two-tier cities and rural areas where usage is lower. The digital fintech platforms provide simpler and more convenient ways of banking as conventional banking slowly phases out of the system. Digital payments and peer-to-peer lending are already gaining popularity in the country. With health and social programs being very important to Indonesia’s economy, the usage of technology in this space would be more than welcome. With COVID-19 restrictions and lockdowns in place in 2020, digitalization rapidly expanded. According to a report from the US, in-app sessions among Indonesian users for e-commerce and shopping apps increased by nearly 70% from February to June 2020. The country witnessed a spike in consumption and average purchasing rose by 5.7% in April 2020. Public service delivery is expected to be reformed by President Widodo who has expressed his intention to create an e-government portal like the ‘gov.uk’ website by 2025. E-services will be strengthened through their integration with other services provided by the central and local governments. The government has formed a 5G task force to speed up the adoption of 5G technologies. According to the 2020 GSMA mobile economy Asia-Pacific report, 5G is projected to account for 5% of total internet connections in Indonesia by 2025. Indonesia remains the lowest among APAC countries, with India projected to see 7%, Singapore 34% and South Korea will lead the region with 67% by 2025.



4.5.5. Future risks Increasing software piracy Indonesia has very high levels of software piracy. According to the ‘2018 BSA Global Software Piracy Study’, piracy was around 83% in 2017. The commercial value of the illegal pirated software is US$1,095m, which is quite high in comparison to peer countries such as Thailand (US$714m) and Vietnam (US$492m). Because of the lack of adequate and effective IP protection and enforcement, the ‘2020 Special 301 Report’ by the Office of the United States Trade Representative (USTR) placed Indonesia second on its Priority Watch List, right after China. The Directorate General of Intellectual Property is active under the Ministry of Law and Human Rights and aims to tighten the country’s intellectual property regime. However, due to the lack of effective law implementation, rampant corruption and the presence of a large unorganized sector, it is difficult to crack down on piracy in an effective way under the present legal landscape. High piracy will deter foreign investment and dampen investment in innovation. In December 2019, a new survey found out that around 63% of online Indonesian customers have accessed a streaming piracy website or torrent sites to access premium content without paying any subscription fees. To overcome this damaging online piracy, the Video Coalition of Indonesia (VCI) has been working closely with the Ministry of Communication and Information Technology (KOMINFO) to identify and block domains associated with piracy websites. Since July 2019, around 1,000 piracy websites and illegal application domains have been blocked by KOMINFO.



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4.6. Legal analysis 4.6.1.



Overview



The country has an effective competition law and the total tax rate is lower than the regional average. However, the country’s legal environment remains affected by an inefficient bureaucracy, rigid labor laws and a weak judicial system, which can easily be influenced and manipulated by the political and business elite. Furthermore, foreign companies face risks from the arbitrary intervention of the Indonesian government, which has often created problems for foreign entities by either not honoring deals or imposing new conditions after an agreement has been signed.



Table 8: Analysis of Indonesia’s Legal Landscape



Current strengths ▪ Effective competition law ▪ Low total tax rate



Current challenges ▪ Improving legal system but corruption poses a challenge ▪ Higher FDI restrictions compared to peers



Future prospects ▪ Better business environment ▪ New Omnibus law



Future risks ▪ Legal uncertainty and economic nationalism



Source: MarketLine



MARKETLINE



4.6.2. Current strengths Effective competition law An effective competition law is a vital tool for attaining and maintaining sound economic performance in any country, and Indonesia is no exception. The country’s first competition law – Concerning Prohibition of Monopolistic Practices and Unfair Business Competition – was enacted on March 5, 1999 and came into force a year later. The law, which has been in effect since February 2000, prohibits any single domestic company from controlling more than 50% of the market. The Commission for the Supervision of Business Competition (Komisi Pengawas Persaingan Usaha [KPPU]) was established immediately after the passage of the law. Although it has been criticized on various occasions, the KPPU has been credited with countering a large number of cartels. Around 153 complaints on cartels were handled by the KPPU and it passed 11 decisions in 2017. Bid-rigging was still a major concern covering about 70% of the cases filed against cartels. Amendments to the law are still in progress, focusing on the extraterritorial application of the competition law, leniency applications and extension of penalties.



Low total tax rate According to the World Bank’s Paying Taxes 2020 report, Indonesia’s total tax rate (which includes profits taxes, labor taxes and other taxes) is 30.1%. Furthermore, it is lower than that of the Philippines (43.1%), Malaysia (38.7%) and the world average of 40.5%. A low total tax rate bodes well for an emerging economy in terms of attracting investments. In 2019, the government set out a series of tax incentives for labor intensive businesses, as well as R&D. A 60% reduction of their total investment in the form of tangible assets can be claimed by businesses that are labor intensive. Investors investing in training activities to develop workers on specific skill knowledge may get a reduction in gross



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income of up to 200% of the total cost incurred. Furthermore, a 300% tax reduction in gross income of total assets can be obtained by taxpayers who engage themselves in R&D initiatives.



4.6.3. Current challenges Improving legal system but heavy corruption poses a challenge The Indonesian judicial system is weak and is easily influenced and manipulated by the political and business elite. According to the ‘Global Competitiveness Report 2019’, Indonesia ranked 56th among 141 nations on the judicial independence parameter, while in terms of the reliability of police services, the country ranked 68th. According to the 2020 Rule of Law Index, Indonesia has improved its aggregate score from 0.52 to 0.53 in 2020. The index measures the country’s adherence to the rule of law on a 0–1 scale, with 1 being the strongest. However, this slight improvement does not reflect the corruption and draconian laws present in the judicial system. Furthermore, the country’s rank for order and security slipped to 82nd out of 128 countries in 2020.



Higher FDI restrictions compared to peers In 2019, Indonesia was one of the most restrictive economies among 70 nations, as per the OECD’s FDI Regulatory Restrictiveness Index. FDI inflows have continued to grow over time, due to the country’s strong growth prospects. Despite this, there are many sectors that are shielded from foreign competition. In 2016, there were changes made to the NIL (Negative Investment List), and foreign investment in infrastructure-sectors such as ports, electricity and waste treatment were eased, keeping in mind the ASEAN (Association of South East Asian Nations) investors. Furthermore, the regulation of sectors such as the oil industry and logistics remains stringent. This restrictiveness is higher compared to other emerging markets.



Figure 8: FDI Regulatory Restrictiveness Index, Selected Countries, 2019 (Closed = 1 and Open = 0)



Source: OECD



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4.6.4. Future prospects New Omnibus law enacted The government introduced the Omnibus law in November 2020, which is commonly known as the job creation law. The main aim of the Omnibus law is to generate investment, create new job opportunities, open new trade windows for businesses, to make licensing easier for the businesses, and to make policy decisions to respond to global challenges. The major points under this law are: •



• • • • • • •



It focuses on increasing the ease of doing business reforms in Indonesia through simplifying licensing processes, simplifying land acquisition processes, formalizing economic zones, providing more incentives to free-trade zones, and creating a land bank supervisory authority. A new concept of risk-based business activities has been implemented. The business activities are divided into three categories of risk. It gives a push to capital investment, except for investment in business lines that are closed. It removes the restrictions for foreign investment that are currently specified in various laws governing business sectors that are amended by the Omnibus law. It introduces key amendments for mining, power, forestry, public housing, healthcare, and postal services. It simplifies environmental assessment requirements and licensing procedures and integrates environmental permits and business licenses. Tax provisions are made easier for the business under the ease of doing business initiative by the government. It also introduced several changes to the immigration law.



Better business environment The incumbent Indonesian president has prioritized the reduction of corruption, the removal of inefficient government bureaucracy and upgrade of infrastructure, all of which are considered problematic issues in terms of conducting business in Indonesia, according to the ‘Global Competitiveness Index 2019’. There are initiatives to set up a “one-stop service for investment” and reduce the time taken to get a business license by combining different social security registrations. There were revisions to its Negative Investment List in 2014 and 2016, which loosened restrictions on foreign ownership in public-private partnership projects such as large power plants, electricity transmission and distribution, and seaport projects. There was also an initiative to improve access to credit and reduce notarization fees in both Jakarta and Surabaya during 2017–2018. In 2019, the government decided to revise the presidential regulation 44 in the negative investment list maintained by Indonesia so as to reduce the current account deficit and help bolster growth. The negative investment list would be removed, and a positive investment list would be made available in its place. According to the World Bank’s Ease of Doing report for 2020, the Indonesian economy has taken several steps to enhance and expand business activity: • • • • •



The country is developing its e-commerce platforms, introduced online platforms for business licensing and replaced hard copies with electronic copies. Major taxes can now be paid and filed online, especially in Jakarta and Surabaya. Trading across borders has been made even more convenient through the online processing of export customs declarations. An electronic case management system is in place to track the enforcement of contracts by judges. Surabaya has improved the reliability of its power supply and enhanced the maintenance of its electrical grid.



4.6.5. Future risks



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Legal uncertainty and economic nationalism Foreign companies face significant risks due to the arbitrary intervention of the Indonesian government, which has often created problems by either not honoring deals or imposing new conditions after an agreement has been signed. For example. in July 2018, the Indonesian government persuaded the US mining giant Freeport-McMoRan (the operator of the Grasberg mine in the Papua region, which is the world’s largest gold mine and second-largest copper mine) to sign a negation agreement which gives Indonesia’s state-owned mining company Indonesia Asahan Aluminum (Inalum) and the local government of Papua a controlling 51.23% stake in its Indonesian subsidiary, Freeport Indonesia.



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4.7.



Environmental analysis



4.7.1.



Overview



Indonesia’s biodiversity is one of its greatest assets. The country is among the top five in the world in terms of plant diversity, with an estimated 38,000 higher plant species. Indonesia leads the world in terms of palm diversity. However, large tracts of Sumatra's forest have been destroyed to make way for palm oil plantations, with companies clearing trees and burning the stumps that remain. Furthermore, the government’s heavy energy subsidies have hindered its environmental initiatives.



Table 9: Analysis of Indonesia’s Environmental Landscape



Current strengths ▪ Rich biodiversity ▪ Declining deforestation in Indonesia Future prospects ▪ Protection of forests and conservation of wildlife



Current challenges ▪ Indonesia’s Omnibus law poses threat to environmental protection ▪ Rising pollution levels Future risks ▪ Distorted pricing ▪ Declining share of renewables in the primary energy supply



Source: MarketLine



4.7.2.



MARKETLINE



Current strengths



Rich biodiversity Indonesia is one of the 17 mega diverse countries in the world, having 515 species of mammals (second on the world mammal list behind Brazil), 1,539 bird species, and it accounts for 45% of the world’s total fish. The country has about 259 endemic mammals, 382 endemic birds, and 172 endemic amphibians, as per IUCN, 2011. About 184 mammals, 119 birds, 32 reptiles, 32 amphibians, and 140 fish form the country’s total number of threatened species. 68 species are critically endangered, 69 are endangered and 517 are vulnerable. This makes Indonesia richly endowed in terms of biodiversity. According to the Convention on Biological diversity, around 16% of the world’s reptiles (781 species) and 35 species of primate residing in Indonesia places the country fourth in the world. Moreover, around 17% of the total species of birds (1,592 species) and 270 species of amphibians residing in Indonesia places it fifth and sixth, respectively, worldwide as of 2021.



Declining deforestation in Indonesia Indonesia’s lowland tropical forests, which are rich in timber resources and biodiversity, are most at risk. They have been almost entirely cleared in Sulawesi and Sumatra, while those on Kalimantan could also be cleared in the next few years. In 2020, palm oil deforestation reduced due to the lockdowns imposed amid the pandemic. According to the World Bank, Indonesia’s forest area as a percentage of land area reduced from 53.26% in 2007 to 49.86% in 2016. It is astonishing that the country – known as one of the lungs of the earth – is being allowed to deteriorate so quickly and has reached a situation where forest area has reduced to less than half the area of the land. However, as of March 2021, deforestation in Indonesia has hit an all-time low due to the policies implemented by the government. According to the Ministry of Forestry in Indonesia, the country managed to maintain its total forest cover at 50.9% of PESTLE Country Analysis Report: Indonesia © MarketLine. This report is a licensed product and is not to be photocopied



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its total land area, at 95.6 million hectares in 2020. According to the Ministry of Environment and Forestry, the country’s annual deforestation rate declined to 0.15% in 2019–2020. The various measures adopted to tackle deforestation include: a permanent ban on issuing new permits to clear primary forests and peatlands; a moratorium on new oil palm plantation licenses; forest fire mitigation; a social forestry program; land rehabilitation; and increased enforcement against environmental violations.



4.7.3.



Current challenges



Indonesia’s Omnibus law poses a threat to environmental protection Indonesia’s new Omnibus law, which was introduced in November 2020, is a cause for concern regarding environmental protection. According to the law, some of the provisions encourage more deforestation and ease the procedures for environmental deregulation. The law intends to amend the incentives for the coal industry, but these do not take into account climate change and other environmental concerns. Another provision in the new law that threatens to aggravate emissions will scrap the requirement for all regions to maintain a minimum 30% of their watershed and/or island area as forest area. The government needs to change its job creation law so that it takes into account environmental concerns.



Rising pollution levels Pollution levels have been rising in Indonesian cities during the past five years. According to the World Air Quality Index, Indonesia ranks ninth out of 106 countries in 2021. According to the Pollution and Health Metrics report, released in December 2019 by the Global Alliance on Health and Pollution, 232,974 pollution-related deaths were recorded in Indonesia, out of which 123,753 were attributed to air pollution and 60,040 to water pollution. Around 16,331 deaths were caused by occupational pollution. Huge amounts of pollution and dry weather cause fires in Indonesian cities.



4.7.4.



Future prospects



Protection of forests and conservation of wildlife According to the World Wildlife Fund, more than 230,000 orangutans existed about a century ago. However, the Bornean orangutan population is now estimated to be 104,700, making it an endangered species. The Sumatran orangutans are critically endangered and currently number 7,500. The orangutan population has declined drastically in the last 15 years. Indonesia has a solid action plan to conserve orangutans, which will have important benefits in terms of reducing climate change. Orangutans play a significant role in the fight against climate change and forest regeneration, as they disperse seeds that help regenerate fruit trees, which in turn helps to keep the forest healthy and reduces greenhouse gases such as CO2. As a part of the government initiatives to reduce deforestation, the Indonesian government declared a moratorium on logging in undisturbed tropical forests and peatlands in 2011. In December 2016, a regulation (PP No.57/2016) was signed by the president to protect the peatlands from further clearing and to allow the restoration of degraded lands. In September 2018, a moratorium was signed by the president barring new licenses for oil palm plantations. It is important for Indonesia to sustain its biodiversity and forest cover to mitigate the impacts of climate change. Going forwards, further tightening of the country’s environmental regulations and the stringent enforcement of those are crucial for a sustainable Indonesia.



4.7.5.



Future risks



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Distorted pricing Energy prices are highly distorted in Indonesia. Subsidies on fossil fuels have resulted in increased utilization, which ultimately contributes to pollution. The price of scarce energy resources should take into account the environmental and social costs. Putting a tax on it is an effective way to curb their reckless use. Moreover, the distortive pricing mechanism is also inhibiting the development of green technology. The government should ensure the market prices for a resource rather than arbitrarily fixing them. The lack of a market-driven pricing mechanism could become an obstacle to emission reduction.



Declining share of renewables in the primary energy supply The latest available reliable data from the OECD indicates that the share of renewables in the country’s primary energy supply has been declining considerably since the 1990s. During 2010–2018, renewables’ share of the primary energy supply witnessed a decline from 31.55% to 25.7%. Without solid policy changes and government interventions, this trend is expected to continue, leading to the higher use of coal and petroleum products. This will in turn lead to higher CO2 emissions and other greenhouse gases.



Figure 9: Indonesia – Percentage of Renewables in Total Primary Energy Supply, 2010–2018



Source: OECD



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5.



Political Landscape



5.1.



Summary



After four centuries of European colonization, Indonesia was declared independent by Sukarno and Mohammed Hatta in 1945. Subsequently, the pair set out a constitution and created a provisional parliament, and Sukarno became Indonesia’s first president with executive control. By the end of 1970, President Sukarno had transferred most of his executive powers to General Suharto, who by that time had become chief of the armed forces and was subsequently elected for five consecutive terms until 1998. However, Suharto had to resign at the beginning of his fifth term amid massive and widespread public protests, which were fueled by the Asian financial and economic crisis and falling commodity and fuel prices in the global market. Following Suharto’s resignation, Vice President BJ Habibie became Indonesia’s third president. Indonesia’s first elections for its national, provisional, and sub-provisional parliaments were held in June 1999 with the participation of 48 political parties. Abdurrahman Wahid served as president until he was impeached in 2001; he was replaced by Megawati Sukarnoputri, who served as president until 2004. The first direct elections were held in 2004, with retired army general Susilo Bambang Yudhoyono emerging victorious against incumbent president Megawati Sukarnoputri. Yudhoyono was re-elected for a second term in the 2009 presidential elections. However, his second term in office was tainted with corruption scandals mainly involving politicians from his own Democratic Party. The 2014 presidential elections saw Joko Widodo of the Indonesian Democratic Party of Struggle (Partai Demokrasi Indonesia Perjuangan [PDI-P]) emerging victorious against the Great Indonesia Movement Party’s Prabowo Subianto with 53.2% of the votes. Indonesia’s recent-most elections were held in April 2019, in which President Widodo was reelected for a second term, defeating Probowo Subianto by a majority of 55.5% of the votes. The next elections are scheduled for 2024.



5.2. Evolution 5.2.1.



Pre-1950s



Civilization in Indonesia goes back 1,500 years. By the time of the renaissance, the islands of Java and Sumatra already had well-developed cultures. In 1602, the Dutch started colonizing the region and the Netherlands East Indies became one of the world’s most affluent colonial possessions over 300 years. During the first decade of the 20th century, a struggle for independence started gaining traction, led by young professionals and students, particularly between the two world wars. Japanese forces occupied Indonesia for three years during World War II; however, after they surrendered to the Allied forces, a group of Indonesians led by Sukarno and Mohammed Hatta proclaimed independence and established the Republic of Indonesia on August 17, 1945. Subsequently, the pair set up a provisional government and adopted a constitution to govern the republic until elections could be held and a new constitution could be framed. At the same time, Dutch efforts to re-establish control over Indonesia were met with strong opposition.



5.2.2.



1950–1998



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Starting in 1958, rebellions in Sumatra, Sulawesi, West Java, and other islands weakened government control. Indonesia’s constituent assembly failed to develop a new constitution and President Sukarno revived the provisional 1945 constitution that allowed broad presidential powers. Sukarno imposed an authoritarian regime and called it Guided Democracy. He drove a radical transition in Indonesia’s foreign policy and gathered leaders from former colonies in Bandung, West Java to realize the non-aligned movement. During 1965–1966, Sukarno vainly attempted to restore political stability and get the country back to its pre-1965 position. Although he retained presidential status, his position was rather titular, as he had transferred most executive powers to General Suharto, who by that time had become the chief of the armed forces. In 1967, the Provisional People’s Consultative Assembly (Majelis Permusyawaratan Rakyat [MPR]) named General Suharto as acting president. President Suharto proclaimed a New Order in Indonesian politics that led to a dramatic transition in foreign and domestic policy from the developments during Sukarno’s final years of rule. The New Order had economic rehabilitation and development as primary goals. In 1968, the MPR elected Suharto for a full five-term presidency until 1998.



5.2.3.



1998–2004



Indonesia’s political and economic stability was distorted by the East Asian financial crisis, which affected major East Asian countries. The crisis was exacerbated by the worst drought Indonesia had faced in 50 years, alarmingly high inflation rates and falling prices of oil, gas, and other commodities in the international market. The national currency, the rupiah, depreciated as the exchange rate regime transitioned from a fixed to a managed float, and then further to a fully floating currency. This situation resulted in massive protests by students, who demanded President Suharto’s immediate resignation. In May 1998, Suharto was approved to run for a seventh term by the parliament; however, following dissidence in his own party ranks over his candidature, he resigned. Following Suharto’s resignation, Vice President B.J. Habibie became Indonesia’s third president. President Habibie requested that the International Monetary Fund (IMF) and donors support the country’s economic stabilization programs. In January 1999, the government initiated a process under which the residents of East Timor were allowed to choose between complete independence and autonomy. Around 78.5% of registered voters chose independence. Indonesia’s first elections for national, provisional, and sub-provisional parliaments were held in June 1999 with the participation of 48 political parties. The Indonesian Democratic Party of Struggle (PDI-P), led by Megawati Sukarnoputri, claimed victory by winning 34% of the total registered votes. However, the MPR selected the leader of the Conservative Islamic organization Abdurrahman Wahid as the fourth president. Megawati Sukarnoputri eventually replaced him in 2001.



5.2.4.



2004 onwards



The first direct elections were held in 2004, with retired army general Susilo Bambang Yudhoyono emerging victorious against incumbent president Megawati Sukarnoputri. Yudhoyono was subsequently re-elected for a second consecutive term in 2009 after winning 60.8% of the total registered votes. After experiencing political and economic stability just months after being elected (the country was hit by a series of seismic tremors in December 2004, which caused large-scale damage to life and property), Yudhoyono could be credited for consolidating Indonesia’s democracy after decades of authoritarian rule. During his rule spanning two terms, the level of communal violence declined, the 30-year civil war in Aceh ended with a peace agreement with Free Aceh Movement separatists, terrorism threats declined and there were few intra-elite clashes that would have threatened the stability of the country's political and civil order. However, the period also saw political corruption increase as maintaining peace within a large coalition became more vital than reformist policies. Religious minority rights also deteriorated under his rule.



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In the 2014 presidential elections, Joko Widodo of the PDI-P was elected president, as he emerged victorious against Prabowo Subianto of the Great Indonesia Movement Party in a tight presidential race. Core areas of focus during the incumbent Widodo’s administration include the reduction of corruption and red tape, improvements to infrastructure and strengthening the economy. Widodo emerged victorious in the elections held in April 2019 and was re-elected as president of the country.



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Figure 10: Indonesia – Political Events Timeline



Source: MarketLine



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5.3. Structure and policies 5.3.1.



Key political figures



The key political figures in Indonesia are: •



President Joko Widodo



Figure 11: Indonesia – Key Political Figures



Joko Widodo, also known as “Jokowi”, was sworn in as Indonesian president after a closely fought presidential election against Prabowo Subianto in 2014 and was re-elected in 2019. He was born in 1961 as the son of a wood-seller. He is a graduate from the forestry faculty at Gadjah Mada University, Yogyakarta, in 1985. Jokowi has served as mayor of Solo, a city in the center of Java, during 2005–2012 and has gained popularity by focusing on policies that boost small and local businesses. He was later elected as governor of Jakarta during 2012–2014. During his presidency, he has focused on initiatives to end corruption, nepotism and intolerance, as well as to strengthen the domestic economy. Source: MarketLine



5.3.2.



MARKETLINE



Provincial setup



Indonesia is segregated into provinces that are further divided into administrative regions. Each region has an established legislative body as the chief administrative authority. Indonesia has nearly 250 regional units, village communities, and other special administrative units. The regional administrative units chalk out development plans and answer directly to the public.



5.3.3.



Structure of legislature



The unicameral parliament is called the House of Representatives (Dewan Perwakilan Rakyat [DPR]) and has 575 seats filled up by members who are elected to serve a term of five years. However, unlike other parliamentary democracies, the DPR cannot be dissolved by the president, as its members are concurrently part of the MPR, the highest legislative decision-making body. The DPR is constitutionally bestowed with the right to endorse or cancel laws. The members of the DPR also have the right to submit bills. Furthermore, without the approval of the DPR, a particular bill cannot be sanctioned by the president. The constitution mandates that members of the DPR meet once a year. The president cooperates with the DPR in determining the national budget. The House of Regional Representatives (Dewan Perwakilan Daerah), a body of 136 members, assists the DPR in administrative matters.



5.3.4. Key political parties



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Indonesian Democratic Party of Struggle The Indonesian Democratic Party of Struggle (PDI-P) grew from a faction of the Indonesian Democratic Party, which was the primary opposition party to the ruling Golkar during Suharto’s New Order. The party’s ideology is based on five principles: belief in the one and only god, just and civilized humanity, unity of Indonesia, democracy guided by the inner wisdom in the unanimity arising out of deliberations among representatives, and social justice for the people of Indonesia. The PDI-P emerged victorious in the 1999 legislative elections with 33% of the votes; however, the party did not form a coalition with any other party, except for a loose alliance with the Abdurrahman Wahid's National Awakening Party (PKB). Wahid was chosen as the country’s president. Megawati Sukarnoputri, daughter of Sukarno, the first president of Indonesia, was elected as vice president after riots broke out in major cities such as Jakarta, Solo and Medan supporting her. She assumed the presidency during 2001–2004 after Wahid was impeached in 2001. The party stayed in opposition for 10 years during Yudhoyono’s presidency, after which it emerged victorious in the 2014 and 2019 legislative elections.



Golkar Golkar was formed in 1964 as Sekber Golkar and was a federation of 97 non-governmental organizations, which later increased to 220 organizations. It is also known as the Party of Functional Groups. It was the ruling party during Suharto’s regime (1968–1998). Suharto was not initially linked to any political party; however, he needed to be affiliated with one in order to be elected as president for a second time. In order to become president, Suharto chose Golkar and transformed it from a loose federation of non-governmental organizations to a political party with the help of his associate Ali Murtapo. Murtapo used gangs of young people to wipe out the political opposition. Suharto’s affiliation with Golkar paid dividends, as it won 62% of the votes in the DPR in the 1971 elections. He went on to be elected as president for a third term in 1978 and tightened his hold on the party after being elected as chairman of the executive board. Following Suharto’s exodus in 1998, Akbar Tanjung emerged as the new chairman of Golkar after beating Army General Edi Sudrajat. This was the first time that a chairman was democratically elected rather than being appointed by the chairman of the executive board. In 1999, Golkar lost its first legislative elections to Megawati Sukarnoputri's PDI-P; however, the party joined forces with the Central Axis, a political coalition put together by then MPR Chairman Amien Rais, to secure the election of Abdurrahman Wahid as president. Disillusioned with Wahid’s sacking of Jusuf Kalla as Minister of Industries and Trade, Golkar supported the Central Axis in replacing President Wahid with Megawati. With Megawati’s declining popularity, Golkar again emerged victorious in the 2004 legislative elections. Despite this, the party’s presidential candidate, Wiranto, and his running mate, Salahuddin Wahid, lost in the first round in their bid for the 2004 presidential elections. Later that year, Tanjung lost his Golkar chairmanship to Jusuf Kalla, the country’s vice president during 2004–2009. In the 2009 legislative elections, the party relinquished its top position to the Democrat Party (PD) of President Susilo Bambang Yudhoyono; however, it joined the PD’s majority legislative coalition. Golkar also finished as runner-up in the 2014 legislative elections (this time to PDI-P), although it decided to join the opposition majority coalition in parliament.



Great Indonesia Movement Party The Great Indonesia Movement Party (Partai Gerakan Indonesia Raya [Gerindra]) emerged in 2008 after Prabowo Subianto resigned from the Golkar Party in July 2008. The party served as Prabowo’s political vehicle after he failed to win the 2004 presidential nomination of his original party. The party had a six-point action program for 2014–2019, which included the building of a strong, prosperous and fair economy; the implementation of a social economic system; the development of food, water and energy sovereignty; bringing improvements to the quality of human development; infrastructure development and preservation of environment; and building of a government free of corruption, which is strong, resolute and effective. The party won 4.5% of the votes and 26 out of 560 seats in parliament in the 2009 elections. In 2014, the party emerged as the third largest party after the PDI-P and Golkar, as it PESTLE Country Analysis Report: Indonesia © MarketLine. This report is a licensed product and is not to be photocopied



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more than doubled its vote share to 11.5% and grabbed 73 seats in the MPR. Similarly, in the 2019 elections also, the party came second with 85 seats, increasing its share to 14.78%.



Democratic Party The Democratic Party (Partai Demokrat [PD]) was founded in September 2001 to gain support for 2001 vice presidential candidate, Susilo Bambang Yudhoyono, for the 2004 presidential elections. The PD was supported by three other minor parties, namely the Crescent Star Party (Partai Bulan Bintang [PBB]), the Prosperous Justice Party (Partai Keadilan Sejahtera [PKS]), and the Indonesian Justice and Unity Party (Partai Keadilan dan Persatuan Indonesia [PKP]) in its 2004 presidential campaign, which helped ensure that the party nominees were successful. Although Megawati Sukarnoputri refused to accept the results of the presidential election, independent observers found no evidence of foul play. In the 2009 legislative elections, the party almost tripled its vote share to 20.9% from just 7.5% in 2004, as it emerged as the single largest party in the country. The party favors industrialization and prudent economic policies. It is a strong proponent of bilateral ties with developed countries, in particular the US, and multilateral donor agencies such as the IMF and the World Bank. The party’s popularity started declining during Yudhoyono’s second-term due to the emergence of corruption scandals involving members of the party.



5.3.5.



Composition of parliament



Figure 12: Indonesia – Composition of Parliament, 2019 United Development Party, 19



National Mandate Party, 44 Prosperous Justice Party, 50



Indonesia Democratic Party-Struggle, 128



Democrat Party, 54 Golkar, 85 National Awakening Party, 58



National Democratic Party, 59



Great Indonesia Movement Party, 78



Source: CIA – The World Factbook



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5.3.6.



Key policies



Economic In light of macroeconomic imbalances that came to the fore in the third quarter of 2013 after the reversal of capital flows from the US, the government and the central bank have adopted measures aimed at reducing these vulnerabilities. In order to reduce its fiscal and external imbalances and to pave the way for development-related expenditure, the government raised the price of subsidized petrol by 44% and the price of subsidized diesel by 22% in June 2013. The weakening of oil prices in the later part of 2015 led the government to revise the budget based on the oil price per barrel from US$48 per barrel to US$30–35 per barrel. Infrastructure development is one of the key areas of focus in the incumbent government budgets. The 2020 state budget allotted 3% more than the previous year’s budget, allocating a total of US$180bn to compensate for the global slowdown and prevent any issues that may occur due to the global trade war. The deficit has been pegged at US$22bn for 2020, which as a percentage of GDP has reduced from 1.94% in 2019 to 1.76% in 2020. The 2021 State Budget bill aims to enable the nation’s economic recovery following the pandemic, as well as promote structural reforms to enhance productivity and speed up the country’s transformation into a digital economy. The 2021 budget proposes a budget deficit of 5.5% of GDP compared to a 6.34% budget deficit in 2020.



Social Indonesia has implemented various social assistance programs, including cash transfer programs, to raise the income levels of poor households, consequently reducing poverty levels. The government runs a conditional cash transfer scheme, Program Keluarga Harapan (PKH), and non-cash assistance programs such as the “cheap rice assistance program (Rastra)”. Non-cash food assistance programs include the BPNT, which distributes eggs and rice worth IDR110,000 (US$7.8) per month to those enrolled under the program. The total subsidies were reduced by around 14% in the 2020 state budget to an allocated amount of US$8.8bn. The subsidies will only be given to households that have electricity connections of 450 and 900 VA. The budget for villages increased by 5.2% to an allocated amount of around US$60bn for the construction of infrastructure related to education, healthcare and other social factors. The budget also provided three new Social Security cards for low income Indonesians. The KIP Kuliah was allocated with a budget of US$473m to help student enrolment in primary and secondary education. Vocational training and certificate programs could be undertaken by job seekers or the unemployed with the help of the pre-employment card, for which the budget set aside US$700m. A basic food card was allocated, with US$2bn to alleviate low-income households from poverty. Various housing credit programs will work in tandem with such basic food card systems to help increase agricultural production and productivity. According to the 2021 budget, social protection support has been allocated US$30bn, which aims to accelerate social recovery from the pandemic. The government aims to support social protection schemes and bring in gradual reforms to social security in Indonesia.



Foreign The country historically does not interfere in regional conflicts. The country has not sided with any major power bloc and has stuck to its non-alignment policy. As a result, it has been able to maintain strong diplomatic ties with both the US and China. However, lately there are some signals from Indonesia that it is moving away from its neutral stance. For instance, Indonesia is pressing the ASEAN nations to take a stance and make diplomatic interferences in Myanmar based on the Rohingya mass displacements. In 2017, Indonesia renamed a part of the South China Sea, which is close to Indonesia’s northern reaches, as the North Natuna Sea, indicating its resistance towards China’s geographical aggressions. Amidst the various ups and downs in its relationship with Australia, mostly of a political nature, both countries are in the process of mending their differences through the joint naval petrol of their borders and strengthening their economic cooperation. Indonesia is actively involved in various trade negations as well. In 2018, the country signed various bilateral treaties with counties such as Australia, India and Singapore that aim to strengthen economic ties and technological



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cooperation. Indonesia is a major negotiator for the Regional Comprehensive Economic Partnership (RCEP), a proposed FTA between China, India, Japan, Australia and ASEAN nations. Indonesia is also a part of the ASEAN Economic Community (AEC) initiative, along with countries such as Malaysia, Singapore, Brunei Darussalam, the Philippines, Thailand, Laos, Myanmar and Vietnam. The AEC aims to achieve international economic integration of the ASEAN member countries by 2025. In May 2019, Indonesia entered into 23 memorandums of understanding with China, which were worth a total of IDR200tn (US$14.1bn). 14 out of these 23 were signed as Business to Business contracts and involved the government only as a facilitator. A total of 13 MOUs were signed between Indonesia and Russia at the Russian-Indonesian Business Forum in August 2019. These were mostly related to various sectors such as furniture and food products. Investments, trade and tourism are expected to be positively impacted by the activation of these agreements. Indonesia and Canada signed a free trade agreement, and in January 2021, Canada announced that it would launch public consultations on a comprehensive economic partnership agreement with Indonesia. This consultation will consider the public’s input in large-scale projects, policies and laws. Despite the volume of trade being low, there is huge potential for growth which is untapped for both countries.



Defense Since 2009, the country has achieved several successes against terrorists. In September 2009, the police shot the country’s most wanted Islamist militant Noordin Mohammad, who was allegedly responsible for a series of attacks across the archipelago. In February and March 2010, several suspected militants were arrested in a series of raids on training camps of groups linked to Jemaah Islamiah in the Aceh province. In March 2010, the police succeeded in killing Dulmatin, an alleged member of the group and the main suspect in the 2002 Bali bombing. In August 2011, Umar Patek, the alleged mastermind of the bombing, was extradited from Pakistan and was sentenced to 20 years of imprisonment in June 2012. In January 2014, Indonesia signed it first defense cooperation agreement (DCA) with Saudi Arabia, which covers cooperation on several aspects of defense, such as military training, education, counterterrorism and the defense industry. Indonesia has a defense cooperation agreement with South Korea, which involves a technology transfer of submarines from South Korea. In addition to these countries, Indonesia has cooperation agreements with the US, the UK, India, and the Netherlands. Indonesian defense forces are also engaged in regular joint military exercises with their counterparts from countries such as Australia (Garuda Kookaburra), India (Garuda Shakti), the US (Garuda Shield), as well as the Philippines, Malaysia and Singapore. The country’s most recent military exercise was with the US, which was known as “Garuda Shield” and was conducted during July–August 2018. Indonesia is strengthening its bilateral relations with the US in order to increase capacities and interoperability. Also, combined exercises and training started with the Indonesian Special Forces KOPASSUS in 2020. The 2020 state budget allocated US$9.2bn to the defense ministry and US$7.3bn to the National Police. The defense ministry received the highest increase among the sectors under the 2020 budget at 20%, whereas the National Police received an increase of about 11%. Indonesia’s 2021 defense budget stands at US$9.2bn, an increase over its 2020 allocation. The 2021 spending includes US$3bn for military modernization. The country seeks to upgrade its indigenous industry and capabilities, especially in terms of air defense, in line with government’s goal of a minimum essential force by 2024.



5.4. Performance 5.4.1.



Governance indicators



The World Bank report on governance uses voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law and control of corruption as indicators for 215 countries and territories over 1996–2019. Daniel Kaufmann of the Brookings Institution, Massimo Mastruzzi of the World Bank Institute and Aart Kraay of the World Bank Development Economics Research Group conducted the study. For any



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country, a percentile rank of zero corresponds to the lowest possible score and a percentile rank of 100 corresponds to the highest possible score. In 2019, Indonesia ranked in the 52.71 percentile on the voice and accountability parameter, which measures the extent to which citizens can participate in selecting their government, as well as freedom of expression, freedom of association, and freedom of the media. Malaysia placed lower than Indonesia, with a percentile rank of 43.35. In 2019, Indonesia ranked in the 28.1 percentile on political stability and absence of violence parameter. Political stability and the absence of violence measures perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including domestic violence and terrorism. Malaysia had a better percentile rank of 50.95 on this parameter. Indonesia ranked in the 60.1 percentile on the government effectiveness parameter in 2019. Government effectiveness measures the quality of public services and civil services and their degree of independence; the quality of policy formulation and implementation; and the credibility of the government's commitment to such policies. The Malaysian government is considered to be the most effective in East Asia due to the effective implementation of policies. As a result, it recorded a much higher percentile rank of 79.33, which is comparable to other developed nations. Indonesia ranked in the 51.44 percentile on regulatory quality in 2019. Regulatory quality measures the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development. Indonesia's score indicates that the country lags behind in terms of implementation of policies and regulations for the private sector. Malaysia ranked higher with a percentile rank of 73.56. Indonesia ranked in the 42.31 percentile on the rule of law parameter in 2019. Rule of law measures the extent to which agents have confidence in the rules of society, with particular emphasis on the quality of contract enforcement, the police, and the courts, as well as the likelihood of crime and violence. Indonesia ranks low mainly due to the possibility of terrorist strikes. Malaysia, on the other hand, ranked in the 73.08 percentile, signifying a better law and order situation. Indonesia ranked in the 37.98 percentile on the control of corruption parameter in 2019. Control of corruption measures the extent to which public power is exercised for private gain, especially corruption, as well as the private and elite influence on the state. Malaysia ranked higher in the 62.5 percentile.



5.5. Outlook Joko Widodo (popularly known as “Jokowi”) won the July 2014 presidential elections, marking an important turning point for Indonesian democracy as it is the first time that a relative political novice is at the helm of the country’s affairs, historically dominated by a handful of political and business families. He was re-elected as president in the elections held in 2019. Jokowi’s main priorities during his ongoing rule include institutional reforms and the betterment of public services, as his administration has undertaken measures to empower the Anti-Corruption Commission (KPK), restructure bureaucracy and implement a merit-based system for the appointment of public servants. Jokowi’s budgets are prominently focused on improving investments in infrastructure and the better provision of healthcare and educational services. An active involvement in the Regional Comprehensive Economic Partnership (RCEP) can be helpful as well in expanding the country’s export economy. Widodo’s main aim is to prioritize public health and help the economy recover from the COVID-19 crisis. Amidst his liberal policies and strong stances against extremism, Indonesia is witnessing a deepening of Islamic extremism in mainstream politics and society. Economic nationalism is also on the rise. Indonesia may continue to face political challenges from terrorist attacks, both at the domestic and international level.



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6.



Economic Landscape



6.1.



Summary



Since the onset of the New Order policy of 1966, Indonesia has strengthened its industrial and manufacturing sectors as engines of economic growth. The government has also liberalized trade and investment policies to attract overseas investment in its key economic sectors, but success has not been continuous, largely due to policy uncertainty and the government’s failure to resolve structural problems. Indonesia’s economy as of 2021 is the fourth largest populous country in the world and a member of G20. The Indonesian government is following a 20-year plan, from 2005 to 2025, which is further segmented into five-year medium-term plans that focus on development priorities. Currently, the government is pursuing its last five-year medium-term plan (2020–2024), which aims to improve infrastructure, lead to human capital creation, and strengthening the country’s global presence. 2020 has been a challenging year for the country, but with its effective vaccine rollout and government stimulus packages worth 4.3% of its GDP, these will help the economy to grow in 2021.



6.2. Evolution Significant changes in the Indonesian economy from the 1980s onwards are listed below.



6.2.1.



Pre-1997



The New Order brought significant development during the 1970s and 1980s, lifting the country out of economic uncertainty. During this period, Indonesia went from having virtually no industry in 1965 to producing steel, aluminum, and cement by the late 1970s. However, the success of the New Order did not last long as the policy failed to solve structural problems. Although government policies introduced in the 1980s were focused on reducing interference in private businesses and enabling the greater penetration of technology, the economic outlook was significantly weakened by charges of corruption, collusion, and nepotism against Suharto and his family in 1996.



6.2.2.



1997–2020



Indonesia experienced a dramatic economic reversal due to the 1997 East Asian financial crisis. With the abrupt depreciation of Indonesian currency, most foreign investors started re-evaluating their investments in Asia, and as a result dumped most of the assets and investments they held in the region, with Indonesia being the worst affected. GDP contracted by -13.13% and inflation rose exponentially to 58.45% in 1998. Moreover, the economy was illprepared to address the turmoil created by the 1997 financial crisis despite liberalization in the late 1980s. The government sought a US$43bn IMF (International Monetary Fund) loan, which was at the time the largest sum ever offered by the IMF to an individual nation, with disbursement conditional on the implementation of specific reforms such as bank and debt restructuring and fiscal policy adjustments. In 2003, the government terminated its loan program with the IMF because of its reluctance to continue implementing unpopular economic restrictions. By 2005, Indonesia had recovered from economic and social turmoil by recapitalizing its banking sector, improving the monitoring mechanism of its capital markets, and taking radical steps to spur economic growth and investment. The country’s growth rate, which had averaged 4.57% of GDP during PESTLE Country Analysis Report: Indonesia © MarketLine. This report is a licensed product and is not to be photocopied



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2000–2004, improved to a healthy 5.89% during 2005–2008. The growth rate fell 4.63% in 2009. The economy picked up strongly during 2010–2012 to grow at an average rate of 6.14% as commodity prices surged and the US Federal Reserve’s quantitative easing (QE3) improved liquidity. China’s slowdown, which led to a fall in commodity export prices, coupled with the tapering of QE3, resulted in a slowdown in the growth rate during 2013–2014. Falling commodity prices have also been a problem, causing growth to decline from 5.56% in 2013 to 5.01% in 2014. Growth came down further to 4.88% in 2015. During 2016–2017, the country witnessed stable inflation, interest rate cuts, increased investment spending, as well as a rise in international trade. However, economic growth was stagnant around 5.03% in 2016, and 5.07% in 2017, mainly due to weak growth in the domestic consumer sector, as well as low domestic commodity prices relating to its major export commodity palm oil. With the strong job market, increased government spending for social assistance programs, improving commodity prices, and strengthening trade, GDP witnessed growth of 5.17% in 2018. Externalities such as the US-China trade war and sluggish investments marginally slowed down the country’s growth to 5.02% in 2019. Pandemic related lockdowns and uncertainty regarding the investment climate led the economy to stumble down to -1.84% in 2020.



Figure 13: Indonesia – Evolution of GDP (%), 2011–2020e



Source: Country Statistics, MarketLine



MARKETLINE



6.3. Structure and policies 6.3.1.



Financial system



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6.3.2.



Financial authorities and regulators



The Bank of Indonesia, the country's central bank, has a single overarching objective, which is to maintain the rupiah’s stability. The objective incorporates two key aspects: to maintain a stable rupiah for goods and services reflected by the prevailing inflation rate and to maintain exchange rate stability against other foreign currencies. In terms of the Bank of Indonesia’s roles and functions, accountability and transparency principles are applied through the regular and open publication of information. The bank formulates monetary policies and sets monetary targets for consecutive years. The Indonesian Capital Market Supervisory Agency’s main functions are to draft capital market rules and regulations, to establish disclosure principles for issuers of public companies, and to guide and supervise any person who is granted a business license, approval, and registration from the agency, and any other persons related to the capital markets. Moreover, the agency works with the US Securities and Exchange Commission to promote the development of a sound securities regulatory mechanism and to integrate the Indonesian market into a broader international framework. In October 2011, a bill was passed to establish a single regulator for the financial services industry. The new financial services authority (Otoritas Jasa Keuangan [OJK]) is responsible for the supervision of banks, insurance companies, pension funds, capital markets and other entities in the industry.



Stock markets and derivatives The Indonesia Stock Exchange (IDX) was set up after the government restarted its capital market in 1977, which was paused due to the World Wars and the country’s power transition. It has since expanded with considerable support from government-issued incentives and regulations.



Insurance Major life insurance companies in terms of gross written premiums are Jiwa Mega Life, Jiwa Sinarmas and Prudential Life Assurance. Major non-life insurance companies by the same parameter are Adira Dinamika, Tugu Pratama Indonesia and Central Asia Insurance.



6.4. Performance 6.4.1.



GDP and growth rate



Overview The country’s GDP growth rate averaged a robust 5.95% during 2006–2008; however, due to the global economic crisis, it fell to 4.62% in 2009. After the crisis, strong growth in Indonesia’s key trading partners – India and China – easy monetary and fiscal policies, which followed those implemented by Western nations, and a rebound in commodity prices helped maintain the economy’s momentum. As a result, the economy picked up strongly in 2010 and 2011 and grew at rates of 6.22% and 6.17%, respectively. Since 2012, tailwinds that led to strong growth in other emerging markets and drove commodity prices upwards till 2011 dissipated. Economic growth slowed to 6.03% in 2012 and further to 5.55% in 2013. The 2013 slowdown was also partly due to the macro-stabilizing monetary and exchange rate policy measures taken during June–November 2013 to arrest further depreciation of the Indonesian rupiah and to control the widening of its high current account deficit. The Indonesian economy grew at a slower rate of 5.01% in 2014 and growth came down further to 4.88% in 2015. With increasing investments, stable inflation and expenditure promoting monetary policies, there was an upward trend in 2016 and 2017, at 5.03% and 5.07%



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respectively. Due to the country’s positive economic situation, commodity prices will remain low. With improved government spending in the form of subsidies and social assistance programs, low interest rates, and the country’s improved international trade scenario, commodity prices also showed an increasing trend in 2018. However, inflation remains under the control. The economy witnessed growth of 5.17% in 2018, according to MarketLine. The economy slowed down in 2019, registering a growth rate of 5.02% on the back of the US-China trade war. The growth rate stumbled down to -1.84% in 2020 due to COVID-19. However, a robust recovery is forecast by MarketLine, with a growth rate of 5.51% expected in 2021.



Figure 14: Indonesia – Real GDP and Growth Rate (US$ Trillion/%), 2016–2025f



Source: Country Statistics, MarketLine



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6.4.2. GDP composition by sector The Indonesian economy is largely dependent on its mining, manufacturing, and utilities sectors. The country is among the top producers of liquefied natural gas. Indonesia’s major industries include petroleum and natural gas, textiles and apparel, mining, cement, footwear, plywood, rubber, chemical fertilizers and tourism. In 2020, the industrial sector accounted for 41.07% of GDP, while agriculture accounted for 13.55%. The services sector is the largest, accounting for 45.38% of GDP.



Figure 15: Indonesia – Composition of GDP by Sector, 2020e



Source: Country Statistics, MarketLine



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Agriculture Indonesia is one of the largest producers and consumers of agricultural products in Asia. Indonesia has predominantly been an agricultural country, but since the advent of the New Order, policy focus has shifted to the manufacturing, industrial and services sectors. Indonesia is the largest producer and exporter of palm oil in the world. Other notable crops cultivated by Indonesian farmers are rubber and similar products, palm oil, poultry, beef, forest products, shrimp, cocoa, coffee, medicinal herbs, essential oil, fish and its similar products, and spices. The sector witnessed an average growth rate of 6.67% during 2016–2019. In 2020, agricultural production reduced due to COVID-19 lockdowns and the growth rate fell to -1.55%. MarketLine forecasts a V-shaped recovery, with growth expected to register 8% in 2021.



Figure 16: Indonesia – Agricultural Output (IDR Trillion/%), 2016–2020e



Note: The sectoral breakdown is given in local currency due to the impact of foreign exchange fluctuations on growth figures. Source: Country Statistics, MarketLine



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Industry Indonesia’s mining activities are concentrated on the extraction and production of bauxite, tin, and silver. However, over the past decade, Indonesia has significantly expanded its copper, nickel, gold, and coal output to broaden its mineral export base. Other prominent subsectors are petroleum and natural gas, textiles, automotive, electrical appliances, apparel, footwear, mining, cement, medical instruments and appliances, handicrafts, chemical fertilizers, plywood, rubber, processed food, jewelry, and tourism. Industrial output witnessed an average growth rate of 7.5% during 2016–2019. In 2020, growth fell to -2.4% and is expected to grow at 9.6% in 2021 due to the robust recovery in industrial production.



Figure 17: Indonesia – Industrial Output (IDR Trillion/%), 2016–2021f



Note: The sectoral breakdown is given in local currency due to the impact of foreign exchange fluctuations on growth figures. Source: Country Statistics, MarketLine



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Services Over the last decade, transport and communications, financial services and retail trade, and hotel and restaurants have proven to be lucrative areas of the services sector. Nevertheless, the Indonesian services sector remains less developed compared to other emerging economies in Asia, such as Malaysia and India. Services output witnessed an average growth rate of 8.83% during 2016–2019. Amid the pandemic, due to the closure of businesses worldwide, services sector growth declined to -5.36% in 2020. MarketLine expects a speedy recovery in 2021.



Figure 18: Indonesia – Services Output (IDR Trillion/%), 2016–2021f



Note: The sectoral breakdown is given in local currency due to the impact of foreign exchange fluctuations on growth figures. Source: Country Statistics, MarketLine



MARKETLINE



6.4.3. Fiscal situation Overview Fiscal deficit/surplus situation Indonesia’s general government net borrowing increased to 6.31% of its GDP in 2020 compared to 2.22% in 2019, according to the IMF. The country’s lower tax collection rate is one of the major challenges Indonesia needs to tackle to improve its revenues.



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Current account The current account deficit, which amounted to 1.3% of GDP in 2020, according to data from the IMF, was a marked improvement from the deficit of 2.9% of GDP in 2018. Improving commodity prices of major export items such as rubber, coal and palm oil, as well as better international export prospects, led to the improvement. Amid the pandemic, and huge fiscal expenditure, the deficit is expected to increase to 2.4% in 2021.



6.4.4. Exports and imports According to the IMF, the country’s volume of exports shrunk by -10.6% in 2020, from -6.25% in 2019. Import growth declined to -14.9% amid the pandemic, but is forecast to recover to 23.4% in 2021, once trade restrictions are eased. According to UN Comtrade, Indonesia’s main export partners in 2019 were China (8.34%), the US (5.33%), Japan (4.77%), Singapore (3.85%) and India (3.53%). In 2018, its main import partners were China (12.07%), Singapore (5.68%), Japan (4.76%), Thailand (2.9%) and the US (2.71%).



Figure 19: Indonesia – External Trade (%), 2016–2025f



Source: IMF, MarketLine



MARKETLINE



6.4.5. International investment position Foreign direct and portfolio investments The country received inflows worth US$23.4bn in 2019, according to the UNCTAD. Total FDI inward stock reached US$232.6bn in 2019.



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6.4.6. Credit rating In August 2020, credit rating agency Fitch changed Indonesia’s long term foreign currency issuer default ratings to ‘BBB with a stable outlook’, from ‘BBB-’, mainly due to the government’s policy measures and low government to debt ratio against a high dependence on external financing.



6.4.7.



Monetary



Key monetary indicators



6.4.8. Inflation During 2016–2019, average inflation in Indonesia was 3.39%. The government undertook reform polices to strengthen the country’s domestic industries, including opening them up to various sectors. Despite government spending being directed towards infrastructure and social assistance programs, the government has also followed a tight fiscal policy. Amid the pandemic in 2020, inflation rates fell down to 2.18%. According to Indonesia’s central bank, core inflation rose at a slow pace in 2020. With tepid demand and falling consumer goods prices, the path to recovery for 2021 seems to be sluggish.



Figure 20: Indonesia – Consumer Price Index and CPI-based Inflation, 2016–2025f



Source: Country Statistics, MarketLine



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6.4.9. Interest Rate During October 2018, the Bank of Indonesia hiked its key interest rate up by 25 basis points to 5.75% and then further to 6.00% in November, mainly to avoid capital outflows due to an increase in the US’s interest rates, as well as to contain inflationary pressures. Containing the value of the Indonesian rupiah against the appreciating US dollar is also a core area of focus for the Bank of Indonesia. The rates stayed constant till June 2019, then the same was reduced to 5.75% in July 2019. The next three months witnessed a gradual cut in the interest rate, reaching 5.00% in October 2019. It has remained unchanged since then. These cuts came as an expected move to boost the domestic economy after the IMF cut global growth expectations. As of February 2021, the central bank cut its key interest rate by 25 basis points to 3.5%. This move is consistent with the country’s ongoing slow economic recovery and low inflation outlook. This is the sixth time amid the pandemic that the central bank opted to ease lending rules and cut key interest rates.



6.4.10. Unemployment Indonesia’s unemployment rate declined from 5.56% in 2016 to 5.23% in 2019, which was mainly a consequence of the economic growth the country witnessed during that period. However, the employment potential of the Indonesian working-age population is limited because of rigid labor regulations and high severance pay, which has hurt recruitment. Consequently, the country has high instances of temporary workers. Furthermore, during the COVID-19 pandemic, businesses were shut, which raised the unemployment rate to 7.07%. MarketLine predicts a fall in the unemployment rate from 2021 due to the resumption of business activities.



Figure 21: Indonesia – Unemployment Rate (%), 2016–2025f



Source: Country Statistics, MarketLine



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6.5. Outlook The economy has proved to be vulnerable in the recent past. The country’s growth has become strongly intertwined with the prices of the commodities it has been exporting, which remains a point of vulnerability. While the country’s natural resources sector has attracted massive foreign investment, the government’s continued nationalization and protectionism polices hurt the country’s growth potential. Low tax contributions continue to pressure the economic scenario as well. Nevertheless, the country has firm economic fundamentals, including prudent fiscal policies and solid monetary measures, which boost the domestic consumption sector. There is also increasing industry confidence in Indonesia due to positive international trade prospects. These aspects will propel Indonesia towards strong growth in the medium-term. The government will be looking to boost consumption by cutting interest rates, as it did in 2019. This will help it tackle trade setbacks that could occur due to the outbreak of coronavirus.



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7.



Social Landscape



7.1.



Summary



Indonesia's population has grown steadily since the 1990s. With a population of more than 269.6 million in 2020, according to the MarketLine, Indonesia is one of the most populous countries in the world. The rising urban population has long been a cause for concern for the government ‘s policymakers. Moreover, major cities have witnessed an influx of individuals from rural areas. In order to stall such migration, the government has established schools and higher education centers in rural areas. It has also announced special provisions for investors keen on establishing their operations in rural locations. Tourism is one sector that provides rural inhabitants with substantial employment and self-employment opportunities. The government, with considerable support from international agencies, has accelerated social welfare schemes in natural disaster-prone areas. These schemes include the rehabilitation of disaster-affected people, organizing refugee camps for the displaced, and running healthcare services on isolated islands in the archipelago.



7.2.



Evolution



Indonesia is the fourth most populous country and has the world’s largest Muslim population. The rapidly growing urban population has been a matter of serious concern for the government since the 1990s. However, with the support of present policies, population growth has been controlled in major cities. Government policies have focused on increasing access to public healthcare in rural areas. The Ministry of Health is also working on increasing the number of health staff in the nation's more remote regions.



7.3. 7.3.1.



Structure and policies Demographic composition



Age and gender composition Indonesia has a relatively young population, with a median age of 31.1 years as of 2020. Based on MarketLine data, in 2020, around 93.05% of the population was below 65 years of age, while people over 65 years of age constituted the remaining 6.92%. Moreover, around 67.52% of the population was in the working-age group of 15–64 years, which gives the country a huge demographic advantage.



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Table 10: Indonesia – Mid-year Population by Age (Percentage of Population), 2020e Age Group



Female



Male



0–4



7.86



8.20



5–9



8.48



8.86



10–14



8.62



9.03



15–19



8.24



8.63



20–24



7.76



8.13



25–29



7.46



7.68



30–34



7.60



7.52



35–39



7.84



7.49



40–44



7.42



7.14



45–49



7.01



6.78



50–54



5.49



5.69



55–59



4.76



4.71



60–64



3.99



3.71



65–69



2.69



2.85



70–74



1.71



1.55



75–79



1.59



1.16



80+



1.48



0.87



Source: Country Statistics, MarketLine



7.3.2.



MARKETLINE



Urban/rural composition



According to MarketLine, 56.64% of the total population lived in urban areas in 2020, compared to just 30.58% in 1990. The total population in urban areas is forecast to increase to 59.82% in 2025. The rising urban population has long been a cause for concern for the government ‘s policymakers. Moreover, major cities have witnessed an influx of individuals from rural areas. In order to stall such migration, the government has started establishing schools and higher education centers in rural areas. It also has special provisions for investors keen on establishing their operations in rural locations.



7.3.3.



Religious composition



Muslims constitute 87.2% of the total population, followed by Protestants (7.0%), Roman Catholics (2.9%), Hindus (1.7%), other (0.9%) and unspecified (0.4%), according to the 2010 census.



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Figure 22: Indonesia – Major Religions (%), 2010 Census



Roman Catholic, 2.90%



Hindu, 1.70% Other, 0.90%



Unspecified, 0.40%



Protestant, 7.00%



Muslim, 87.20%



Source: The CIA World Factbook



7.3.4.



MARKETLINE



Education



The national education system in Indonesia aims to elevate the nation’s intellectual status. It has its roots in Indonesian culture based on the 1945 constitution and is based around Law No. 2 of 1989, which aims to equip the masses with skills and increase the standard of living and the dignity of the Indonesian people in order to achieve national development objectives.



7.3.5.



System of education



Education in Indonesia comprises two systems: one is the normal school system and the other is the out-of-school educational system. School education is organized through teaching and learning activities, which are gradual, hierarchical, and continuous, whereas out-of-school education is organized through the formal schools via teaching and training but may or may not be hierarchical and continuous. The education system consists of different types of education, such as general education, which prioritizes awareness of general knowledge and improvement of skills; vocational education, which prepares a student to master a number of employment-specific skills; service-related education, which substantiates education and training related to a specific career; religious education, which focuses on imparting education and training on religion and specific activities; and academic education, which focuses on research and mastery in the sciences.



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In addition, the education system is divided into different levels, such as basic education, secondary education, and higher education, with a focus on institutions that provide vocational and technical training to aspiring young people. Amid the pandemic, the government has transformed education by encouraging online classes and remote learning. After education activities were suspended due to the lockdown, Indonesia simplified its national curriculum, created online learning modules, strengthened the Learning Management System (LMS) platform and provided free internet and special training for students and teachers. Despite these efforts, challenges such as accessibility to the internet and dropouts pose downside risks to online education. It is important to have effective communication in place regarding the new curriculum and advanced training for teachers to help them deal with online classes.



Schools The basic educational system in Indonesia comprises the following levels: •



Six years of primary education (compulsory)



•



Three years of junior schooling (compulsory)



•



Secondary education (available to graduates of primary education)



•



Higher education (an extension of secondary education consisting of academic and professional education).



In Indonesia, basic education includes pre-school education, primary education, and regular secondary education. The goal of basic education is to develop students as ethical individuals and members of society. Over the past 20 years, the basic education system has gained considerable ground in achieving its targets. An education system also exists parallel to this system known as the Islamic education system.



7.3.6.



Higher education



Higher education in Indonesia is an extension of the secondary education system, consisting of academic and professional education. Tertiary education consists of four types of institutions – polytechnics, academics, institutes and universities. Academic education is particularly aimed at mastering science, technology, and research, whereas professional education is inclined towards the individual development of practical skills. Universities, schools of higher learning, and specialized institutes for technology and medicine are all prominent centers of higher learning within the country. The time required to receive a diploma is three years, while graduate programs require four years. After the completion of a graduate program, students have the option to continue their education by joining a master's program for two years and finally a doctorate program for three years. Both public institutions and private institutions provide higher education. Vocational education is also provided, mainly by private colleges and donor nations. However, the same is generally available in urban areas, hence rural areas are involuntarily involved in manual labor and hard work.



7.3.7.



Healthcare



Healthcare services The Ministry of Health and Social Welfare regulates the health sector. Indonesia is divided into several administrative provinces and each province is further divided into districts and sub-districts. The healthcare decentralization policy, established in 1998, mandates the presence of one health center in each sub-district. Health centers are headed by a doctor. Some health centers are responsible for providing ambulatory services using motor vehicles and speed boats and providing quality healthcare to the underserved population residing in remote areas. PESTLE Country Analysis Report: Indonesia © MarketLine. This report is a licensed product and is not to be photocopied



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At the village level, integrated family health posts provide preventative and precautionary healthcare services. Healthcare at the village level is largely managed by communities, which receive assistance from health centers and sub-centers. Moreover, to improve child and maternal healthcare, the government has pledged to introduce midwife services in village health posts. Indonesia’s urban clusters have specialized referral hospitals. In addition, privately owned diagnostic centers and multispecialty clinics are quite common in cities. The National Health Information System and the National Health Insurance scheme are the two main subsidiaries of the Ministry of Health and Social Welfare. The National Health Information System envisions accomplishing the goals set under its Healthy Indonesia plan through the accurate, updated and punctual presentation of health data and information. On the other hand, the National Health Insurance scheme provides free health services to the population, irrespective of their payments to the national insurance fund.



7.4.



Performance



7.4.1.



Healthcare



Overview According to MarketLine, total healthcare expenditure increased from US$32.01bn in 2017 to US$33.14bn in 2018. As a percentage of GDP, it increased from 3.15% in 2017 to 3.18% in 2018.



Figure 23: Indonesia – Healthcare Expenditure (US$ Billion/%), 2009–2018 35.0



3.3 3.2



30.0



3.1 25.0



20.0



2.9



15.0



2.8 2.7



Percentage (%)



US$ Bn



3.0



10.0 2.6 5.0



2.5



0.0



2.4 2009



2010



2011



2012



2013



2014



2015



2016



2017



2018



Year Total Healthcare Expenditure



Total Healthcare Expenditure as a % of GDP



Source: Country Statistics, MarketLine



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7.4.2.



Education



Literacy rate In 2020, the total literacy rate in Indonesia was 96.38%, according to MarketLine. Government spending on education has increased at a steady and commendable rate. In fact, expenditure on education has steadily increased since 2010, according to MarketLine. In 2019, total expenditure on education in Indonesia stood at US$66.71bn.



Figure 24: Indonesia – Expenditure on Education (US$ Billion/%), 2010–2019



Source: Country Statistics, MarketLine



7.5.



MARKETLINE



Outlook



Amid the pandemic, economic growth in Indonesia slipped to -1.84% in 2020, from 5.02% real GDP growth in 2019, according to MarketLine. However, unemployment and poverty levels are expected to rise in 2021 due to the displacement of jobs and livelihoods amid pandemic related lockdowns. Due to increases in household spending and business investments, growth is expected to be positive 2021. However, the closure of businesses resulted in a hike in the unemployment rate in August 2020. Poverty levels also shot up, with around 1.63 million Indonesians falling into poverty in March 2020. The poverty rate increased to 9.78% in September 2020, compared to September 2019.



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8.



Technological Landscape



8.1.



Summary



Indonesia has significantly changed its policy focus from joint ventures and the transfer of technology to innovation. Its reformed policies now aim to develop core technologies. This reflects Indonesia’s plans to achieve self-dependence in the sphere of technology. The country intends to increase its research and development (R&D) expenditure from 0.24%, which is below 1% of GDP in 2019. Furthermore, Indonesia wants to increase the penetration of technology to spur economic growth and limit its dependence on technology imports.



8.2. Evolution Indonesia’s earlier policies were oriented towards technological transfers from foreign investors through joint ventures rather than the core development of technology. With the ever-changing international scenario, the Indonesian government has revised its policies, and currently focuses on developing indigenous technology. The government has overhauled its intellectual property rights (IPR) and now fulfills the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). The Indonesian government aims to increase funding for R&D in medicine, agriculture and technology as the government seeks to achieve international standards in agriculture, telecommunications and medical research. Due to the easing of regulations and research provisions, Indonesia has become one of the pioneers in stem cell research. However, the country lags way behind in terms of technology compared to its neighbors, Singapore and Malaysia, mainly due to the paucity of funds for R&D. Because of the lack of adequate and effective IP protection and enforcement, the ‘2020 Special 301 Report’ by the Office of the United States Trade Representative (USTR) placed Indonesia second on its Priority Watch List, right after China.



8.3. Structure and policies 8.3.1.



Intellectual property



Indonesia is a member of the World Intellectual Property Organization (WIPO) and is a party to certain sections of the Convention for the Protection of Intellectual Property. The country is trying to fulfill its obligations under the TRIPS agreement, as well as improving its IPR system. It is fostering close and productive cooperation between stakeholders and institutions, including law enforcement agencies, and is working on human capacity building. In order to fulfill TRIPS, the Indonesian government has introduced suitable amendments to its IPR legislation.



8.3.2. Copyrights In 1987, Indonesia enacted amendments to its copyright laws, conforming them to international standards, and in August 1989, a bilateral copyright agreement between the US and Indonesia went into effect, extending protection to copyrighted works. The government has demonstrated that it wants to stall copyright piracy and that it is willing to



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work with copyright holders to this end. The enforcement of copyright law in terms of pirated audio and video cassettes and textbooks is reasonably effective; however, measures against software piracy are still in their infancy.



8.3.3. Research and development The Indonesian government is a proponent of technological, medical, and agricultural innovations. In particular, the government has significantly propagated technical research in order to bolster the country’s domestic telecom and IT market. To align more closely with the global market, Indonesia has revised its policies on technology transfers and the entry of foreign investment. The government’s ultimate objective is to achieve global significance in technological and scientific innovations in order to lessen its dependence on foreign technology . Indonesia has a comparative advantage among many of the global nations in the area of stem cell research and therapy due to its lenient policies. In 2014, Indonesia approved an allogeneic stem cell trial, making it the first nation to do so from the Southeast Asian region. More than 10 Indonesian university hospitals are authorized to perform stem cell research, along with stem cell treatments, and the number is expected to increase due to supportive government policies. Health and social programs are very important to the country, so technology would be more than welcome to help foster growth by helping to provide easier and simpler access to medical and healthcare products.



8.4. Performance Mobile and internet As of 2020, mobile penetration stood at 122.81 per 100 people, according to MarketLine. The country’s mobile penetration has grown rapidly; its mobile penetration rate was only 87.37 per 100 people in 2010. According to MarketLine, internet users as a percentage of the total population stood at 44.85% in 2020, up from 25.45% in 2016.



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Figure 25: Indonesia – Internet Users (Millions/%), 2016–2020e



Source: Country Statistics, MarketLine



8.4.1.



MARKETLINE



Research and development



R&D expenditure Indonesia spent less than half a percentage point of its GDP on R&D (0.23%) in 2019, which is expected to impede innovation. Low R&D expenditure indicates that the country has to do a lot more in terms of fostering innovation. Though there has been an increase in the number of patents filed by Indonesia in the past years, 2020 witnessed 17 patents due to poor R&D funding hindering the growth of the research and development sector.



8.5. Outlook In order to bolster its economic growth, the Indonesian government has to significantly increase its R&D expenditure. Areas that require focus are agriculture, medicine, minerals, and technology. The government also needs to push for the automation of its meteorological research departments to get accurate forecasts in natural-disaster prone areas. Despite some advances in e-education, constraints remain due to poor infrastructure and a lack of public awareness. The usage of the technology in various areas such as banking, healthcare and others would be something that the country needs to pay attention to so that it can bolster the technological sector.



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9.



Legal Landscape



9.1.



Summary



The Indonesian legal system is complex and is a combination of three distinct legal systems. The Indonesian judicial system consists of several types of courts under the Supreme Court. Most disputes appear before the courts of general jurisdiction – in the first instance, the state court. The Supreme Court, the highest court in Indonesia, performs its duties independently. Its primary function is to review the decisions made by state courts and high courts. In the World Bank’s ‘2020 Doing Business Report’, the country was placed 73rd out of 190 countries. The country was ranked 140th in terms of the ‘starting a business’ parameter and 110th in terms of ‘dealing with construction permits.’ This reflects the regulatory hassles that entrepreneurs face. The unpredictable enforcement and reversal of rules and regulations has caused considerable uncertainty for foreign investors. This unchanged scenario could hurt Indonesia’s capability to attract investments in the future. The Omnibus law, which was introduced in November 2020 to aid investment and promote employment, hurts the sentiments of labor unions across the country. The major bone of contention was that labor had no meaningful role in the drafting of the Omnibus Law.



9.2. Evolution Before the arrival of Dutch traders in the late 16th and early 17th centuries, Indonesia was an amalgamation of independent kingdoms that followed a system of Adat (customary law). Colonization over the next 350 years – until the end of World War II – left a legacy of Dutch colonial law, and a number of such laws are still applied. However, after Indonesia declared its formal independence in August 1945, the authorities began formulating a new national legislative system, which was an amalgamation of Adat law and Dutch law. From 1951, Indonesia witnessed the unification of its judicial administrative system. Government courts with single judges have jurisdiction in the first instance of civil and criminal cases, but in December 1989, the Islamic judicature law also gave wider powers to Sharia courts. The new law provided Muslim courts with jurisdiction over civil matters, particularly regarding issues related to marriage and divorce. However, the judicial system allows both Muslims and non-Muslims to appear before a secular court. The Halal law was another major law that was enacted by the Indonesian government in 2014, which conveyed that all products that are imported, distributed and traded in the country shall have to be “halal certified”. Prior to October 17, 2019, this was allowed on a voluntary basis and was not a compulsion for all products. However, from this date onwards, all such products will be required to have a Halal Certification Requirement. This will be certified by the Halal Product Assurance Implementing Board (Badan Penyelenggara Jaminan Produk Halal or BPJPH).



9.3. Structure and policies 9.3.1.



Judicial system



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Structure of the system The judicial system consists of several types of courts under the Supreme Court. Most disputes appear before the courts of general jurisdiction, with the court of first instance being the state court. Indonesia has about 250 state courts, each with its own territorial jurisdiction. Appeals from the state court are heard in the high court, which are around 20 in number, each with its own territorial jurisdiction. Appeals from the high court, and in some cases the state court, can be heard by the Supreme Court located in Jakarta. The Supreme Court also hears cassation appeals, which are final appeals from the lower courts.



Supreme Court The Supreme Court is the highest trial authority in the country and performs its right of trial independently. Its primary function is to review decisions and summons made by state courts and high courts. The Supreme Court also acts as a supervisory body over the trial practices of state courts and high courts at all levels. For instance, if errors are found in the judgments and rulings made by state and high courts, the Supreme Court has the power to hear the cases or order the local courts to re-examine them.



Grassroots, intermediate and higher courts There are around 250 state courts in Indonesia, each with its own jurisdiction. State courts are entitled to appeal to the high court. Appeals from both high courts and district courts are made to the Supreme Court, and in some instances, appeals made by the state court can also be heard by the Supreme Court. The state courts’ primary responsibilities are to examine all criminal, civil, and legal offences and handle them according to the law. In addition to handling lawsuits, the state and high courts may also set up tribunals to hear general and civil transgressions.



Special courts The Indonesian government has established other special courts as the first instance of judiciary of the general courts, including the human rights court, the children's court, the corruption court, the commercial court, the industrial relations court, and the marine fishery court. Furthermore, certain jurisdictions of the state courts have been shifted to these courts and some procedural laws have been changed or overhauled.



Commercial courts The commercial court has the jurisdiction in the first instance for bankruptcy cases and intellectual property rightsrelated civil cases. Appeals from the commercial court are directly heard in the Supreme Court.



Corruption courts The corruption courts hear cases regarding bureaucratic and administrative corruption. As commercial courts, corruption courts can directly approach the Supreme Court for clarification and further hearings. In some cases, they also have the right to give their own summons without the consent of the Supreme Court.



Industrial relations court The industrial relations courts are typically responsible for resolving industrial disputes within the country. In certain situations, these courts are also liable to settle disputes between labor and management. These courts consider issues such as granting permission for new industrial operations, canceling licenses of industries in cases of violations of prescribed rules and regulations initiated by the Indonesian government.



Human rights court The constitution has established special courts to monitor human rights violations. The court is constitutionally bestowed with the right to prosecute any institution on such charges. The human rights court has introduced specific



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laws for particular groups of people, such as women, children, and the disabled, as well as certain laws that allow the rehabilitation of criminals.



9.3.2.



Tax regulations



Corporate tax Resident companies are taxed on their worldwide income and non-resident companies are taxed on income earned in Indonesia. The standard corporate tax rate is 25%, as of 2019. However, Widodo plans to reduce the corporate tax rates to 22% for 2020 and 2021. The corporate taxes will be further reduced to 20% in 2022.



Individual income tax In Indonesia, individual income taxes are levied at a national level. The law holds employers accountable for calculating, deducting, and remitting tax on employees' salaries and other remuneration in the form of allowances. Non-salaried taxpayers are liable to assess their own taxable income. Personal income tax rates are progressive between 5% and 30%.



Withholding tax Dividends paid to a resident are subject to a 15% withholding tax; however, the rate is 20% for foreign recipients, unless reduced under a tax treaty. Withholding taxes on royalties and interest payments are levied at 15% for residents and 20% for foreign residents, unless reduced under a tax treaty.



VAT and customs duty on exports Indonesia operates a VAT system that taxes the supply of goods and the provision of services at a standard rate of 10%. Certain goods and services are exempt. Certain goods considered as “luxury” are taxed under a range of 10– 125% under the Luxury Goods Sales Tax (LGST).



9.4. Performance 9.4.1.



Effectiveness of the legal system



The unpredictable enforcement and withdrawal of rules and regulations has historically caused considerable uncertainty for foreign investors and this could hurt Indonesia’s capability to attract investments in the future. This is reflected in Indonesia’s poor ranking in terms of global indices measuring business regulations and trade and investment freedom. Indonesia is ranked 54th out of 180 countries in the 2020 Heritage Foundation and the Wall Street Journal’s Index of Economic Freedom. This placed the country below the world average in terms of parameters such as property rights, judicial effectiveness, labor freedom, business freedom, and investment freedom. In the World Bank’s ‘2020 Doing Business Report’, the country was ranked 140th out of 190 countries in terms of starting a business. In terms of paying taxes, the country ranked 81st. In terms of dealing with construction permits, the country ranked 110th and for registering property it ranked 106th. These indicators reflect the regulatory hassles that entrepreneurs have to face when starting a business in Indonesia. Overall, the country placed 73rd, which indicates excessive red tape that is driving firms elsewhere.



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9.5. Outlook The country’s outlook is characterized by unpredictable enforcement and policy uncertainty. The Indonesian government has opened up many of its sectors to foreign investments through the 2014 and 2016 revisions of its Negative Investment List. In the 2016 revision, the government removed 35 sectors, which are now fully open to investments from abroad. However, investment in many sectors still requires prior approval. The government has to do a lot more in terms of cutting red tape and easing tax payments and improving the availability of electricity to attract foreign investors. In 2019, the government decided to replace a negative investment list with a positive investment list to be published in 2020. The Omnibus law was also implemented in November 2020 to standardize and harmonize the laws and regulations of various sectors. These ongoing reforms and policy changes are expected to improve Indonesia’s business environment in the medium and long run.



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10. Environmental Landscape 10.1. Summary Indonesia has been able to recover from past economic crises through large-scale industrialization, but the drive to record impressive economic growth rates has resulted in the degradation of its environment. The emission of toxic elements into both the water and air by industries and households has been on the rise. In addition, persistent land degradation, soil erosion and diminishing biodiversity have contributed significantly to the ever-increasing environmental pollution. The Indonesian government has set ambitious targets to control environmental deterioration, improve ecological conditions, and significantly reduce total industrial emissions and energy consumption. The Ministry of Environment has issued laws that prohibit the poaching of rare aquatic and mammalian species and penalize people who violate the laws. However, its effective implementation is often diluted by the corrupt regional governmental bodies and business lobbies.



10.2. Evolution The Asian financial crises of 1997 and 1998 worsened Indonesia's environmental problems. In an effort to encourage local enterprises, Indonesia put aside the regulatory framework for the protection of its environment; consequently, local firms pursued cheaper but more environmentally damaging production and harvesting methods. There is a lack of clear authority among Indonesia's central, regional, and local governments, which has resulted in weak regulatory institutions. Extensive and unregulated logging has increased the country’s problems, as the resultant deforestation has been closely linked with floods and landslides. As of March 2021, deforestation in Indonesia hit an all-time low due to the policies implemented by the government. According to the Ministry of Forestry in Indonesia, the country managed to maintain its total forest cover at 50.9% of its total land area, at 95.6 million hectares in 2020.



10.3. Structure and policies 10.3.1. Environmental regulations Overview In Indonesia, several well-resourced agencies are responsible for developing and implementing a range of environmental policy instruments. Five ministries and agencies have mandates for environmental programs: these are the Ministry of Environment, which also houses the Environmental Impact Management Agency; the Ministry of Marine Affairs and Fisheries; the Ministry of Forestry; the Department of Water Resource Development; and the National Development Planning Agency. Furthermore, a large number of donors and micro-financing institutions support the ministries in carrying out Natural Resource Management Programs.



Policy Distinct environmental policies have been framed by different ministries in Indonesia. The Ministry of Environment promotes incentives for both large and small businesses by providing soft loans to companies looking to invest in



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cleaner technologies or to companies developing more environmentally sustainable practices. In addition, the ministry provides fiscal incentives such as tax holidays for companies importing green technology. The responsibility for the implementation of forestry laws and regulations at the central level lies with the Ministry of Forestry. The Department of Forestry is responsible for implementing policies for the control of illegal logging, forest rehabilitation, and sustainability. The Ministry of Marine Affairs and Fisheries governs policies for the control of fishing and the protection of rare aquatic species within Indonesian maritime zones. It also monitors sea pollution, which is growing at an alarming rate. The Department for Water Resource Development formulates policies geared towards the efficient use of limited water resources through meandering canal systems. The department also focuses on the availability of safe and potable drinking water in the country’s rural and semi-urban areas. The Peatland Restoration Agency, which coordinates the rebuilding and management of peatlands, partnered with civil society organizations to rewet 200,000 hectares of peat in 2017 and a further 460,000 hectares of peatland saw rebuilding efforts in 2018 – a total area the size of 800,000 soccer fields. To mitigate the impacts of climate change, the government plans to expand programs following a recent wave of natural disasters. The Environment and Forestry Ministry launched a mangrove planting campaign to boost the ecosystem and landscape’s resilience, which will target 600,000 hectares across the nation, a jump from 15,000 in 2020. The government plans to reforest watershed areas in the Bornean province of South Kalimantan and compel coal-mining companies to rehabilitate their concessions there in response to recent deadly floods as of January 9, 2021. The Indonesia government aims to achieve 23% of its energy from renewable sources by 2025 and it has finalized new rules to regulate the usage of renewable energy. The new rules will include simpler pricing, including a feed-in tariff system for certain plants. Furthermore, the government will focus on boosting solar due to the big potential of renewable energy sources in places such as North Kalimantan province.



10.4. Performance 10.4.1. Environmental impact Indonesia is the world's largest producer of palm oil. The drive to further increase palm oil cultivation is taking a major toll on the environment, as it is leading to forest clearing, the pollution of rivers, and the introduction of pests. Large tracts of Sumatra's forest were destroyed to make way for palm plantations, with companies clearing the trees and burning the stumps that remain. Palm oil cultivation is leading to the clearing of forests and the burning of peat lands, increasing greenhouse gas emissions. Indonesia’s CO2 emissions increased to 632.1 million metric tons in 2019, from 428 million metric tons in 2010. Indonesia was ranked 116th out of 180 countries in the ‘2020 Environmental Performance Index’ published by Yale University, while its neighbors Malaysia (68th) and Singapore (39th) were ranked much better.



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Figure 26: Indonesia – Carbon Dioxide Emissions (Billion Metric Tons/%), 2010–2019



Source: Country Statistics, MarketLine



MARKETLINE



10.5. Outlook In recent years, the Indonesian government has increased its focus on environmental protection, which is evident in the strengthening of environmental legislation. Lately, there have been moratoriums on logging in fresh forests, as well as on the issue of new licenses for palm oil farms. However, the forest department and various regional administrations are allegedly mired in corruption. Specifically, it been alleged that staff have been bribed by palm oil tycoons. The country’s future energy mix is tilted towards fossil fuels, which points toward further environmental imbalance in the future. Without strong environmental policies and the strenuous implementation of them, the country’s environmental landscape is bound to degrade further in the near future.



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11. Appendix 11.1. Ask the analyst MarketLine’s Country Analysis Practice consists of a team of economists, analysts, and researchers, all with expertise in their given fields. For any questions or comments about this report you can contact the author directly at [email protected]



11.2. Disclaimer All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher, MarketLine. The facts of this report are believed to be correct at the time of publication but cannot be guaranteed. Please note that the findings, conclusions and recommendations that MarketLine delivers will be based on information gathered in good faith from both primary and secondary sources, whose accuracy we are not always in a position to guarantee. As such MarketLine can accept no liability whatever for actions taken based on any information that may subsequently prove to be incorrect.



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