Indonesia: Risk Assessment

Country Rating¹

Rating: B

Business Climate Rating¹

Rating: C

Risk Assessment²

Dynamism unabated in the crisis
Indonesia proved very resilient to the crisis thanks to strong household consumption and expansionary economic policies. In 2010, economic activity returned to pre-crisis levels thanks to a rebound in both investment (fuelled by a credit recovery, exports upsurge to Asia, and an influx of FDI) and household consumption (underpinned by improvement in the labour market and by wage increases). Conversely, agriculture recorded its poorest performance in three years due to adverse weather conditions.
Despite the tightening of monetary policy, economic activity will continue to trend up this year, driven by domestic demand. In the first quarter, the economy grew 6.5%. Private consumption will remain the main growth engine and will underpin retail sales. Investment will stay very strong (especially in the construction and infrastructure sector). Exports will benefit from the recovery of Asian economies and the steadiness of raw material prices at satisfactory levels. Export industries (especially rubber) have nonetheless been affected by the repercussions of the earthquake in Japan, second largest market for Indonesian sales abroad. However, the initial figures reported for 2011 augur well for very strong business activity in the automotive industry and low value-added sectors. Inflation, meanwhile, will likely remain at high levels, spurred by tensions in the energy market and strong domestic demand.
In this context, the Coface payment monitoring records will likely remain stable in 2011. But weaknesses persist in terms of corporate transparency. The accounts are rarely available and when they are their reliability is questionable. Moreover, problems with corruption persist, and the legal system remains slow and costly.

Solid financial position
Despite the economic stimulus plan, sovereign risk has continued to improve as reflected by the decline in the ratio of public sector debt to GDP and in the proportion denominated in foreign currencies. Furthermore, foreign debt ratios are expected to remain under control even if the current account surplus were to decline in 2011 as a result of the very rapid growth of imports in a context of a recovery of domestic demand.
After extensive capital flight in the 2008 fourth quarter, portfolio investment rebounded significantly in 2009/10. Since these volatile capital inflows involve some risks (rupiah appreciation undermining export competitiveness, rapid expansion of the money supply), the authorities instituted capital controls (minimum holding period for Central Bank certificates) in June 2010. These measures will, however, have only a marginal impact on the destabilizing financial inflows. Foreign exchange reserves will nonetheless remain at satisfactory levels in 2011, which will limit Indonesia's vulnerability to sudden flight of volatile capital.
The crisis notwithstanding, the country's banking system has remained solid thanks to a reduction in the proportion of non-performing loans, the protection provided by the deposit insurance system, good capitalisation and profitability ratios.

Persistent shortcomings in the business environment
The legislative elections in April 2009 followed by the presidential election in July resulted in the strengthening of the Democratic Party of President Yudhoyono who won re-election by a very wide majority. But lacking an absolute parliamentary majority, a coalition government was nonetheless formed. Dissensions within the coalition are expected to slowdown the implementation of structural reforms, the fight against corruption, and will prevent the authorities from taking steps to remedy the major shortcoming in the business environment.

Strengths

• Banking sector strengthened
• Diversity of natural resources (agriculture, energy, mining)
• High competitiveness underpinned by low labor costs
• Entrenched political stability
• Dynamic tourism

Weaknesses

• Low investment rate
• Limited bank intermediation
• Infrastructure deficiencies
• Persistent corruption and lack of transparency
• Inter-ethnic tensions stoked by high unemployment and poverty