Indonesia: Risk Assessment
Country Risk Rating
Business Climate Rating
- Diverse natural resources (agriculture, energy, mining)
- Highly competitive thanks to low labor costs
- Dynamic tourism industry
- Huge internal market
- Strong banking sector
- Sovereign bonds rated “Investment Grade” by the three main rating agencies
- Low investment rate
- Exports of commodities increasingly dependent on Chinese demand
- Infrastructure shortcomings
- Persistent corruption and lack of transparency
- Very extensive archipelago with numerous islands and diverse ethnic groups and religions
- High unemployment and poverty rates sharpening inter-ethnic tensions
Growth Buoyed by Internal Demand
Growth has so far remained relatively dynamic in 2018, driven by internal and external demand. Private consumption (57% of GDP in 2016) benefits from a young and growing population, with a high urbanization rate and increasing per capita GDP. This has enabled the emergence of a burgeoning middle class. The moderation of inflation, now in the lower tranche of the central bank target of 4±1%, should sustain this private demand. However, private investment growth will be slowed by Bank Indonesia’s tightening cycle, aiming at anchoring the Indonesian rupiah. Tensions stemming from the US-China trade spat are also set to further dampen investor sentiment, as China is Indonesia’s largest trade partner. Two factors will help to cushion this blow: the infrastructure development programme launched by President Joko Widowo's (225 priority infrastructure projects), as well as reforms to simplify administrative procedures ahead of general elections in 2019. These reforms have already enabled Indonesia to jump 19 places in the World Bank’s Ease of Doing Business Index in 2018, to 72nd place. The three major rating agencies have also upgraded the country to “investment grade” in 2017. However, there is still a long way to go and investment will remain constrained by a sluggish mining sector, which is yet to fully recover from the ban on exporting unrefined ores (in place since 2014), which was lifted in January 2017. Finally, exports comprise 19% of GDP and include predominantly commodities (oil and gas, palm oil, copra, lignite, and copper), as well as simple manufactures (electrical components, automotive, paper, clothing, and jewelry). These are expected to slow going forward, leading to a wider trade deficit.
Budget Balance Under Control, but Pressure Builds on the Current Account
Constrained by a constitutional limit of 3% for the annual deficit, the Indonesian government has embarked on tax reforms aimed at controlling expenditure and increasing revenues. Subsidies (particularly on energy) have been cut so as to redirect public spending to infrastructure investments. On the income side, the increase associated with the repatriation of funds following the tax amnesty introduced in 2016 (+3.6% of income between 2015 and 2016) is unlikely to enable the government to achieve its aims. This shortage of income could lead to spending cuts. In this context of a controlled public deficit, the public debt is expected to remain low with interest rates falling after the three main rating agencies raised Indonesia's credit rating. Regarding the current account, imbalances will worsen mainly because of the increase in the price of energy imports, with oil making up 20% of total imports in 2017 The balance of trade will also be under pressure from imports growth linked with the government’s investment programme. This resulting current account deficit is largely financed by FDI flows (1.7% of GDP) and portfolio investments (2.0% of GDP), allowing the Indonesian central bank (Bank Indonesia, BI) to accumulate reserves. The rupiah remains dependent on the influx of short-term capital, with 39.5% of rupiah-denominated sovereign bonds held abroad. Pressures on the foreign exchange front led BI to embark on a tightening cycle.
Popular Joko Widowo Put to the Test by Religious and Ethnic Tensions
Joko “Jokowi” Widowo enjoys great popularity thanks to the economic progress made since the start of his term in office in 2014. Polls present him ahead for the presidential elections set for April 2019, but he is facing competition: Prabowo Subianto (Gerindra Party), supported by ultra-conservative Muslims, was previously a contender in 2014 and is running again. The municipal elections in Jakarta in April 2017 highlighted the country's deepening religious and ethnic tensions. Basuka Tjahja Purnama (known as Ahok), the candidate supported by Jokowi and from the Chinese Christian population, was accused of blasphemy by the ultra-conservative Muslim population, strongly discrediting him in favor of his rival Anis Basedwan, supported by Mr. Subianto, who ultimately won. The June 2018 local elections were perceived as a new test for the president in regions accounting for 43% of the total population. The programmes reflected the oppositions and stances of presidential candidates. However, the results of the elections did not provide any strong indications as to the results of the 2019 elections. Indonesia's political landscape is dominated by a hardening anti-terror policy aimed at curtailing the spread of religious fundamentalism in the country.