Economic analysis
Indonesia

Indonesia

Population 266.9 million
GDP per capita 4,197 US$
A4
Country risk assessment
A4
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Synthesis

major macro economic indicators

  2018 2019 2020 (e) 2021 (f)
GDP growth (%) 5.2 5.0 -1.7 5.1
Inflation (yearly average, %) 3.2 2.8 2.5 1.6
Budget balance (% GDP) -1.8 -2.2 -4.5 -3.6
Current account balance (% GDP) -3.0 -2.7 -1.3 -2.4
Public debt (% GDP) 30.1 30.5 38.5 41.8

(e): Estimate (f): Forecast

STRENGTHS

  • Diverse natural resources (agriculture, energy, mining)
  • Low labour costs and demographic dividend
  • Growing tourism industry (10.3% of GDP)
  • Huge internal market
  • Sovereign bonds rated “Investment Grade” by the three main rating agencies
  • Exchange rate flexibility

WEAKNESSES

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

Risk assessment

A mild recovery as the pandemic persists

Growth is expected to recover in 2021, albeit weakly, as the spread of the COVID-19 outbreak lingers and has yet to be contained at the time of writing. This would continue to exacerbate downside pressures on the key growth drivers. Domestic consumption (55% of GDP) has been hit by the pandemic: first, through containment measures that urged the population to stay at home (particularly in cities), and second, with a longer-term impact through a rise in unemployment, as according to the Planning Minister, the unemployment rate could reach 7.7%-9.1% in 2021. As such, the latter would dampen any strong rebound in domestic consumption. Inflation would continue to remain under the Bank Indonesia (BI) 2%-4% target range due to subdued domestic consumption. This would compel BI to remain on an easing path in order to support growth. In 2020, at the time of writing, BI has slashed the policy interest rate four times by 25 bps (100 bps in total) to 4%. The tourism sector, another key driver (10.3% of GDP), should remain sluggish through 2021. While the government is considering the reopening of international borders, despite struggling with a high number of COVID-19 cases, a time frame for a decision has not been setup so far. Even if it does, some requirements should be expected upon arrival (testing, quarantine measures), which might discourage some visitors. Investments (32% of GDP), on the other hand, should bounce back in 2021 and drive the economic recovery, thanks to structural changes made in 2020. Indeed, the government passed the Omnibus law – a part of Jokowi’s cornerstone policies in his second mandate - that includes deregulation, changes to foreign investment rules and labour reforms. Exports of manufactured goods and commodities (23.4% of GDP) are expected to recover, supported by the economic recovery in China, one of the major trading partners.

 

Budget deficit set to narrow, partly financed by the central bank

The budget deficit could narrow slightly, as revenues would gradually recover after being hit by containment measures in 2020, although the pace of the recovery would be slower than government spending. Furthermore, the low existing revenue base would add further challenges in financing the expenditures. The parliament agreed to suspend the budget ceiling of 3% of GDP until 2023 and to expand the 2021 budget deficit to 5.7% of GDP (compared to 6.3% of GDP in 2020) in order to support the recovery. In response to this, as “burden-sharing” (an agreement with the central bank that was introduced in 2020, the government might continue to seek BI’s support in financing the budget deficit through direct bond purchases until 2022, if economic growth does not reach the target of 4.5-5.5% in 2021. Moreover, a bill proposal in September 2020 that aims to reform the central bank by adding ministers to its board, with the right to vote during policy meetings, might raise – if passed next year - further concerns among investors regarding BI’s independence.

The current account is set to remain in deficit, which will widen in 2021, as imports should increase from 2020 when containment measures disrupted supply chains and forced households to delay some purchases. Exports, on the other hand, although supported by the recovery in China, should increase at a slower rate, as oil prices should remain subdued and demand from other key partners, such as the U.S. (11.1% total exports) and the EU (10%), should remain sluggish considering their lockdown measures. FDI inflows might gradually recover thanks to the Omnibus law, which would adequately finance the current account deficit. Foreign exchange reserves should remain adequate, standing at 11.0 months of imports as of September 2020.

 

Pushing the reforms agenda through a large coalition

President Jokowi was re-elected for a second five-year mandate in April 2019. His legislative coalition – the Indonesian Democratic Party of Struggle (PDIP) - received strong support and controls nearly 70% of the lower house (Dewan Perwakilan Rakyat), which could help to push further his reform agenda that includes two major projects: the relocation of the capital to the province of East Kalimantan and the Omnibus bill. The latter was passed and signed in October 2020 and could reform labour, tax and other major laws in order to cut red tape and spur investments into a post-pandemic economy. It received much disapproval from workers and labour unions, who protested and claimed that these would reduce workers’ rights at a time when the unemployment rate is increasing. On the external front, Indonesia’s stance towards China on the South China Sea should continue to harden, as Beijing reiterated claims of historic rights on areas that overlap Indonesia’s exclusive economic zone.

 

Last updated: February 2021

Payment

Cash, cheques, and bank transfers are each popular means of payment in Indonesia. SWIFT bank transfers are becoming more popular as an instrument of payment for both international and domestic transactions due to the well-developed banking network in Indonesia.

Standby Letters of Credit constitute a reliable means of payment because a bank guarantees the debtor’s quality and repayment abilities. Furthermore, the Confirmed Documentary Letters of Credit are also considered reliable, as a certain amount of money is made available to a beneficiary through a bank. 

Debt collection

Amicable phase

The first step to recovering a debt is to negotiate the issue with the debtor to attempt to resolve the issue amicably. There is an inherent Indonesian culture and ideology (Pancasila) where amicable settlement is encouraged. Creditors usually issue a summon/warning letter to the debtor, which outlines a statement concerning the debtor’s breach of commitment. The letter also calls for a discussion to determine whether the dispute should be settled through the court system. If the amicable phrase does not result in a settlement, the parties may trigger legal action.

 

Legal proceedings

The Indonesian judicial system comprises several types of courts under the oversight of the Supreme Court. Most disputes appear before the courts of general jurisdiction, with the Court of First Instance being the State Court. Appeals from these courts are heard before the High Court (a district court of appeal). Appeal from the High Court, and in some instances from the State Court, may be made to the Supreme Court.

 

Ordinary proceedings

Ordinary legal action may commence when the parties have been unable to reach a compromise during the amicable phase. The creditor may file a claim with the District Court, who is subsequently responsible for serving the debtor with a Writ of Summons. If the debtor fails to appear at the hearing to lodge a statement of defence, the court has discretion to organize a second hearing or to release a default judgment (Verstekvonnis).

Prior to considering the debtor’s defence, as previously mentioned, the court must first verify whether the parties have tried to reach an agreement or amicable settlement through mediation). If the parties have undergone the mediation process, the panel of judges will continue the hearings and the parties’ evidence will be examined. The judge will render a decision and may award remedies in the form of compensatory or punitive damages.

District Court will usually take from six months to a year before rendering a decision in the first instance. The proceedings may take longer when a case involves a foreign party. 

Enforcement of a legal decision

When all appeal venues have been exhausted, a domestic judgment becomes final and enforceable. If the debtor does not comply with the judge decision, the creditor may request the District Court to commend execution by way of attachment and sale of the debtor’s assets through public action.

Indonesia is not part to any treaty concerning reciprocal enforcement of judgments, making it highly difficult to enforce foreign judgments in Indonesia, or to enforce Indonesian court decisions abroad. Because foreign judgements cannot be enforced by Indonesian courts within the territory of Indonesia, foreign cases must therefore be re-litigated in the competent Indonesian courts. In such a case, the foreign court judgment may serve as evidence, but this is subject to certain exceptions as regulated by other Indonesian regulations.

 

Insolvency proceedings

There are two main procedures for companies who are experiencing financial difficulties:

 

Suspension of payments proceedings

This procedure is aimed at companies that are facing temporary liquidity problems and are unable to pay their debts, but may be able to do so at some point in the future. It provides debtors with the temporary relief to reorganize and continue their business, and to ultimately satisfy their creditors’ claims. The company continues its business activities under the management of its directors, accompanied by a court-appointed administrator under the supervision of a judge. The company must submit a composition plan for the creditors’ approval and for ratification by the court. The rejection of the plan by the creditors or the court will result in the debtor’s liquidation.

 

Liquidation

The objective of liquidation is to impose a general attachment over the assets of bankrupt debtors for the purpose of satisfying the claims of their creditors. It can be initiated by either the debtor or its creditors before the Commercial Court. Following the submission of the petition, the court will summon the debtor and its creditors to attend a court hearing. Once bankruptcy has been declared, the directors of the debtor company lose the power to manage the company, which is transferred to the court-appointed receiver who then manage the bankruptcy estate and the settlement of the debts. The debtor’s assets will be sold by way of public auction by the appointed receiver.

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