Republic of Indonesia Business Guide
Introduction
Indonesia, officially the Republic of Indonesia (Indonesian: Republik Indonesia), is a nation in Southeast Asia. Comprising 17,500 islands, it is the world's largest archipelagic state. With a population of over 200 million, it is the world's fourth most populous country and the most populous Muslim-majority nation. Indonesia is a republic, with an elected parliament and president. The nation's capital city is Jakarta. The country shares land borders with Papua New Guinea, East Timor, and Malaysia. Other neighboring countries include Singapore, the Philippines, Australia, and the Indian territory of the Andaman and Nicobar Islands.
Economy
Indonesia, a vast polyglot nation, has struggled to overcome the Asian financial crisis, and still grapples with persistent poverty and unemployment, inadequate infrastructure, endemic corruption, a fragile banking sector, a poor investment climate, and unequal resource distribution among regions. The country continues the slow work of rebuilding from the devastating December 2004 tsunami and from an earthquake in central Java in May 2006 that caused over $3 billion in damage and losses. Declining oil production and lack of new exploration investment turned Indonesia into a net oil importer in 2004. The cost of subsidizing domestic fuel placed increasing strain on the budget in 2005, and combined with indecisive monetary policy, contributed to a run on the currency in August, prompting the government to enact a 126% average fuel price hike in October. The resulting inflation and interest rate hikes dampened growth through mid-2006, while large increases in rice prices pushed millions more people under the national poverty line. Economic reformers introduced three policy packages in 2006 to improve the investment climate, infrastructure, and the financial sector, but translating them into reality has not been easy. Keys to future growth remain internal reform, building up the confidence of international and domestic investors, and strong global economic growth. Significant progress has been made in rebuilding Aceh after the devastating December 2004 tsunami, and the province now shows more economic activity than before the disaster. Unfortunately, Indonesia suffered new disasters in 2006 and early 2007 including: a major earthquake near Yogyakarta, an industrial accident in Sidoarjo, East Java that created a "mud volcano," a tsunami in South Java, and major flooding in Jakarta, all of which caused additional damages in the billions of dollars. Donors are assisting Indonesia with its disaster mitigation and early warning efforts.
Market Overview
Indonesia reached major milestones in its transition towards democracy in the last three years. The Indonesian electorate chose a new Parliament, including a newly formed upper house representing regional interests, its first directly elected President, and regional district heads and parliaments.
Indonesia’s macro economy demonstrated impressive resilience in 2006 following October 2005 reductions in government fuel subsidies and monetary policy tightening in response to a budget and currency crisis brought on by record world fuel prices. By the end of 2006, inflation and Bank Indonesia’s (central bank) benchmark, short-term interest rate returned to single digits, and a rebound in consumption and a record $100 billion in exports (fueled by the run-up in world commodity prices) pushed Indonesia’s GDP growth to 5.5 percent for the year. Record foreign reserves also enabled the GOI in October to complete payment of its IMF program four years ahead of schedule. On March 2, 2006 the GOI announced an ambitious “Investment Climate Improvement Package” containing 85 planned GOI regulatory and institutional reforms to be undertaken in 2006, including significant revisions to the country’s investment, tax, labor and customs laws. The GOI announced in February an ambitious infrastructure policy reform package, listing 156 specific actions the GOI would undertake mostly in 2006. The GOI subsequently held a second Infrastructure Summit in November 2006 where it presented a focused list of 10 high-priority commercially viable “model projects” worth USD 4.4 billion. At the end of 2006, however, the GOI had not yet tendered any of the 10 model projects, and key National Committee for the Acceleration of Infrastructure Provision (KKPPI) institutions mandated to review the tendering process had not been fully staffed or funded.
Market Challenges
Much needed economic and political reform remain the main impediments to Indonesia’s economic development. The unpredictable nature of the judicial process and the arbitrary actions of local officials are two problems cited by many businesses as particularly difficult to overcome. In some cases, judges rule against foreigners in commercial disputes, ignoring the facts of the case and the contracts between the parties. It is also difficult to get international arbitration awards enforced by Indonesian courts, often leaving no recourse for international investors. The Government of Indonesia’s (GOI) policy of decentralizing political power, although well intentioned, has given local leaders greater authority, which has been used in some provinces to levy unanticipated fees and extract additional services that add to the financial burden of foreign investors. In a few high-profile cases, Indonesia has applied criminal penalties for commercial or environmental infractions that are typically covered by civil law in most countries. On the plus side, President Yudhoyono’s anti-corruption campaign made clean progress in 2006 with a slew of high-profile investigations and prosecutions of current and former government of Indonesia officials.
Market Opportunities
Assuming significant progress on economic and investment law reforms, opportunities should abound in the telecommunications, transportation, oil and gas, electric power, water treatment & sanitation, and engineering sectors. Large infrastructure and reconstruction projects should drive increasing demand for all types of construction machinery and building materials. The police and other government entities are improving their capabilities to deal with the terrorist and crime threats by procuring sophisticated security equipment and services for airports, ports and tourist destinations. Indonesia’s tropical climate makes disease control particularly challenging, creating a good market for medical and laboratory equipment and pharmaceuticals. Other “Best Prospects” for American business in Indonesia include aircraft & parts, computer and peripherals, industrial chemicals, retail, medical equipment and supplies, and food & business service franchising.
