Monday, 12 September 2011

Indonesia Economy Review


Indonesia has a market-based economy in which the government plays a significant role. There are 139 state-owned enterprises, and the government administers prices on several basic goods, including fuel, rice, and electricity.

In the mid-1980s, the government began eliminating regulatory obstacles to economic activity. The steps were aimed primarily at the external and financial sectors and were designed to stimulate employment and growth in the non-oil export sector. Annual real gross domestic product (GDP) growth averaged nearly 7% from 1987-97 and most analysts recognized Indonesia as a newly industrializing economy and emerging major market. The Asian financial crisis of 1997 altered the region's economic landscape. With the depreciation of the Thai currency, the foreign investment community quickly reevaluated its investments in Asia. Foreign investors dumped assets and investments in Asia, leaving Indonesia the most affected in the region. In 1998, Indonesia experienced a negative GDP growth of 13.1% and unemployment rose to 15%-20%. In the aftermath of the 1997-98 financial crisis, the government took custody of a significant portion of private sector assets via debt restructuring, but subsequently sold most of these assets, averaging a 29% return. Indonesia has since recovered, albeit slower than some of its neighbors, by recapitalizing its banking sector, improving oversight of capital markets, and taking steps to stimulate growth and investment, particularly in infrastructure. GDP growth has steadily risen this decade, achieving real growth of 6.3% in 2007 and 6.1% growth in 2008. Although growth slowed to 4.5% in 2009 given reduced global demand, Indonesia was the third-fastest growing G-20 member, trailing only China and India. Growth has rebounded in 2010, with the consensus forecast for growth of 6.0%. Poverty and unemployment have also declined despite the global financial crisis, with the poverty rate falling to 13.3% (March 2010) from 14.2% a year earlier and the unemployment rate falling to 7.4% (February 2010) from 7.87% (August 2009).

Indonesia’s improving growth prospects and sound macroeconomic policy have many analysts suggesting that it will become the newest member of the “BRIC” grouping of leading emerging markets. Its solid track record has also resulted in credit upgrades from each of the major ratings agencies in the past year, with Fitch rating Indonesia sovereign debt one level below investment grade, while S&P and Moody’s rate it two levels below investment grade.

In reaction to global financial turmoil and economic slowdown in late 2008, the government moved quickly to improve liquidity, secure alternative financing to fund an expansionary budget and secure passage of a fiscal stimulus program worth more than $6 billion. Key actions to stabilize financial markets included increasing the deposit insurance guarantee twentyfold, to IDR 2 billion (about U.S. $222,000); reducing bank reserve requirements; and introducing new foreign exchange regulations requiring documentation for foreign exchange purchases exceeding U.S. $100,000/month. As a G-20 member, Indonesia has taken an active role in the G-20 coordinated response to the global economic crisis. In the face of surging portfolio inflows in 2010, Bank Indonesia has implemented a number of measures to encourage inflows toward less volatile, longer tenor instruments.

Economic Policy: After he took office on October 20, 2004, President Yudhoyono moved quickly to implement a "pro-growth, pro-poor, pro-employment" economic program, which he has continued in his second term. The State Ministry of National Development Planning (BAPPENAS) released a Medium-Term Development Plan for 2010-2014 focused on development of a “prosperous, democratic and just” Indonesia. The Medium-Term Development Plan targets average economic growth of 6.3%-6.8% for the period, reaching 7% or above by 2014, unemployment of 5%-6% by the end of 2014, and a poverty rate of 8%-10% by the end of 2014. President Yudhoyono’s economic team in his second administration is led by Coordinating Minister for Economic Affairs Hatta Rajasa. Sri Mulyani Indrawati continued as Finance Minister until May 2010, when she resigned to take a senior position at the World Bank. She was succeeded by Agus Martowardojo, a well-respected banker who had led Indonesia’s largest state-owned bank. In July 2010, Indonesia’s DPR Commission XI approved the appointment of Darmin Nasution as Governor of Bank Indonesia, following a 14-month vacancy of the position after former Governor Boediono stepped down to become Yudhoyono’s running mate. In May 2010, President Yudhoyono established a National Economic Committee to provide strategic recommendations to accelerate national economic development and a National Innovation Committee to provide input and recommendations to increase national productivity, create a culture of innovation, and speed up economic growth.

Indonesia's overall macroeconomic picture is stable. By 2004, real GDP per capita returned to pre-financial crisis levels and income levels are rising. In 2009, domestic consumption continued to account for the largest portion of GDP, at 58.6%, followed by investment at 31.0%, government consumption at 9.6%, and net exports at 2.8%%. Investment realization had climbed in each of the past several years, until the global slowdown in 2009. It is again rebounding in 2010.

Following a significant run-up in global energy prices in 2007-2008, the Indonesian Government raised fuel prices by an average of 29% on May 24, 2008 in an effort to reduce its fuel subsidy burden. Fuel subsidies had been projected to reach Rp 265 trillion ($29.4 billion) in 2008, or 5.9% of GDP. The fuel price hikes, along with rising food prices, led consumer price inflation to a peak of 12.1% in September 2008. To help its citizens cope with higher fuel and food prices, the Indonesian Government implemented a direct cash compensation package for low-income families through February 2009 and an extra range of benefits including an expanded subsidized rice program and additional subsidies aimed at increasing food production. Subsequent declines in oil and gas prices allowed the government to reduce the prices for subsidized diesel and gasoline, but with oil and gas prices recovering, the energy subsidy bill has again swelled in 2010.

Banking Sector: Indonesia has 122 commercial banks (May 2010), of which 10 are majority foreign-owned and 28 are foreign joint venture banks. The top 10 banks control about 64% of assets in the sector. Four state-owned banks (Bank Mandiri, BNI, BRI, BTN) control about 36.3% of assets (May 2010). The Indonesian central bank, Bank Indonesia (BI), announced plans in January 2005 to strengthen the banking sector by encouraging consolidation and improving prudential banking and supervision. BI hopes to encourage small banks with less than Rp 100 billion (about U.S. $11 million) in capital to either raise more capital or merge with healthier "anchor banks" before end-2010, announcing the criteria for anchor banks in July 2005. In October 2006, BI announced a single presence policy to further prompt consolidation. The policy stipulates that a single party can own a controlling interest in only one banking organization. Controlling interest is defined as 25% or more of total outstanding shares or having direct or indirect control of the institution. BI planned to adopt Basel II standards beginning in 2009 and to improve operations of its credit bureau to centralize data on borrowers. Another important banking sector reform was the decision to eliminate the blanket guarantee on bank third-party liabilities. BI and the Indonesian Government completed the process of replacing the blanket guarantee with a deposit insurance scheme run by the independent Indonesian Deposit Insurance Agency (also known by its Indonesian acronym, LPS) in March 2007. The removal of the blanket guarantee did not produce significant deposit outflows from or among Indonesian banks. Sharia banking has grown in Indonesia in recent years, but represented only 2.66% of the banking sector, about $7.9 billion in assets as of May 2010.

Exports and Trade: Indonesia's exports were $116.5 billion in 2009, down 14.8% from a record $136.8 billion in 2008. The largest export commodities for 2009 were oil and gas (16.3%), minerals (14.3%), crude palm oil (12.5%), electrical appliances (8.2%), and rubber products (5.0%). The top four destinations for exports for 2009 were Japan (12.3%), the U.S. (10.7%), China (9.1%), and Singapore (8.2%). Meanwhile, total imports in 2009 were $96.86, down from $128.8 billion in 2008. Indonesia is currently our 28th-largest goods trading partner with $18.0 billion in total (two-way) goods trade during 2009. The U.S. trade deficit with Indonesia totaled $8 billion in 2009 ($5.1 billion in exports versus $12.9 billion in imports).

Oil and Minerals Sector: Indonesia left the Organization of Petroleum Exporting Countries (OPEC) in 2008, as it had been a net petroleum importer since 2004. Crude and condensate output averaged 948,000 barrels per day (bpd) in 2009, down slightly from 2008. In 2009, the oil and gas sector is estimated to have contributed $19.8 billion of government revenues, or 19.5% of the total. U.S. companies have invested heavily in the petroleum sector. Indonesia ranked tenth in world gas production in 2009. Despite the declining oil production, Indonesia's oil, oil products, and gas trade balance was negative in 2008 with a $1.4 billion deficit, but became positive again in 2009 with a $29.4 million surplus, according to official statistics.

Indonesia has a wide range of mineral deposits and production, including bauxite, silver, and tin, copper, nickel, gold, and coal. Although the coal sector was open to foreign investment in the 1990s through coal contracts of work, new investment was closed again after 2000. A new mining law, passed in December 2008, opened coal to foreign investment again, although it eliminated the difference between foreign and domestic ownership structures. Total coal production reached 208.0 million metric tons in 2009, including exports of 161.3 million tons. Two U.S. firms operate two copper/gold mines in Indonesia, with a Canadian and a U.K. firm holding significant investments in nickel and gold, respectively. In 2007 Indonesia ranked fifth among the world's top gold concentrate producers. Although coal production has increased dramatically over the past 10 years, the number of new metals mines has declined. This decline does not reflect Indonesia's mineral prospects, which are high; rather, the decline reflects earlier uncertainty over mining laws and regulations, low competitiveness in the tax and royalty system, and investor concerns over divestment policies and the sanctity of contracts.

In early 2010, the Government of Indonesia also formally decided to become a candidate country of the Extractive Industries Transparency Initiative (EITI), which will increase accountability and transparency in energy revenue transactions between the government and oil, gas, and mining firms.

Investment: President Yudhoyono and his economic ministers have stated repeatedly their intention to improve the climate for private sector investment to raise the level of GDP growth and reduce unemployment. In addition to general corruption and legal uncertainty, businesses have cited a number of specific factors that have reduced the competitiveness of Indonesia's investment climate, including: corrupt and inefficient customs services; non-transparent and arbitrary tax administration; inflexible labor markets that have reduced Indonesia's advantage in labor-intensive manufacturing; increasing infrastructure bottlenecks; and uncompetitive investment laws and regulations. In each of the past 3 years, the Government of Indonesia has announced a series of economic policy packages aimed at stimulating investment and infrastructure improvements and implementing regulatory reform. A new investment law was enacted in 2007, which contains provisions to restrict the share of foreign ownership in a range of industries. The new negative investment list was signed by President Yudhoyono on May 25, 2010 and announced by the Chairman of Indonesia's Investment Coordinating Board (BKPM), Gita Wirjawan, on June 10. The changes included long-awaited legal clarifications alongside limited liberalization. The clarifications include a continuous review of closed sectors for increased market access. The new decree replaces the previous list (Presidential Regulation 111/2007). The decree confirms that investment restrictions do not apply retroactively unless the new provisions are more beneficial to the investor. The changes also clarify that capital investments in publicly listed companies through the stock exchange are not subject to Indonesia's negative list unless an investor is buying a controlling interest.

In 2010, the Overseas Private Investment Corporation (OPIC) updated its 1967 investment support agreement between the United States and Indonesia by adding OPIC products such as direct loans, coinsurance, and reinsurance to the means of OPIC support which U.S. companies may use to invest in Indonesia. Over its 39-year history OPIC had committed more than $2.1 billion in financing and political risk insurance to 110 projects in Indonesia. Currently, OPIC is providing more than $94 million in support to six projects in Indonesia in the energy, manufacturing, and services sectors.

On September 2, 2008, the DPR passed long-awaited tax reform legislation. The legislation reduced corporate and personal income tax rates as of January 1, 2009. Corporate income tax rates fell from 30% to 28% in 2009 and to 25% in 2010, with additional reductions for small and medium enterprises and publicly listed companies. The legislation raises the taxable income threshold for individuals, cuts the maximum personal income tax from 35% to 30%, and provides lower marginal personal income tax rates across four income categories. Taxes on dividends also fell from a maximum of 20% to a maximum of 10%. Long-planned labor reforms have been delayed.

The passage of a new copyright law in July 2002 and accompanying optical disc regulations in 2004 greatly strengthened Indonesia's intellectual property rights (IPR) regime. Despite the government's significantly expanded efforts to improve enforcement, IPR piracy remains a major concern to U.S. intellectual property holders and foreign investors, particularly in the high-technology sector. In March 2006, President Yudhoyono issued a decree establishing a National Task Force for IPR Violation Prevention. The IPR Task Force was intended to formulate national policy to prevent IPR violations and determine additional resources needed for prevention, as well as to help educate the public through various activities and improve bilateral, regional, and multilateral cooperation to prevent IPR violations. It has yet to fully realize these aims. In 2007, Indonesia was removed from the U.S. Trade Representative's "Priority Watch" list and placed on the "Watch" list. However, Indonesia was raised back to the Priority Watch List in 2009 due to an overall deterioration of the climate for IPR protection and enforcement and some concerns over market access barriers for IP products. There have not been signs of improvement in the past year.

Environment: President Yudhoyono's administration has significantly increased Indonesia's global profile on environmental issues, and U.S.-Indonesia cooperation on the environment has grown substantially. Indonesia is particularly vulnerable to the effects of climate change, which include rising sea levels and erosion of coastal areas, increased frequency and intensity of extreme weather events, species extinction, and the spread of vector-borne diseases. At the same time, Indonesia faces challenges in addressing the causes of climate change. Indonesia has the world's second-largest tropical forest and the fastest deforestation rate, making it the third-largest contributor of greenhouse gas emissions, behind China and the U.S. President Yudhoyono pledged at the 2009 G-20 in Pittsburgh to reduce Indonesia’s greenhouse gas emissions by up to 41% below business as usual by 2020, in addition to eliminating fossil fuel subsidies. In June 2010, President Barack Obama pledged to support U.S.-Indonesia shared goals on climate change through a Science, Oceans, Land Use, Society and Innovation (SOLUSI) partnership and through the establishment of a climate change center. Indonesia continues expanding its constructive engagement in Southeast Asia, within the G-20 and Major Economies Forum, and in other international bodies to encourage other developing countries to adopt and implement ambitious steps to reduce the impacts of global climate change.

In 2004, President Yudhoyono initiated a multi-agency drive against illegal logging that has significantly decreased illegal logging through stronger enforcement activities. The Department of Justice-sponsored Environmental Crimes Task Force supports this enforcement effort. The State Department and the U.S. Trade Representative negotiated with the Indonesian Ministries of Trade and Forestry the U.S. Government's first Memorandum of Understanding on Combating Illegal Logging and Associated Trade. Presidents George W. Bush and Yudhoyono announced the MOU during President Bush's November 2006 visit to Indonesia. Implementation of the MOU includes collaboration on sustainable forest management, improved law enforcement, and improved markets for legally harvested timber products. This effort will strengthen the enabling conditions for avoiding deforestation, specifically addressing the trade issues that are involved.

The U.S. Government contributed to the start of the Heart of Borneo conservation initiative to conserve a high-biodiversity, transboundary area that includes parts of Indonesia, Malaysia, and Brunei. The three countries launched the Heart of Borneo initiative in February 2007. In 2009, the Governments of Indonesia and the U.S. concluded a Tropical Forest Conservation Act (TFCA) agreement. The agreement reduces Indonesia's debt payments to the U.S. over the next 8 years; these funds will be redirected toward tropical forest conservation in Indonesia.

Indonesia is also home to the greatest marine biodiversity on the planet. President Yudhoyono called for a Coral Triangle Initiative (CTI) in August 2007. The Coral Triangle Initiative is a regional plan of action to enhance coral conservation, promote sustainable fisheries, and ensure food security in the face of climate change. In December 2007, the U.S. Government announced its support for the six CTI nations (Indonesia, Malaysia, Philippines, Timor-Leste, Papua New Guinea, and Solomon Islands). Since then, the United States has provided $8.4 million to this initiative. With projected funding of $32 million over 5 years, the U.S. is the largest bilateral donor to CTI, and President Bush endorsed the CTI proposal formally at the 2007 Asia-Pacific Economic Cooperation (APEC) Summit.

Indonesia hosted the first-ever World Oceans Conference in Manado, North Sulawesi, May 11-15, 2009. The World Oceans Conference was also the venue for the Coral Triangle Initiative Summit, at which leaders from the six CTI nations launched the CTI Regional Plan of Action. From June to August 2010, the National Oceanic and Atmospheric Administration (NOAA) research vessel Okeanos Explorer and the Indonesian research vessel Baruna Jaya made a pioneering joint mission to the "Coral Triangle" in the Indo-Pacific region. The "Coral Triangle" region is the global heart of shallow-water marine biodiversity.


GDP (2007): $433 billion; (2008): $511 billion; (2009): $542 billion.
Annual growth rate (2007): 6.3%; (2008): 6.1%; (2009): 4.5%; (2010 est.): 6.0%.
Inflation, end-period (2007): 6.6%; (2008): 11.1%; (2009): 2.8%; (2010 est.): 6.0%.
Per capita income (2009 est., PPP): $4,149.
Natural resources (10.5% of GDP, 2009): Oil and gas, bauxite, silver, tin, copper, gold, coal.
Agriculture (15.3% of GDP, 2009): Products--timber, rubber, rice, palm oil, coffee. Land--17% cultivated.
Manufacturing (26.4% of GDP, 2009): Garments, footwear, electronic goods, furniture, paper products.
Trade:
 Exports (2009)--$116.5 billion including oil, natural gas, crude palm oil, coal, appliances, textiles, and rubber. Major export partners--Japan, U.S., China, Singapore, Malaysia, and Republic of Korea. Imports (2009)--$96.86 billion including oil and fuel, food, chemicals, capital goods, consumer goods, iron and steel. Major import partners--Singapore, China, Japan, U.S., Malaysia, Thailand, South Korea.


source:  http://www.traveldocs.com/id/economy.htm

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