major macro economic indicators
|2017||2018||2019 (e)||2020 (f)|
|GDP growth (%)||5.1||5.2||5.0||0.5|
|Inflation (yearly average, %)||3.8||3.2||3.2||3.3|
|Budget balance (% GDP)||-2.5||-1.8||-1.9||-1.8|
|Current account balance (% GDP)||-1.6||-3.0||-2.9||-2.7|
|Public debt (% GDP)||29.4||30.1||30.2||30.0|
(e): Estimate. (f): Forecast.
- Diverse natural resources (agriculture, energy, mining)
- Low labor costs and demographic dividend
- Growing tourism industry (5.8% of GDP)
- Huge internal market
- Sovereign bonds rated “Investment Grade” by the three main rating agencies
- Exchange rate flexibility
- 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 potentially leading to unrest (Papua)
- Persistent corruption and lack of transparency
Steady growth despite external headwinds
Growth is facing external headwinds but will remain strong in 2020. GDP growth slowed to 5.0% year-on-year in the third quarter of 2019, missing the official 5.4% growth target. Consumption (55% of GDP and the main growth driver) is benefitting from population growth, urbanization and a rise in per capita GDP, interconnected factors that are leading to a growing middle class. Inflation remained below Bank Indonesia (BI)’s target range (4±1%) in 2019, as food price increases were muted and oil prices were lower, enabling BI to cut the policy rate interest rate by 25 basis points to 5.0% in October. This rate cut could provide additional support to consumption and sluggish investment, which has been deterred by high interest rates and worsening investor sentiment because of global protectionism and slower demand from China. Investment (32% of GDP) should nonetheless contribute to growth thanks to the government support through the infrastructure development program launched in 2016. The government budgeted USD 30.2 billion (423.3 trillion rupiah) for infrastructure investments in 2020, 2% up from last year. However, this will not be enough to plug the infrastructure gap, President Joko Widodo (Jokowi) will have to implement structural reforms to boost foreign direct investment (FDI). Indonesia jumped 33 places to 73rd in the Ease of Doing Business Index in 2020 thanks to reforms. Nevertheless, reforms are ongoing and some projects remain stalled due to inadequate financing. Coal and mineral mining is benefitting from sustained investments, while manufacturing is expected to expand, albeit less vigorously than in previous years due to weaker Chinese demand and other external headwinds. Exports (23.4% of GDP) of manufactured goods and commodities (oil and gas, palm oil, copra, lignite and copper) are set to decline, while imports will continue to grow due to policy stimulus, weakening the contribution of net exports. The tourism sector will continue to underperform due to the lack of infrastructure in most regions.
Budget deficit on a tight rope with external pressure on current account
The parliament passed a USD 180 billion budget for 2020, along with a 1.8% GDP fiscal deficit. This aims to address domestic issues while anticipating global economic uncertainties. The budget is set to improve domestic environment through investments in infrastructure and human resources, notably in education and villages’ infrastructure. That said, the budget includes tax cuts (income tax and VAT) to boost investment, which raises challenges in tax revenues. Considering tax collections have been sluggish due to weaker company profits, the government may struggle to maintain the budget deficit under control. While the constitutional limit ensures that public debt levels remain low, pressures might emerge if a return to monetary tightening in the US reignites capital outflows, as foreigners own a large proportion of the short-term external debt.
The current account will remain in deficit due to ongoing trade tensions between the US and China. Exports are set to remain sluggish, particularly in commodities (energy and palm oil), as prices remain subdued. Meanwhile, import growth will grow supported by demand, linked to the public investment program. The government is likely to resort to import control measures (import permits, centralisation and tariffs) in case the deficit widens substantially. Trade in goods and services balance is expected to remain in small deficit, though. The current account deficit is mainly driven by the income account due to debt interest payments and the repatriation of dividends. However, the current account deficit is adequately financed by FDI inflows and portfolio investments. On the positive front, portfolio capital inflows should continue to stay throughout 2020, as pressures on the rupiah appear to have eased since the Fed took on a more dovish stance in 2019. Foreign reserves remain at an adequate level, covering 5.8 months of imports.
Seeking political stability through a large coalition
President Jokowi was elected for a second five-year term in April 2019, capitalizing on his track record on reforms despite missing the growth target of 7%. With a focus on domestic issues during his second-term, he reaffirmed the reform agenda, particularly across labour, healthcare and infrastructure to lure foreign investments. That said, his victory was contested by Prabowo’s opposition camp, which resulted in violent protests. Considering Jokowi is seeking to push forward the reform agenda with ease, he formed a broad coalition with Prabowo and key opponents in October 2019, hoping it would weaken critics over the government. This might pave the way for more political stability and help to mitigate risks of political Islam, as it would conciliate Jokowi’s pluralism and Islamist groups backing Prabowo.
Last update : February 2020
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.
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.
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 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.
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.
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.