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Indonesia

Indonesia

Population 270.2 million
GDP 3,922 US$
A4
Country risk assessment
A4
Business Climate
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Synthesis

major macro economic indicators

  2019 2020 2021 (e) 2022 (f)
GDP growth (%) 5.0 -2.1 3.5 5.5
Inflation (yearly average, %) 2.8 2.0 1.6 2.6
Budget balance (% GDP) -2.2 -6.1 -5.4 -4.8
Current account balance (% GDP) -2.7 -0.4 -0.3 -1.0
Public debt (% GDP) 30.6 36.6 41.4 43.3

(e): Estimate (f): Forecast

STRENGTHS

  • Diverse natural resources (agriculture, energy, mining)
  • Low labour costs and demographic dividend
  • Growing tourism industry (6% of GDP in 2019)
  • Huge domestic 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

Growth will accelerate but downside risks related to the pandemic persist

Growth is set to accelerate in 2022, on the back of robust external  and domestic demand. However, with a large part of the population still not fully vaccinated (60% in December), the economy remains vulnerable to potential future outbreaks. Delays in vaccine shipments under the COVAX scheme and reluctance among the population) is slowing down the vaccination drive. Domestic consumption (54% of GDP) is expected to recover, supported by improving labour market conditions while mobility restrictions are gradually eased. The extension of relaxed rules for automotive loans and mortgage loans until end-2022 should spur consumption. That said, an increase in the VAT under the 2022 budget is likely to weigh on the recovery. Consumer inflation should pick up in light of higher domestic demand and commodity prices, but should stick to Bank Indonesia’s (BI) 2-4% target range. Policy normalization in the U.S. is likely to pressure BI to tighten the policy rate, which stands at a record low of 3.50% since the beginning of 2021,  in tandem to maintain sufficiently high positive yields on Indonesian assets to avert disorderly capital outflows. The tourism industry (6% of GDP  in 2019 ) should remain weak due to border restrictions. While Bali, one of the popular destinations, reopened for vaccinated tourists from 19 countries, inbound travellers are still subject to a five-day quarantine and COVID-19 testing. The government is taking a rather cautious approach as the country is planning to host the G20 summit in Bali in November 2022  . Investment (33% of GDP), on the other hand, should rebound in 2022, supported by recent reforms to improve the business and investment climate. The government passed the Omnibus law that includes deregulation, changes to foreign investment rules and labour reforms. Exports of manufactured goods and commodities   (23% of GDP) – coal, oil and gas, palm oil, gold, rubber, steel and electronics - should continue to benefit from high commodity and intermediates prices, as well as the power crunch in China,  in which the latter eased imports curbs to support its energy shortage.

 

Budget deficit set to narrow thanks to tax reforms

The budget deficit is set to narrow as the government seeks to return it below 3% of GDP by 2023 through tax reforms to consolidate public finances. The pandemic led the government to suspend the budget deficit ceiling in order to support the recovery. The Harmonized Tax Law (HPP) implemented in Oct 2021 will help to reduce the pandemic-induced tax fall and reduce the fiscal deficit. This will mean an increase in taxes on the wealthy population and consumption through VAT, set to increase from 10% to 11% by April 2022. The tax reforms come at a time when the government is seeking to reduce reliance on the central bank to finance its expenditures under the burden sharing arrangement , which consists of bond purchases. The central bank will purchase up to USD 30 billion (3% of GDP) in 2021 and 2022. This arrangement has kept government interest costs low to finance pandemic relief measures, but increased concerns over a risk of political interference in the monetary policy.

 

The trade balance will remain in surplus in 2022 on the back of robust export and high commodity prices, but should narrow as imports are set to rebound following the lifting of containment measures that impeded domestic consumption in 2021. The surplus in merchandise trade will partly offset the services trade deficit, as international borders are not likely to fully open to tourists in 2022. FDI inflows might gradually recover thanks to the Omnibus law, which would adequately finance the current account deficit. Foreign exchange reserves should therefore remain adequate, standing at 8 months of imports (as of September 2021).

 

Large coalition facilitating reforms

President Jokowi was re‐elected for a second five‐year mandate in April 2019. His legislative and governmental coalition – centred around the Indonesian Democratic Party of Struggle (PDIP), gathers several parties and controls 81.9% (471 out of 575 seats) of the lower house. This 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 government estimated its cost at USD 32 billion of which a fifth would come from the state budget . The project received criticism at a time when the country is freshly recovering from the pandemic, which has depleted public finances. The Omnibus bill passed in October 2020 in order to cut red tape and spur investments, was ruled "unconditionally unconstitutional" a year later. The government was given two years to amend it. On the external front, Indonesia’s stance towards China on the South China Sea should continue to firm up, as Beijing reiterated claims of historic rights on areas that overlap Indonesia’s exclusive economic zone.

 

Last updated: February 2022

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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