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Expropriation Risk: 83 80 79 81 Political Violence Risk: 69 64 69 67 Terrorism Risk: 55 53 57 58 Exchange Transfer and Trade Sanction Risk: 62 58 57 60 Sovereign Default Risk: 46 46 46 48
TREND ▲ OUTLOOK ▲
Almost all of Indonesia’s economic priorities and structural reforms for 2020 have been overwhelmed by the impact of the COVID-19 pandemic. The government went into the crisis with growth already slowing. The economy expanded by only 5% during 2019, the slowest rate since 2015 and below the government’s target of 5.3%. The government’s initial response to the outbreak appeared uncoordinated and uncertain as Jakarta Governor Anies Baswedan unilaterally declared a two-week state of emergency in the capital on March 20 (2020), including a reduction in transport services and a plea for people to stay at home, even though President Joko 'Jokowi' Widodo was reluctant to introduce such measures in the densely packed capital. However, the scale of the emergency quickly became clear and within a week Jokowi allowed the country’s provincial governments, some of which had already begun to move without Jakarta’s blessing, to introduce tight lockdown procedures to slow the spread of the virus. One reason for Jokowi’s initial hesitation was a determination to secure passage of the legislation needed to underpin his ambitious programme intended to reform key aspects of the economy, including labour rights and foreign investment. Rather than asking parliament to consider each aspect individually, the government has rolled all the changes needed to existing legislation into a small number of ‘omnibus’ bills, which Jokowi was keen to get passed into law before the crisis took hold. His aim is to get the country onto the list of the world’s top 40 countries for ease of business, on the grounds that substantial investment is needed to sustain the slowing economy. Under the legislative timetable, the bills needed to be approved by the end of April 2020. Although the country’s revenues will be heavily impacted by the recent dramatic falls in oil, natural gas and other mineral commodity prices, the government has had little choice but to ramp up spending. In March 2020, it unveiled a series of measures intended to protect local economic activity while seeking to maintain social stability. Most notably, it is using 8.1 billion USD from the state budget to stimulate the economy through tax incentives and subsidies for workers, businesses and families affected by COVID-19. Key elements of the stimulus package include waiving raw material import taxes for selected manufacturing industries, a six-month cut of 30% in corporate tax rates and a six-month tax holiday for manufacturing workers on lower incomes. The government already expects that the budget deficit will increase to 2.5% of GDP this year, and in early April 2020 the president approved a change that will allow it to go through the legal cap of 3%.
TREND ▲ OUTLOOK ►
Despite the negative impact on investor sentiment, the government has been pressing ahead with its ban on all mineral exports by 2022. The aim is to stimulate the construction of new smelters so that more of the value of its minerals is retained within the country. In January 2020, the energy and mineral resources ministry said four smelters were expected to come online this year, with almost 30 being operational by the end of 2022. The emphasis is on processing nickel ore, for which Indonesia’s export ban has been pushing up prices. In another move to capture value from its natural resources, from May 2020 all local coal exports must be carried in Indonesian-owned ships. Despite the sharp fall in global demand for most commodities due first to the US-China trade dispute and then the COVID-19 outbreak, the government has shown no sign of wavering from its determination to introduce and retain these new measures.
TREND ▼ OUTLOOK ▲
There has been no repeat of the large-scale, student-led protests last September 2020 against government moves that were widely seen as protecting the wealthy and well-connected from investigation by the widely respected Corruption Eradication Commission (KPK). Instead, they were followed by a number of largely peaceful demonstrations called by organised labour groups to oppose the government’s proposed omnibus legislation affecting employment and workers’ rights. The onset of COVID-19 and the ban on gatherings has ended these demonstrations, at least for now. Once the emergency is passed it is possible that the government may be prepared to change some aspects of the legislation to account for what may be a new employment landscape.
At the end of March 2020, PT Freeport Indonesia (PTFI) reported that gunmen killed one of its workers and injured six other people in an attack at the company's offices in Papua province, where the company runs Grasberg, the world's largest gold mine and second-largest copper mine. While separatist movements are likely to be involved, they do not have the capacity to impact mining operations. Although there have been no other serious incidents in recent months, there is growing concern about the latent threat posed by Islamist groups, their supporters and the potential impact of experienced militants returning to Indonesia from Middle Eastern conflicts. In January 2020, the government’s security minister said that more than 6,000 Indonesian nationals have been identified as foreign terrorist fighters. If the information is accurate, it implies that Indonesia may be facing a substantial influx of experienced fighters who are able to transfer their skills and tactics to local groups. Many of these have demonstrated a readiness to confront the country’s security forces even though they have so far lacked the weapons, equipment and planning capabilities needed to make their attacks effective.
The central bank made a small cut in its benchmark interest rate to 4.5% in March 2020 as part of the government’s effort to support economic growth while maintaining stability in the financial market, but this was not enough to halt a massive, virus-related capital outflow as investors sought safer currencies and assets. By the end of March 2020, the rupiah had approached a level against the dollar (USD) last seen in 1998, during the widespread civil disorder that led to the overthrow of President Suharto.
Foreign debt rose by 7.5% during 2019, with the government’s share overtaking that held by the private sector. Although this reflected a net increase in state borrowing as well as a decline in private sector debt, the country’s ratio of debt to GDP was only around 36% at the start of 2020. This is well within the legally mandated ceiling of 60%. This affords the government some leeway to fund a sharp increase in the budget deficit through borrowing, and President Jokowi will be hoping that some of the additional spending for job creation can be channelled into his push to modernise the country’s infrastructure.
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