Previous Quarterly Editions
Expropriation Risk: 80 79 81 83 Political Violence Risk: 64 69 67 64 Terrorism Risk: 53 57 58 56 Exchange Transfer and Trade Sanction Risk: 58 57 60 58 Sovereign Default Risk: 46 46 48 48
TREND ► OUTLOOK ►
Indonesia, now in the fifth month of its efforts to counter the COVID-19 pandemic, is struggling to reconcile the need to meet public health expectations with the imperative of protecting and regenerating the economy. Some 90,000 cases of COVID-19 and more than 4,000 deaths had been recorded by mid-July 2020, the highest toll in Southeast Asia but does reflect Indonesia’s 270 million population. The government’s emphasis has now switched to preserving jobs, companies, and by extension social stability while accepting that COVID-19 will continue to take its toll under a policy it calls the ‘new normal’. The threat COVID-19 poses to years of growth, during which an increasing number of Indonesians saw their standard of living improve, is now evident. Growth was only 2.9% in the January-March 2020 quarter, the slowest in almost two decades, and the following quarter saw a year-on-year contraction of 3%. The finance ministry is still hoping that the final figure for GDP growth in 2020 will be above zero but international agencies have less optimistic projections of a contraction to be 1-4%. The social impact of COVID-19 is also measured in rising unemployment, with at least 5.5 million Indonesians having already lost their jobs as a consequence of the pandemic and millions of others at risk of losing theirs in the coming months. The government response has been to allocate almost 50 billion USD for health care and economic stimulus packages. Finance Minister Sri Mulyani Indrawati has admitted that the cost of responding to the pandemic, and the fall in state revenues, has widened the national budget deficit from under 2% to almost 7% in just a few months. Forecasts for 2021 are speculative, but the consensus is that GDP could surge from between 5% to 8% next year as a result of pent up demand. In June 2020, seven Papuan men were convicted of treason and imprisoned for having advocated a referendum on Papuan independence last year, a reminder that unrest in the country’s eastern province remains possible. In May 2020, parliament passed revisions to the 2009 mining law that ease restrictions on the size of mining operations and allow automatic permit extensions for operators of up to 20 years. The intent is to increase legal certainty for the mining industry and buttress the role of the private sector, thereby attracting more investment in the long term. An early legal challenge from civil society organisations on environmental grounds is likely but is not expected to produce any substantial alteration in policy, and the changes should help reduce the threat from economic nationalism. The government is also committing nine billion USD to bail out Indonesia’s state-owned industries, which have high levels of foreign debt, and aims to reorganise them into clusters in the hope of increasing efficiency. Relations with Malaysia are improving as both countries contest the EU’s plan to phase out the import of biofuels made from their economically important but environmentally damaging palm oil industries.
TREND ▲ OUTLOOK ▲
In June 2020, the US Office of the Trade Representative opened a new investigation into the five countries that have already adopted a digital services tax (DST), of which Indonesia is one. The US aim is to pre-empt countries from using DSTs to fund their post-pandemic economic recovery. A similar investigation into French plans for a DST last year led to threats of retaliatory US tariffs on French imports and resulted in France agreeing to suspend its tax. The Indonesian government responded in July 2020 by imposing a new 10% value-added DST on non-resident foreign firms, a move which hits US technology firms such as Amazon and Google particularly hard. It is not alone in seeing a boom of its domestic digital economy to also then coincide with a crash in public revenue, due to the pandemic crisis, which has sparked decisions to push on with a DST, particularly since Washington's unilateral withdrawal from OECD/G20 digital tax talks in June 2020 has reduced the prospects for a global consensus around the issue.
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COVID-19 regulations related to social gatherings have contributed to the absence of any significant political protests during the first half of 2020. The government’s decision to ban 'mudik', the practice of workers in cities returning to their hometowns and villages to celebrate Eid (which usually involves as many as 20 million people), was widely accepted despite criticism from religious conservatives. Civil society organisations are helping to provide relief but two-thirds of funding for the non-governmental sector comes from abroad. As foreign aid from the United States, Europe and Japan falls as a result of the pandemic, it will be increasingly difficult for domestic philanthropy, often delivered through religious institutions, to fill the gap. One consequence may be a greater role for Chinese aid. There are concerns that larger and more volatile demonstrations may occur later this year if, as planned, the government’s proposed omnibus law is passed by the legislature, which would affect employment and workers’ rights a time when millions of Indonesians are unemployed or fear losing their jobs.
TREND ▼ OUTLOOK ►
In June 2020, one police officer was killed and another was seriously wounded in an attack in South Kalimantan on Borneo island. Although the perpetrator, who was killed by police, reportedly carried documents and other material linked to the Islamic State group, the attack appeared to have been the act of a self-radicalised individual rather than part of a coherent or coordinated campaign. Most local extremists are confined to small, under-resourced, and cell-based groups without organisational structure and so are incapable of coordinating action or sharing skills. While this offers them a degree of protection from counter-terrorism efforts it also greatly reduces operational capabilities. This situation is unlikely to change in the medium term, although ‘lone wolf’ type attacks against the police remain a constant threat.
The central bank reduced its benchmark interest rate by 25 basis points to 4.25% in June 2020. This was the third cut this year, reflecting the continuing deterioration in the economic outlook. By the start of July 2020, the rupiah had recovered from its near historic lows against the US dollar in March 2020 but remains subject to further downward pressure so long as the pandemic continues to affect the country. Despite the impact of COVID-19, the consumer price index reached a 20-year low in May 2020, with the annual inflation rate at 2.65%.
Foreign debt rose by 2.9% year-on-year in April 2020 as the government issued bonds to cover the budget deficit created by expenditure to offset the impact of the COVID-19 pandemic. However, the debt-to-GDP ratio remains around 36.5%, well within the legally mandated ceiling of 60%. The country’s foreign exchange reserves rose to 128 billion USD at the start of May 2020, up from 121 billion USD a month earlier, largely as a result of the government's issuance of global bonds.
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