Previous Quarterly Editions
Expropriation Risk: 41 41 42 52 Political Violence Risk: 51 51 51 51 Terrorism Risk: 58 58 56 54 Exchange Transfer and Trade Sanction Risk: 35 35 35 35 Sovereign Default Risk: 37 37 37 37
TREND ▲
Indonesia continues to struggle with rebalancing its economy, meeting social needs and coping with the aftermath of the COVID-19 public health crisis. The country’s economy contracted by nearly 3% in 2020, the most serious disruption to most Indonesians’ lives since the 1997 Asian financial crisis that led to widespread violence and instability.
There are indications, barring the emergence of new COVID-19 variants, that the impact of the virus is waning in terms of case numbers and deaths. As of early May 2021, at least 1.7 million COVID-19 cases with around 46,700 deaths linked to the virus have been recorded since the start of the pandemic in March 2020- a mortality rate of 16.85 per 100,000 head of population. By early May 2021, the health ministry reported that around 12.2 million people had been inoculated, with a target of reaching 181.5 million from the country’s 274 million population receiving at least one dose by March 2022.
According to Finance Minister Sri Mulyani Indrawati, projected gross domestic product (GDP) growth should reach at least 7% in the second quarter 2021, with an annualised economic expansion of 4.5-5.3%. However, these assumptions were dented by data showing the economy had contracted by 0.74% in January-March 2021 quarter. While growth will resume, its strength will depend on the virus case load, the vaccine programme maintaining its projected schedule and a recovery in global demand for Indonesia’s primary export commodities (palm oil, hydrocarbons, copper, gold and rubber).
There is little likelihood that political factors will destabilise the overall pattern of recovery as the next general election is not due until 2024 and incumbent President Joko Widodo faces no specific political challenges at present.
Indonesia ranked 102nd in the world in Transparency International’s most recent Corruption Perceptions Index; significant idiosyncratic risks to investment stem from Indonesia’s continuing struggles with corruption, state capacity and the rule of law. That said, the direction of policy offers hopeful signs for the future.
For instance, an investment agreement signed with Singapore in late March 2021 contained explicit protections against expropriation, offering a model for similar deals with other countries. In late February 2021, the government issued new regulations linked to the Omnibus Bill intended to encourage increased foreign investment.
The previous ‘negative’ investment list has been replaced by a ‘priority’ list that offers incentives such as tax allowances or concessions in such sectors as coal, gasification, geothermal exploration, nickel and copper smelting, some pharmaceuticals and the production of electric vehicles and related parts. Rules for investing in land transportation, maritime and aviation traffic information systems and alcoholic beverages have also been eased. The new rules came into effect in early March 2021.
TREND ► OUTLOOK ▲
The principal source of instability in the emerging post-COVID-19 environment is likely to reflect dissatisfaction among the organised and largely industrial labour force (who comprise around one-third of all workers) with the government efforts to reduce their employment rights and protections. Protests against the Omnibus Bill attracted large numbers of supporters in 2020, before COVID-19 measures effectively ended all political rallies and gatherings.
The law, properly known as the Jobs Creation Bill, was ratified in October 2020 during lockdown but remains a source of contention that is certain to re-emerge once legal constraints over protests are lifted. The government’s decision for the second year running to ban the ‘mudik’ (an annual mass movement of workers mainly employed in urban areas to their home communities following the Ramadan fasting month that began on April 12) may also result in protests or widespread defiance of regulations.
TREND ▼
The enforcement of movement control regulations linked to the COVID-19 pandemic may have contributed to a marked decline in serious terrorist incidents over a 16-month period between November 2019 and March 2021. This interregnum ended with two suicide attacks, the first against the Catholic cathedral in Makassar (Sulawesi) during the Easter festival and the second less than a week later at the Jakarta police headquarters.
The police said the Makassar attack was linked to the Jamaah Ansharut Daulah (JAD), which serves as a loose confederation of extremist Islamic groups self-aligned to Islamic State. Many previous attacks- which are generally directed against the police, government and ‘Western’ interests- occur around the Ramadan fasting month. Further sporadic attacks are probable, reflecting the merging of the high economic and social cost of the pandemic with extremist ideologies.
TREND ►
The central bank reduced its benchmark interest rate to 3.5%, a record low, to support the economy during the pandemic. By early April 2021, the Indonesian rupiah was trading at five-month lows against the US dollar, primarily due to rising US bond yields. The central bank is unlikely to alter its present policy radically in the three-month outlook, reflecting the continuing impact of the pandemic and Ramadan (April 12- May 11) on the local economy.
The consumer price index reached 1.37% in March 2021, a sharp fall on the 2.96% rate recorded a year earlier as the pandemic began, although prices are now expected to steadily increase due to easing lockdown restrictions and post-Ramadan spending.
Foreign debt rose by 2.6% year-on-year in January 2021, as the government issued bonds to cover the budget deficit created by expenditure to offset COVID-19’s impact. However, the debt-to-GDP ratio rose to 39.5%, well within the legally mandated ceiling of 60%. The country’s foreign exchange reserves rose to USD138.8bn in February 2021, up from USD138bn a month earlier, largely as a result of tax revenues and reduced government foreign borrowing.
Return to contents Next Chapter
