Previous Quarterly Editions
Expropriation Risk: 84 83 80 79 Political Violence Risk: 68 69 64 69 Terrorism Risk: 57 55 53 57 Exchange Transfer and Trade Sanction Risk: 61 62 58 57 Sovereign Default Risk: 47 46 46 46
TREND ▲ OUTLOOK ▲
President Joko Widodo’s decisive re-election in April 2019 reflected strong support from younger and urban voters for his emphasis on economic development and reformist policies. But by the end of the year much of that enthusiasm had eroded after a series of decisions that have been widely seen as intended to benefit the country’s entrenched elite. Cutting back the powers of the leading anti-corruption agency triggered widespread student protests in September, while the president’s pre-and post-electoral moves to placate traditional Muslim sensibilities by reversing some of his earlier reformist social policies have already sharpened generational and urban/rural divisions. Meanwhile, the economy continued to slow due to the impact of the US-China trade dispute and weak global economic conditions. Growth forecasts for 2019 fell throughout the year, with the final figure barely above 5%. Exports continue to fall in volume and value, while a sharp fall in imports of capital goods reflects weak investment interest. In an effort to boost domestic and international investment, Finance Minister Sri Mulyani Indrawati announced proposed tax reforms at the end of 2019 that would cut corporate income tax to 22% in 2021 and 2022 from 25% at present, before easing further to 20% in 2023. The ability of local governments to impose taxes will also become subject to presidential approval, notionally removing a key investment disincentive in the unlikely event that central government can effectively wrest this power from entrenched local interests. In December, the EU confirmed that it will impose tariffs of 8-18% on biodiesel imports from Indonesia on the grounds that Jakarta is unfairly subsidising export of palm oil products. Indonesia, the world’s largest producer of palm oil, will take the issue to the WTO but, given the EU’s wider policy of phasing out imports derived from palm oil due to deforestation issues, it has plans to step up domestic usage to support the sector. Concerns are surfacing within parts of the government about Jakarta’s reliance on Chinese investment for infrastructure development and its implications for government debt, with Jakarta being noticeably tentative about embracing Beijing’s Belt and Road Initiative (BRI). However, the country will need nearly 430 billion dollars of infrastructure investment between 2020 and 2024 and China remains the most obvious source of assistance. As a result, a more positive response to BRI-related initiatives is likely to develop during 2020.
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With the president safely re-elected, the rhetoric of economic nationalism has subsided. However, government activism in the natural resources sector continues to cause concern. In October, it suddenly brought forward a planned ban on nickel ore exports, which is meant to stimulate the domestic smelting industry, from 2022 to January 2020. The resulting surge in exports to beat the deadline as nickel prices surged diverted supplies from Indonesia’s main domestic smelter and forced the government to push back the date of the ban. Unpredictable policy implementation remains a concern for investors. A report in November from the local chamber of commerce representing US companies noted that government efforts to attract foreign investment through deregulation and tax incentives will only be successful if it is also seen to be tackling corruption, the lack of skilled workers, and the regulatory uncertainties that are evident at all levels of government.
In late September, thousands of students staged protests across the country to oppose government moves that appear designed to protect the wealthy from investigation by the Corruption Eradication Commission (KPK), which is popular and widely trusted. They were some of the largest demonstrations in the country since the huge rallies in 1998 that helped to end the 30-year-rule of President Suharto. While order was restored as security forces quickly resorted to the use of tear gas and water cannon to disperse protesters in Jakarta, a large number of students have been radicalised by their experience in the protests and have lost confidence in Widodo’s ability to introduce any meaningful political reforms. Rioting by separatist elements in Papua during August and September has not been repeated but the area remains tense.
TREND ▲ OUTLOOK ▼
Although the April elections passed off peacefully amid a major security operation, there were two serious terrorist incidents involving suspected Islamist extremists late in the year. In October, the cabinet minister responsible for security coordination was visiting Banten province when he was stabbed and seriously injured by an assailant linked to Jamaah Ansharut Daulah (JAD), a domestic grouping of numerous radical Islamist terrorist cells. In November, six people were injured by a suicide attack at the police headquarters in Medan, a major commercial centre in Sumatra. JAD, which has aligned itself with Islamic State, remains the principal source of concern for the security services and police, but to date most of its targets have been local law enforcement personnel. Security forces moved quickly to make dozens of arrests across several provinces after the Medan incident and have had some success in neutralising JAD cells. Another source of concern are survivors of the several hundred Indonesian nationals known to have served with Islamist groups in Syria and Iraq and the threat they could pose if they return home.
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After capital outflows forced the central bank to raise rates six times during 2018, it was able to make four consecutive monthly cuts during the second half of 2019 to end the year at 5%. In November, it also lowered reserve requirements to boost lending. More cuts appear likely in the first months of 2020 as growth remains the priority. The rupiah weakened slightly towards the end of the year but inflation, at just over 3%, remained well within the 2019 target band of 2.5-4.5%.
TREND ► OUTLOOK ▲
Although total foreign debt rose sharply during 2019 and is now above 400 billion dollars, the government is responsible for less than half of that total and the debt-to-GDP ratio remains around 36%, well within the legally mandated ceiling of 60%. The budget deficit is slightly above 2% and foreign reserves have reached a two-year high. However, the government’s growth strategy increasingly features public sector spending that is supported by borrowing, with more major bond issues expected during 2020.
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