Previous Quarterly Editions
Expropriation Risk: 41 42 52 55 ▲ Political Violence Risk: 51 51 51 51 ► Terrorism Risk: 58 56 54 56 ▲ Exchange Transfer and Trade Sanction Risk: 35 35 35 35 ► Sovereign Default Risk: 37 37 37 47 ▲
TREND ▲
Indications that Indonesia had weathered the worst of the COVID-19 pandemic began to falter in early June 2021 as the number of infections, mainly linked to the Delta variant, began to accelerate rapidly from around a total of 1.82 million aggregate recorded cases to around 4.0 million by end-August, with at least 127,000 related deaths. While peak daily cases in the present wave was reached in mid-July and active infections continue to decline, the number of deaths -- a metric many Indonesians judge as the relative threat posed by the pandemic -- continues to rise. In early June, the total number of deaths was around 50,500, rising rapidly to nearly 130,000 in late August.
Ahead of the current COVID-19 wave the country’s economy grew for the first time in five quarters, climbing 7.07% in the April-June period year-on-year. At least some of these gains are certain be lost in the third quarter, despite the government policy of seeking to balance economic and public health interests, with an official annual growth forecast adjusted downward in August to 3.7-4.5%, from an earlier 4.5-5.3% projection. President Joko Widodo has made it clear his government will not order further protracted and enforced restrictions on movement and commerce used elsewhere to reduce the threat from the virus in order to allow vaccination programmes time to offer greater protection from the disease.
The consequence of this policy, mainly due to an unachievable percentage of the eligible population being fully vaccinated within an effective timeframe, is that further waves of infections are likely in the coming months.
Nevertheless, the rapid economic recovery evident in the first quarter points towards a quick return to growth once the threat from COVID-19 diminishes. This reflects the innate resilience of an economy underpinned by a combination of small-scale enterprises and agriculture among the poorer majority and well-resourced larger companies whose commercial interests have been largely protected by government policies.
President Widodo’s determination to ensure legislation intended to encourage foreign and domestic investment, even at risk of sparking political and social tensions, is enshrined in the Job Creation law. Other pro-business policies have followed, notably measures intended to reduce the often-high levels of bureaucracy involved in obtaining investment permits. In early August the ‘Online Single Submission’ website was launched to process investment proposals based on the level of risk, with lower-risk investments required only to register and medium-risk proposals subject to meeting national standards.
Widodo has emphasised that he wants Indonesia’s investment climate to be such that it encourages investors’ confidence, aids job creation and helps to reduce unemployment that has risen due to COVID-19’s effects. There now seems very little likelihood foreign companies will be targeted by the government through policies that threaten their present status over the duration of Widodo’s term as president due to end in February 2024. That said, there remain some idiosyncratic risks to investment from Indonesia’s continuing struggles with corruption, state capacity and the rule of law; the country ranked 102nd in the world in Transparency International’s most recent Corruption Perceptions Index.
TREND ►
While a number of protests and confrontations between small groups opposed to the government’s action over COVID-19 and the police have been reported, there has been nothing on the scale seen elsewhere in the world. However, the threat of more sustained political unrest, including potentially violent street-level clashes in cities such as Jakarta, Surabaya and Medan, are possible as COVID-19 restrictions ease and issues, notably related to wages and employment conditions and protections many workers believe have been compromised by their perceived loss due to investment-friendly policies, resurface. It is also possible that popular resentment over the government’s COVID-19 strategy and the high death toll in some regions may be reflected in protests or other forms of direct action.
There have been few terrorism-related incidents since two suicide attacks against the Catholic cathedral in Makassar (Sulawesi) during the 2021 Easter festival. However, there are credible concerns that the easing of COVID-19 lockdown measures and events in Afghanistan (with the Taliban once again in control of that country as of August) will combine to increase the threat from radical Islamic groups and ‘lone wolf’ extremists.
This threat was highlighted by the arrest of more than 50 people by counter-terrorism police who are suspected of having links to a new Jemaah Islamiyah militant cell the authorities blame for a series of recent bomb attacks. In addition, at least three individuals with suspected ties to the extremist Islamic State group have also been detained in recent weeks. While such groups and individuals pose a specific threat to local police and government personnel and facilities, the perceived victory of Islamic insurgents in Afghanistan also increases the threat from radical Islamist groups to foreign individuals and companies in Indonesia.
The central bank has continued to follow its policy of supporting the economy during the pandemic by maintaining its historically low 3.50% key interest rate, with its governor pledging to maintain a pro-growth stance throughout the remainder of 2021. By end-August the Indonesian rupiah had recovered a little from its low point against the US dollar in early May but showed no sign of strengthening further in the near term. Foreign exchange reserves at the end of June stood at USD137.1bn, slightly below the February figure.
The consumer price index reached 1.52% in July, above trend, while the core inflation rate eased slightly to 1.40% in the same month, down from 1.49% in June. However, while the central bank assesses inflation will remain in its target 2% to 4 % range in 2021 it is expected to increase in 2022 reflecting a return to local demand and increased commodity prices.
Indonesia would be vulnerable to capital outflows in the event of a sharp increase in global interest rates. That said, foreign debt fell 0.1% to USD415.1bn in the second quarter 2021, while growth in foreign debt slowed to 1.9% year-on-year in the same period, against 7.2% in the previous quarter, both well within the legally mandated 60% ceiling. The sharp decline reflected an increased settlement of government and private sector debts, although the government in late August forecast it would issue more debt before the end of the year, to help cover a budget shortfall equivalent to 5.82% of gross domestic product.
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