Previous Quarterly Editions
Expropriation Risk: 55 58 58 59 ►Political Violence Risk:51 51 51 51 ►Terrorism Risk:54 56 54 57 ▼Exchange Transfer and Trade Sanction Risk: 35 35 35 35 ►Sovereign Default Risk:47 37 37 47 ▲
TREND ▲
Geopolitical alignmentEast 1 2 3 4 5 West
Alignment five years agoEast 1 2 3 4 5 West
Degree of contestationSettled 1 2 3 Contested
Indonesia has long sought to remain non-aligned in terms of its relationship with the major powers while almost reluctantly acknowledging its status as the dominant economic and political power in South-east Asia. This latter role was brought into focus in 2022 by Indonesia’s turn as leader of the Association of South-east Asian Nations (ASEAN) and by hosting a G20 summit due to be held in Bali in November, which is expected to bring together the leaders of the U.S., China, Russia, the European Union, the U.K., and many other countries for the first time since the Russian/Ukraine crisis that began in February 2022.
Despite Jakarta’s rhetoric regarding non-alignment, Indonesia has in the past decade or so moved steadily towards the ‘Western’ camp. This reflects in part Beijing’s overt efforts to dominate and often intimidate South-east Asian nations and despite unresolved trade and commercial issues with Indonesia’s key Western trading partners.
China now persistently intrudes on Indonesia’s expended maritime economic zone, spurring Jakarta to enter costly defence procurement deals with the U.S., France, and Italy, to bolster its aviation and naval forces. Such long-term relationships rely heavily on Jakarta’s trust it will not be pressured through sanctions or other measures to comply with the wider priorities of foreign governments, while largely ruling out any precipitous change in geopolitical priorities that could comprise national defence investments and strategies.
As a result, Indonesia is set to continue espousing its traditional non-aligned policy while fundamentally tilting towards and remaining within the ‘Western’ sphere for the medium to long term.
TREND ►
The government shows no sign of amending President Joko Widodo’s policy of banning or restricting the export of unprocessed commodities, notably minerals, in its bid to ensure Indonesia derives the maximum benefit from its natural resources through domestic processing and refining. On September 7, Widodo said while the country will probably lose in its trade dispute against the European Union over Jakarta’s 2020 decision to ban shipments of nickel ore, the government will still impose similar bans on the export of other raw commodities, notably shipments of unprocessed bauxite, copper, and tin.
Apart from a few scattered protests in June 2022, the Constitutional Court’s November 2021 ruling that gave the government two years to revise and amend sections of its ‘Omnibus’ law has greatly reduced the issue as a source of discontent among organised labour. However, the increase in fuel prices announced in early September 2022 triggered an immediate response, including demonstrations by student and labour groups across the country.
The protests were disruptive but not generally violent, although the potential for serious unrest remains a constant threat. Past fuel prices increases have triggered instability, notably in 1998 when reduced subsidies and high prices linked to the Asia-wide financial crisis led to protests that culminated with the violent removal of the authoritarian leader President Suharto after more 30 years in power.
Political manoeuvring is also underway ahead of the February 2024 general election. Widodo will have completed the legally permissible two consecutive terms as president and cannot stand again. Inter-party and factional divisions can be expected to become more intense in the coming months, as contenders vie for support and seek means to undermine their competitors.
TREND ▼
No serious terrorist incidents have been recorded in Indonesia since suicide attacks against the Catholic cathedral in Makassar, Sulawesi, in March 2021. It is unclear whether this reflects the actions of the country’s security and intelligence services in countering the threat from Islamic extremists, the principal driver of terrorism within the country, or a more fundamental change in the strategy, tactics, and organisational structures of the disparate groups that in the past have espoused and carried out terrorist attacks. However, it is likely at least limited terrorist actions will increase ahead of the February 2024 general election, as various extremist factions seek to influence the outcome.
The country is likely to enter a period of social turbulence following the government’s decision on September 3 to increase the controlled price of gasoline and diesel fuels by 30%, the first rise in eight years. This was a move no administration takes lightly, given its impact on millions of low-waged or poor citizens. However, Widodo called the increase his ‘last option’ after the cost of providing subsidised fuels tripled in 2022 to USD34 billion from its original budget, reflecting rising global hydrocarbon prices and a depreciating local rupiah currency.
Increased fuel prices can be expected have an impact on annual GDP, which rose 5.44% in the first quarter on exports and consumer spending. Inflation is also rising, increasing to 4.69% in August and prompting the central bank to raise interest rates for the first time in four years at the end of the month. Overall inflation is now forecast to rise by up to 7% by the end of 2022, with possible parallel further interest rates increases.
The rupiah, in common with other currencies, is responding to the impact of rising U.S. dollar interest rates to record a level of IDR14,898.9 against the U.S. unit in early September, against IDR15,048.9 in mid-July.
Foreign debt in the second quarter of 2022 contracted 3.4% year-on-year from the same period in 2021, against the 0.9 % contraction recorded in the previous quarter. The government's external debt contracted by 8.6% during the same period against a 3.4% decline in the first quarter.
Easing government debt partly reflected the repayment of bilateral, commercial, and multilateral loans maturing during the period. The ratio of foreign debt to GDP was around 31.8%, against the previous quarter’s 33.8% and well within the legally mandated 60% ceiling. Foreign exchange reserves in August 2022 remained unchanged at USD132.2 billion at the end of August from July.
Return to contents Next Chapter
