Previous Quarterly Editions
Expropriation Risk: 80 80 80 84 Political Violence Risk: 66 66 64 68 Terrorism Risk: 58 56 58 57 Exchange Transfer and Trade Sanction Risk: 57 57 60 61 Sovereign Default Risk: 45 47 48 47
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Most political and economic activity in Indonesia is now viewed in the light of the approaching general elections in April. This will be first time that all 190 million eligible voters have the opportunity to elect the president, vice-president and members of the country’s legislature, the People's Consultative Assembly, on the same day. The presidential election is a re-run of the 2014 contest, with Joko ‘Jokowi’ Widodo, now the incumbent, again facing Prabowo Subianto, a former army general and representative of the country’s traditional elite, in a contest that has far more to do with demographics, faith and regionalism than political ideology. Going into the final weeks of campaigning, Jokowi remained the favourite to win but the result remains in doubt. So far, the main contest between the two campaigns has focused on their efforts to secure the huge, if often amorphous, ‘Islamic’ vote. In reality this often reflects generational, gender and urban-rural divides rather than specific theological issues. Nevertheless, many foreign investors remain uneasy over the overt Islamist and often nationalist tone of the election campaign. While other factors, notably rising US interest rates, concerns over US-China trade relations, and weak commodity and energy prices, have all hurt the local economy, caution over the potential shape of post-election Indonesia has also contributed to a muted mood among overseas investors. According to finance ministry figures, economic growth in 2018 reached 5.15%, marginally up on 2017 but below the official target of 5.4% and far short of Jokowi’s 2014 pledge to achieve 7% growth during his first term in office. The government’s target for 2019 is now 5.3%, reflecting Jokowi’s current emphasis on stability over economic expansion. Other metrics, notably shortfalls in crude oil and natural gas shipments as well as a decline in mineral exports due to falling demand from China, makes this a realistic assessment. Although Jokowi has worked hard to increase the country’s tax base, whoever wins the election will come under pressure to increase the tax-to-GDO ratio, which remains very low at 11.6%. Tourism, an area the government has sought to develop, was adversely affected during 2018 by a series of natural disasters and an air crash. While tourism from some markets will recover quickly, others are unlikely to show such resilience. In particular, Chinese tourism tends to be highly sensitive to perceived security and safety issues.
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In December, Indonesia’s state-owned miner PT Inalum took control of the local unit of US-based Freeport-McMoRan, which operates the huge Grasberg copper and gold mine in Papua province. In a deal worth 3.85 billion dollars, Inalum has acquired a majority 51.23% share in PT Freeport Indonesia, ending many years of complex and highly politicised negotiations over the mine’s ownership. Under the terms of the new mining permit that replaces its previous contract of work, Freeport is required to build a copper smelter in Indonesia within five years and invest an estimated 14 billion dollars in Grasberg, mainly to extend the largely open-cast site’s underground tunnel network. While the conclusion of the deal may help Jokowi’s re-election prospects, it also makes it more likely that China rather than western economies will provide increased investment in Indonesia, given the heightened concerns among Western companies that future policies reflecting resource nationalism may impact their operations.
The finance ministry imposed tariff increases in September on more than a thousand imported goods to protect domestic industry and stabilise Indonesia's balance of payments. The proximity of the election adds an additional degree of risk in the short term. In July a state-owned mining company reached an initial agreement with U.S.-based Freeport-McMoRan Inc. to increase its share in Freeport’s local unit to 51%. PT Freeport operates the huge Grasberg copper and gold mine in eastern Indonesia’s Papua province. The deal, long anticipated and finally concluded in September, will help strengthen the president’s claims to be safeguarding the nation’s resources but will damage the prospects for investment by multinational companies. Other foreign extractive companies are also ending operations Indonesia, in part due to Jakarta’s policy of seeking full control over the country’s natural resources. Total, the French oil major, is reported to have declined to continue as a partner in the key Mahakam block after the government assumed full control of the concession at the start of 2018. In July it was also announced state-owned oil company Pertamina will take over operations in Chevron’s Rokan oil block concession when its lease expires in 2021, after efforts by the US company to extend the lease were rejected. The decision announced in August to make oil companies sell all their crude output to Pertamina, barring long-term contracts to offshore buyers, is part of efforts to curb the external deficit.
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The primary threat to public order in the run-up to the April election is posed by organised and well-funded conservative Islamist groups that can quickly put impressive numbers of demonstrators onto the streets. There is also the potential for the president to make decisions that opponents will question in an effort to make him appear weak. In January, Jokowi was forced to re-examine the decision to release the Islamist cleric Abu Bakar Bashir on humanitarian grounds. Bashir, now is 80 and ill, is widely regarded as the spiritual leader of the Jemaah Islamiyah militant group and the mastermind behind the 2002 Bali bombings that killed 202 people.
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By the end of 2018 there had been no repeat of the terrorist incidents in May 2018 that included a wave of suicide attacks against churches and police facilities in the East Java city of Surabaya. The authorities blamed these on the Jemaah Ansharut Daulah (JAD) group, a loose confederation of extremists associated with Islamic State. JAD was banned in July and anti-terrorism legislation amended to give the military a greater role in countering such groups. Security forces are continuing a crackdown in Papua after the Free Papua Movement's armed wing killed 19 construction workers in the province in December.
The rupiah ended 2018 down by almost 7% against the US dollar, having fallen to its lowest level in 20 years. This decline reflected a combination of capital outflows linked to concerns over the country’s economic performance, US interest rate increases, and the impact the US-China trade dispute. Although a recovery in January was encouraging, the direction of the rupiah in coming months will be largely dictated by the election campaign and external macroeconomic factors. Headline inflation during 2018 was 3.1%, well within the government’s 2.5-4.5% forecast spread for the year, and this should remain the case in 2019.
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Foreign debt stood at 360 billion dollars in late 2018, remaining relatively stable at around 34% of GDP and well within the government’s legally mandated maximum limit of 60% of GDP. Government debt rose 3.3% and private sector debt increased 7.7% during the first three quarters. The 2018 budget deficit was equal to 1.72% of GDP, below the government’s own forecast of 2.19%. This was the lowest level since 2012 and was achieved largely with the help of a tax amnesty. Foreign exchange reserves are now close to 120 billion dollars, boosted by higher oil and gas revenues.
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