Business Monitor International


Indonesia Country Risk Report

Published 28 January 2015 | Quarterly

  • 52 pages
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$1,195.00
Indonesia Country Risk Report

Core Views

  • Despite fears that Prabowo Subianto's red and white coalition would look to block Jokowi's policy-making efforts, the President was able to push through sweeping fuel subsidy reductions in both November and December 2014 on his own accord. This will greatly reduce the government's subsidy bill and improve its fiscal spending mix, and is also a positive sign in terms of Jokowi's reform intentions going forward.

  • We have downgraded Indonesia's real GDP growth forecast in 2015 to 5.5% (from 6.0% previously), as we note that tight monetary policy will keep a lid on investment activity throughout H115. That said, this rate still implies an acceleration from 2014's estimated 5.1% growth rate.

  • The government's subsidy savings, which are estimated at approximately USD18.2bn in 2015, will be channeled towards infrastructure investment as well as direct fiscal transfers for the poor. This should have a stimulative effect on economic growth in 2015, and represents a significantly more efficient spending programme going forward.

Major Forecast Changes

  • We have downgraded our 2015 average forecast for the Indonesian rupiah to IDR12,694 /USD from IDR12,100 /USD previously owing to broad US dollar strength. In particular, we note that it will be difficult for the rupiah to recover from current levels even as the country's fundamentals improve, as regional currencies remain under considerable pressure.

Key Risks To Outlook

  • Indonesia risks a return to the more polarised political environment witnessed before outgoing President Susilo Bambang Yudhoyono took office in the mid-2000s.

  • Indonesia's poor net international investment position, along with a current account deficit, make it vulnerable to periods of acute risk aversion in the global economy. In an environment of rising global interest rates, this is an increasing risk.

Macroeconomic Forecasts (Indonesia 2013-2016)
Indicator 2013 2014e 2015f 2016f

Table of Contents

Executive Summary
5
Core Views
5
Major Forecast Changes
5
Key Risks To Outlook
5
Chapter 1: Political Outlook
7
SWOT Analysis
7
BMI Political Risk Index
7
Domestic Politics
8
Golkar Infighting Could Sway Parliamentary Balance
8
The Golkar Party's inability to decide on a single chairman, along with the government's recent ruling that the party will need to solve its
The Golkar Party's inability to decide on a single chairman, along with the government's recent ruling that the party will need to solve its
leadership debate internally, have created uncertainties over the future composition of the Indonesian parliament
While the most likely
scenario is for Golkar to remain a single party which identifies itself with the majority Red-and-White coalition, a move to Joko Widodo's
scenario is for Golkar to remain a single party which identifies itself with the majority Red-and-White coalition, a move to Joko Widodo's
coalition or an outright splintering remain possible
Table : Politic al Over view
8
Long-Term Political Outlook
9
Outlook Improved, But Uncertainty Lingers
9
Although Indonesia has returned to relative orderliness since the post-Suharto chaos of the late 1990s and early 2000s, the country
Although Indonesia has returned to relative orderliness since the post-Suharto chaos of the late 1990s and early 2000s, the country
faces multiple challenges and threats to its stability that could flare up again if the opposition to president Joko 'Jokowi' Widodo proves
faces multiple challenges and threats to its stability that could flare up again if the opposition to president Joko 'Jokowi' Widodo proves
excessively obstructionist
Chapter 2: Economic Outlook
13
SWOT Analysis
13
BMI Economic Risk Index
13
Economic Activity
14
Modest Growth Pick-Up In 2015, But Structural Reforms Still Needed
14
While we believe that Indonesia's real GDP growth is likely to accelerate to 5
1% in 2014 on the back
of improving terms of trade and fiscal efficiency, we note that broad structural reforms will be necessary in order to return to the 6
0%+
growth rates that the government is targeting
TABLE: Economic Activity
14
Fiscal Policy
15
Government Capitalises On Oil Collapse With Additional Subsidy Cuts
15
The decision by President Joko Widodo (Jokowi) to make further cuts to fuel subsidies following the collapse in oil prices is an
The decision by President Joko Widodo (Jokowi) to make further cuts to fuel subsidies following the collapse in oil prices is an
unmitigated positive for the government's fiscal policy outlook
2bn over the
course of 2015, we have downgraded our forecast for the fiscal deficit to 1
TABLE: Fiscal Policy
15
Monetary Policy
17
BI To Remain Hawkish Throughout H115 Despite Slow Growth
17
The current Bank Indonesia (BI) administration has burnished its hawkish credentials over the past one and a half years, and we see
The current Bank Indonesia (BI) administration has burnished its hawkish credentials over the past one and a half years, and we see
little room for the central bank to shift course over the near term amid a negative real interest rate environment
That said, we believe
that fundamental inflationary drivers remain subdued, and note that headline inflation should return to the central bank's target range
that fundamental inflationary drivers remain subdued, and note that headline inflation should return to the central bank's target range
by the end of 2015
50%,
implying a 25 basis point cut late in Q415
TABLE: Monetary Policy
17
Exchange Rate Policy
18
Regional FX Weakness, Fundamentals Elicit Rupiah Downgrade
18
The confluence of expectations for further US dollar strength against major global currencies such as the euro and Japanese yen,
The confluence of expectations for further US dollar strength against major global currencies such as the euro and Japanese yen,
along with Indonesia's relatively weak fundamental position at present, have led us to downgrade the unit's 2015 average forecast to
along with Indonesia's relatively weak fundamental position at present, have led us to downgrade the unit's 2015 average forecast to
IDR12,694/USD from IDR12,100/USD previously
TABLE: BMI CURRENCY FORECAST
18
TABLE: Curent Account
19
Chapter 3: 10-Year Forecast
21
The Indonesian Economy To 2024
21
A Bullish Long-Term Growth Story
21
Indonesia's large domestic demand base and exposure to commodities are two key factors driving our bullish growth outlook for the
Indonesia's large domestic demand base and exposure to commodities are two key factors driving our bullish growth outlook for the
next decade
TABLE: Long-Term Macroeconomic Forecasts
21
Chapter 4: Operational Risk
23
SWOT Analysis
23
Operational Risk Index
23
Operational Risk
24
TABLE: Operational Risk
24
Availability Of Labour
26
TABLE: Asia - Availability Of Labour Risk
26
TABLE: Labour Force Employment By Sect or, 2004-2012 ('000)
27
Crime Risk
31
TABLE: Asia - Criminal Risk
32
Chapter 5: Key Sectors
35
Autos
35
TABLE: Autos Total Market - Historical Data And Forecasts
35
Food & Drink
39
TABLE: Food Consumption Indicators - Historical Data & Forecasts
40
TABLE: Hot Drink Value/Volume Sales, Production & Trade - Historical Data & Forecasts
41
TABLE: Mas Grocery Retail Sales By Format - Historical Data & Forecasts
43
Other Key Sectors
45
Table: Oil and Gas Sector Key Indicators
45
Table: Pharma Sector Key Indicators
45
Table: Infrastructure Sector Key Indicators
45
Table: Defence & Security Sector Key Indicators
46
Table: Telecoms Sector Key Indicators
46
Table: Freight TRANSPORT SECTOR Key Indicators
46
Chapter 6: BMI Global Assumptions
47
Global Outlook
47
New Era For Oil
47
Table: Global Assumptions
47
Table : Devel oped States , Real GDP Growt H, %
48
Table : BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
48
Table : Emergi ng Markets , Real GDP Growth , %
49

The Indonesia Country Risk Report helps businesses with market assessment, strategic planning and decision making to promote growth and profitability in Indonesia. It is an essential tool for CEOs, Chairmen, Finance Directors/CFOs, Managing Directors, Marketing/Sales Directors with commercial interests in this emerging market.

An influential new analysis of Indonesia's economic, political and financial prospects through end-2019, just published by award-winning forecasters, Business Monitor International (BMI).

Key Uses

  • Forecast the pace and stability of Indonesia's economic and industry growth through end-2019.
  • Identify and evaluate adverse political and economic trends, to facilitate risk mitigation.
  • Assess the critical shortcomings of the operating environment that pose hidden barriers and costs to corporate profitability.
  • Contextualise Indonesia's country risks against regional peers using BMI's country comparative Risk Index system.
  • Evaluate external threats to doing business in Indonesia, including currency volatility, the commodity price boom and protectionist policies.

The Indonesia Country Risk Report by Business Monitor International (BMI) includes four major sections: Economic Outlook, Political Outlook, Operational Risk and Key Sector Outlook.

Economic Outlook:

How will the Indonesia' economic policy-making and performance impact on corporate profitability over 2015-2019?

BMI provides our fully independent 5-year forecasts for Indonesia through end-2019 for more than 50 economic and key industry indicators. We evaluate growth, and also forecast the impact of economic management.

Economic Outlook Contents

The Indonesia Country Risk Report features BMI's forecasts with supporting analysis for 2015 through to end-2019, set against government views and BMI's evaluation of global and regional prospects.

Key Areas Covered:

Data:

  • Full 10-year forecasts with data - for key macroeconomic variables including GDP (real growth and per capita), population, inflation, current account balance and the exchange rate.
  • BMI's comprehensive Risk Index system - rates each country worldwide for economic and political risk, and rates the business environment, within a global and regional context.

Written Analysis:

  • Economic Activity - real GDP growth, employment, inflation, consumption (retail sales and confidence).
  • Balance of Payments - trade and investment, current and capital account.
  • Monetary Policy - interest rate trends (bank lending and deposit rates) and inflation (producer price and consumer price).
  • Exchange Rate Policy - currency controls, foreign investment flows, exchange rates and foreign exchange reserves.
  • Fiscal Policy - macroeconomic strategy and policies, government finance and tax reforms.
  • Foreign Direct Investment - approvals, inflows and climate.
  • External Debt - debt profile (short and long-term plus public and private sector obligations).
  • Global Assumptions - forecasts for each year to end-2019 covering: major commodities, growth in key regions, inflation, and interest and exchange rates, in the United States, Japan, China and the eurozone.

Key Benefits

  • Rely upon BMI's 100% independent forecast scenarios for Indonesia and underlying assumptions - we take no advertising and are privately-owned.
  • Exploit the benefits of BMI's comprehensive and reliable macroeconomic database on Indonesia, sourced and fully maintained by BMI from an extensive network of private sector, government and multilateral contacts.
  • Gain key insights into the current and future direction of government economic policy, which could significantly affect your company's business prospects, from BMI's team of analysts and economists.

Political Outlook:

What are the political risks to doing business in Indonesia over the next 5-years?

BMI's Indonesia country Risk Index evaluates the short- and medium-term threats to political stability.

Political Outlook Contents

  • SWOT Analysis for the Indonesia Market - Political Strengths, Weaknesses, Opportunities and Threats facing Indonesia.
  • Political Stability and Risk Assessment - BMI's Risk Index assesses explicit short- and long-term risks to political stability; latest positioning and trends for Indonesia's risk are compared with regional and global averages.
  • Current Administration and Policy-making BMI assesses the threats to the continuity of economic policy, and likely changes to the business operating environment.
  • Long-Term Political Outlook BMI examines the structural risks to the stability of Indonesia’s political system and the dominant public policy issues likely to affect decision-makers, and outlines scenarios for how the state could evolve in the medium to long term.

Key Benefits

  • Benchmark Indonesia's risk profile against its neighbours, the global and regional average, allowing easy comparison of risks between key business markets.
  • Identify, evaluate and anticipate political and security risks to the business environment, and to your company's current operations and future plans.
  • Gain valuable insights into government and policy-making, through BMI's specialist team of analysts and economists, and their network of private and public sector sources.

Operational Risk

What are the current operational risks and difficulties associated with doing business in Indonesia?

The Operational Risk section gives an evaluation of current risks and difficulties associated with operating in the market. It also provides a brief overview of the regional Operational Risk Index which benchmarks Indonesia against its neighbours.

Operational Risk Contents

The chapter provides a summary of the main threats in the country, within:

  • Labour Market Risk (Education; Availability of Labour; and Labour Costs)
  • Logistics Risk (Market Size and Utilities; Quality and Extent of the Transport Governance)
  • Trade and Investment Risk (Economic Openness; Government Intervention; and Legal Risks)
  • Crime and Security Risk (Crime; Terrorism; and Interstate Conflict risks).

The report also drills down in greater depth to address key issues in one of the following segments most critical to the market:

  • Transport network, economic openness, cost and availability of labour, crime risks, bureaucratic environment, market size and utilities, and interstate conflict.
  • Assess your company’s exposure to country specific operational and business risks, using BMI’s insight on the current dangers of operating in the market.
  • Evaluate Indonesia’s risk profile against its regional peers, helping you understand the market’s strengths and weaknesses in relation to other countries.

Key Sector Outlook*

Which industry sectors in Indonesia will grow fastest, and where are the major investment opportunities in the market?

BMI identifies investment opportunities in Indonesia's high growth industries including automotives, defence & security, food & drink, freight transport, infrastructure, oil & gas, pharmaceuticals & healthcare and telecommunications & IT.

Key Areas Covered:

  • Market Overview - Size and value of each industry, including recent sector developments and major industry key performance indicators (KPIs) that have impacted company performance.
  • 5-year Industry Forecasts - Forecasts for each year over 2015-2019, using BMI's proprietary industry modelling technique, which incorporates key domestic and international indicators - including economic growth, interest rates, exchange rate outlook, commodity prices and demographic trends - to provide fully integrated forecasts across and within each industry.
  • Demand- and Supply-Side Data/Forecasts - BMI's industry data covers both the output of each industry and the domestic demand, offering clear analysis of anticipated import/export trends, as well as capacity growth within each industry.

Key Benefits

  • Target strategic opportunities in high growth industries, which are benefiting from global mega trends, and thus offer strong investment and growth opportunities.
  • Compare the growth path of different industries to identify which are best placed to benefit from domestic and international economic prospects, and which have historically suffered from volatile growth trends - a key indicator of future risks.

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Testimonials

The sections that I find most interesting and useful are the macroeconomic data and forecasts for the country, top export destinations and economic activity. The indicators/analysis of these areas helps us orient our thinking, our assumptions and, consequently, our decisions in the commercial area.

Country Manager, DHL Express