Indonesia is South East Asia’s largest economy and holds a number of investment opportunities. The manufacturing, oil and gas, and infrastructure sectors all represent attractive options, while portfolio investment has traditionally been a key source of capital inflows. Businesses are able to make use of Indonesia’s strategic location on major global shipping lanes, which keeps import and export costs low. However, investors cannot ignore the country’s challenging business environment.
We keep our clients informed of the latest market moves and political developments in Indonesia, as part of our 'top-down' and 'bottom-up' perspective. Clients also benefit from in-depth analysis on 23 of Indonesia’s most important industries. We provide interactive data and forecasting alongside detailed and risk-assessed analysis from our expert research teams. We aim to keep you one step ahead, so you can operate with confidence in Indonesia.
Indonesia Country Risk
We expect Indonesia's real GDP growth to pick up pace in 2016, underpinned by strong investment and government spending. The government's accommodative monetary and fiscal stance should help to mitigate external headwinds, informing our forecast for Indonesia's real GDP to expand by 5.2% in 2016.
Indonesia's fiscal balance will likely deteriorate in 2016 as a combination of lower-than-expected revenue realisation and strong capital expenditure result in a wider shortfall. As such, we forecast Indonesia's budget deficit as a share of GDP to widen to 2.7% in 2016, versus our previous forecast of 2.5%. The weakening of the government finances could lead to expenditure cuts, potentially undermining the growth outlook for the Indonesian economy in 2016.
Major Forecast Changes...
Indonesia Operational Risk Coverage (9)
Indonesia Operational Risk
Indonesia Operational Risk
BMI View: Indonesia performs poorly with regards to labour market risks, due primarily to low skill levels in the labour force and high employment costs. Historically poor secondary and tertiary educational enrolment rates have resulted in significant impediments to the development of a workforce capable of skilled, technical labour. The relatively small proportion of the workforce with more advanced skills may...
Indonesia Crime & Security
Indonesia Crime & Security
Foreign workers and expatriates in Indonesia face a higher risk from terrorism and criminal activity than in many other countries in the region. Foreigners are specifically targeted by terrorist groups and could fall victim to bombings, shootings and kidnappings. Although violent crime is not common, gangs retain some degree of power and influence, and foreign workers and businesses will be at risk from general crimes such as petty theft, robbery and credit card fraud. Consequently, Indonesia is ranked lowly in BMI's Crime and Security Risk Index for the Asia region, in 21 st place out of 30 states, with a score of 44.1 out of 100. The country's only main advantage in this regard is its large army, which improves its international security position.
Membership of the Association of South East Asian Nations (ASEAN), a history of successful bilateral dispute management and a powerful army mean that the risk of...
Indonesia Labour Market
Indonesia Labour Market
Indonesia performs poorly with regards to Labour Market risks, with low basic skills levels and high costs of employment. Low secondary and tertiary educational enrolment rates are also significant impediments to the development of a workforce capable of skilled, technical labour, which may result in having to import skilled labour, incurring high employment costs. Indonesia's overall score for Labour Market Risk is 43.5 out of 100, putting it 20 th regionally, between Samoa and Myanmar (on 44.8 and 45.6 points respectively.
Availability of labour risks are high for Indonesia, and the worst implication stemming from this is the higher wages for potential employers, particularly in skilled professions. A large proportion of Indonesia's workforce lack the skills and literacy to offer investors seeking anything but the most basic manual work. This is reflected in the country's low score of 44.9 out of 100 for availability of labour....
BMI View: Indonesia's poorly developed logistics network is one of the major barriers to economic growth in the country. The difficulties in terms of constructing and maintaining infrastructure over a vast archipelago of 17,000 islands means that the transport and utilities network remains severely underdeveloped on most islands apart from Java. This will pose risks to business operations in the form of supply chain delays and utilities shortages, as growth in key industries such as mining and agriculture places a greater strain on the logistics network. On the other hand, maritime trade connectivity is improved due to the country's proximity to vital global shipping lanes, and major transhipment hubs in Malaysia and Singapore. This has significantly reduced the costs of importing and exporting. Consequently,...
Indonesia Trade & Investment
Indonesia Trade & Investment
BMI View: Investors in Indonesia are faced with a variety of hurdles in the process of setting up a business. The operating environment is undermined by a range of restrictions on foreign direct investment, high levels of bureaucracy, numerous trade barriers, endemic corruption and poor enforcement of intellectual property laws. Having said that, BMI emphasises that Indonesia is South East Asia's largest economy, and there are therefore opportunities for foreign investment, particularly through the stock exchange and in targeted industries such as infrastructure, oil & gas and manufacturing. ...
Indonesia Industry Coverage (32)
BMI View: We hold an optimistic outlook towards Indonesia's agriculture sector and see significant growth opportunities in sub-sectors such as livestock, sugar and palm oil. The country's goal to become self-sufficient in a large number of commodities is overly ambitious in light of the robust outlook for food and drink consumption. Agricultural production will struggle to expand in the coming years amidst scarce agricultural land, the lack of proper infrastructure and the existence of a large number of low-technology, small-scale farmers. While we believe that Indonesia will be able to reduce its dependence on rice imports in the coming years, sugar, corn and beef self-sufficiency are far-fetched.
|Self-Sufficiency Goal Not Always Achievable|
|Indonesia - Select Commodities Self-Sufficiency Ratios (%)|
BMI View: The overall vehicle market will return to positive growth in 2016, but will remain below its 2013 highs in volume terms. Rate cuts will be required to kick-start the credit-dependent market.
|Passenger Car and Light Commercial Vehicle Sales|
|f = BMI forecast. Source: Gaikindo, BMI|
Indonesia Commercial Banking
|Date||Total assets||Client loans||Bond portfolio||Other||Liabilities and capital||Capital||Client deposits...|
Indonesia Consumer Electronics
BMI View: We expect a second successive year of US dollar contraction for Indonesia consumer electronics device spending in 2016, but with a forecast contraction of just 0.1%, performance will be a considerable improvement over 2015. The medium term outlook is much stronger, with economic development driving up incomes, and a significant boost to our forecast across the board from rupiah appreciation against the USD envisaged for 2018-2020. We forecast a CAGR of 8.9% for 2016-2020 as a whole, to total spending of USD19.7bn in 2020. Underpinning our view for improved performance later in the forecast is pent-up demand from 2015 and 2016, which will be unlocked as economic growth strengthens and the household income profile resisters a considerable improvement. Other factors making a positive contribution to the consumer spending growth story will include ...
Defence & Security
Indonesia Defence & Security
BMI View: Indonesia's domestic defence sector is large but needs the current modernization and reorganization efforts underway to realize its potential. The defence industry is largely state-owned, stifling innovation and preventing independent expansion. Current President Jokowi is not likely to prioritize the defence industry as much as previous President Yudhoyono, but as the government is already taking steps to improve procurement procedures and boost local industry by modernizing and re-structuring, the industry is nevertheless likely to slowly improve over the next few years. Efforts are especially being made in the Navy and Air force, and with foreign partnerships coming into place, the industry will likely have a boost regardless of the realization of the ambitious budget increase to 1.5% of GDP before 2020.
The economy is still under pressure, with a slower growth than...
Food & Drink
Indonesia Food & Drink
BMI View: Over the coming months, consumer headwinds - high interest rates, elevated inflation and currency weaknesses - will limit expansion of household purchasing power. Over the longer term, we hold a positive outlook for the Indonesian consumer, translating into rapid growth in the food and drink sector. Rising incomes, urbanisation and high levels of investment will fuel sales of packaged food and soft drinks. The food retail sector will also formalise at a rapid pace, although retailers' margins remain under threat from further hikes in the minimum wage.
Headline Industry Data
Food consumption (local currency) forecast growth in 2015 = +9.2%; compound annual growth rate (CAGR) forecast 2014 to 2019= +8.9%.
Alcoholic drinks value sales growth (local currency) in 2015 = +10.5%; CAGR forecast...
Indonesia Freight Transport
BMI View: In 2016 the air freight mode will see the most significant growth in Indonesia, as trade in Asia is set to rebalance after stalling in 2015 and key sectors such as the pharmaceutical market will see a boost in growth. In our medium-term forecast to 2019, BMI believes the rail and air freight modes will see higher growth than road freight transport, as a result of state and external investment in upgrading rail networks and higher growth in key air freight indicators. Road freight will continue to be hampered by poor road infrastructure and competitiveness.
BMI is optimistic about Indonesia's domestic and trade growth in the coming years. 2016 will mark a return to positive real trade growth (with both positive import and export growth) of 1.75%, up from an estimated -2.32% in 2015. In addition, we forecast real GDP growth of 5.6% in 2016, which should...
Indonesia Freight Transport
BMI View: After a slowdown in Asian trade in 2015, Indonesia's trade sector is set to return to growth in 2016 and will strengthen beyond this over the medium term. Indeed, all major commodities exports and imports are expected to return to positive growth and with it, Indonesia's freight transport modes will benefit. Rail and air freight will, in particular, see marked growth as a result of state and external investment in upgrading infrastructure. Although Indonesia's ports will also continue to experience stable growth, their still-poor capacity and efficiency will hinder its growth potential.
Latest Updates & Key Forecasts
Road freight growth is forecast to grow by 3.7% in 2016, at 1.38bn tonnes.
Rail freight volumes are forecast to rise by 4.2% in...
Indonesia Information Technology
BMI View: As a market that is highly dependent on imported products and solutions, Indonesian IT demand was hit by regional economic uncertainty and rupiah depreciation in 2015, with the hardware segment worst-affected as import taxes added to the reduction in affordability. We expect conditions to begin to improve from 2016, and forecast Indonesian IT spending will grow at a CAGR of 12.2% over 2016-2020 to reach a total of IDR232.4trn in 2020. Rupiah stabilisation and then appreciation will help boost affordability, while rising household income and enterprise modernisation and economic development will support software and services demand growth.
Latest Updates & Industry Developments...
BMI View : Despite expanding use of public-private partnerships and increased public funding for energy and transport, Indonesia will continue to present investors with a range of operational challenges, leading to frequent project delays and development backlogs. We expect the residential and non-residential sub-sector to outperform in 2016 followed by railways.
Latest Updates And Structural Trends
We expect to see growth for 2016 and 2017 come in at 7.2% and 7.3% respectively, with residential and non-residential construction expected to post the strongest annual growth rates.
The 880MW power contract secured jointly by Japan-based Mitsubishi Hitachi Power Systems (MHPS),...
BMI View: The insurance sector in Indonesia is one of the fastest growing in the Asia Pacific region and offers significant future growth potential. The country is home to a large population and while average household incomes in many areas are prohibitively low, the gradual expansion of the middles classes, growing income levels and development of more affordable insurance products including microinsurance all indicate a positive environment for the development of life and non-life insurance. As such we are seeing a growing number of global insurers take interest in the Indonesian market, entering either as new entrants or via local acquisitions in what is currently a relatively fragmented marketplace.
Indonesia Medical Devices
BMI View: We expect Indonesia to remain one of the fastest growing medical device markets over the 2014-2019 period, expanding by a CAGR of 14.6%. A shift towards more advanced medical equipment in the country, and increased government spending on healthcare and infrastructure development projects will spearhead growth; however, financial sustainability of the national health insurance programme remains a concern.
|Total (USDmn)||Per Capita (USD)||Total (Local Currency mn)||...|
BMI View: We have increased our 2016 tin price forecast to USD16,500/tonne owing to a stabilisation in the Chinese economy over Q116 that has boosted all industrial metal prices significantly over January-April. While we expect consolidation over the remainder of 2016, tin prices will continue to recover beyond 2016 as the global market posts sustained market deficits and inventories dwindle.
BMI view: We have revised our aluminium price forecast from USD1,575/tonne to USD1,600/tonne in 2016, as the tightening market provided an earlier than expected floor in Q116. Aluminium prices will gradually edge higher as the global market moves into a deficit by 2018.
BMI View: Despite the strong H116 iron ore price rally, prices will edge lower due to weakening Chinese consumption over the latter half of 2016. From 2017 onwards, iron ore prices will remain subdued as iron ore prices remain under pressure from an over-supplied seaborne market, driven by strong production growth in Australia and Brazil, and weak consumption growth in China.
BMI View: Nickel prices will bottom in 2016 as weak production drags the global market into deficit. For instance, we expect Chinese imports of nickel to grow over the coming quarters. Prices will begin 2016 weaker than we had previously expected and we have thus revised down our 2016 average price forecast to USD9,000/tonne from USD10,500/tonne.
BMI View: We have revised down our average copper price forecast for 2016 to USD4,900/tonne. We expect prices to find a floor over the first half of 2016, and begin to stabilise thereafter, supported by production cuts and modest consumption growth.
BMI View: We have raised our gold price forecast for 2016 to USD1,275/oz and have a new five-year price target of USD1,400/oz. We have turned more positive towards prices due to rising inflation pressures and our view that real rates will remain depressed in developed markets beyond 2016. A modest rise in prices will be insufficient to reverse the trend of weak mine investment and industry consolidation.
BMI View: Global steel prices will remain subdued due to a persistent steel oversupply over the coming quarters. From 2017 onwards, steel prices will gradually edge higher as the global steel surplus will narrow due to Chinese supply moderation.
BMI View: We maintain our average zinc price forecast for 2016 of USD1,750/tonne. We expect zinc prices to reach a floor over the first half of 2016, and begin to stabilise thereafter, as production cuts shift the market to a deficit.
BMI View: Lead prices will gradually edge higher as the global lead market will shift into deficit by 2017 as production growth will slow over the coming years.
BMI View: Indonesia's mineral production growth will slow on the back of the country's ban on mineral exports and continued mineral price weakness.
Oil & Gas
Indonesia Oil & Gas
BMI View: Economic growth, supportive demographics and a weak oil price environment will support consumption growth in Indonesia. However, a tough regulatory environment and weak oil prices will remain an impediment to hydrocarbon production over the next decade. More comprehensive reforms are required to turn Indonesia's upstream segment around.
In BMI's Asia Pacific Petrochemicals Risk/Reward Index, Indonesia ranks 10th out of 12 countries with a score of 52.0 out of 100, unchanged since the previous quarter. It sits 9.5 points behind Australia and 5.1 points ahead of the Philippines, indicating that its ranking is unlikely to change in the short term. Plans for capacity expansion, coupled with improved risk, could raise the country's rating, but BMI thinks it highly unlikely that it will close the gap with other Asian states
The Indonesian petrochemicals industry is witnessing continued investor interest with a surge of capacity over the next five years set to make it more self-sufficient. However, BMI's latest Indonesia Petrochemicals Report warns that the country's petrochemicals market is set to witness a downturn amid weaker growth, particularly as a result of a downturn in...
Pharmaceuticals & Healthcare
Indonesia Pharmaceuticals & Healthcare
BMI View: Foreign exchange pressures will be a key factor influencing the strategies of Indonesia drugmakers. In particular, the need to reduce their reliance on the import of pharmaceutical ingredients has been accentuated in 2015 as the depreciating rupiah erodes profit growth. Addressing this issue will see local firms move to develop their own capability in producing pharmaceutical ingredients or to source inputs from Indonesia-based manufacturers
Headline Expenditure Projections
Pharmaceuticals: IDR70,402bn (USD5.9bn) in 2014 to IDR77,644bn(USD5.6bn) in 2015; +10.3% growth in local currency terms and -4.7% in US dollar terms.
Healthcare: IDR311,131bn (USD26.2bn) in 2014 to IDR347,254bn (USD25bn) in 2015; +11.6% growth in local currency terms and -3.5% in US dollar terms....
BMI View: The power sector in Indonesia is one of the fastest-growing in the Asia Pacific region. The government has committed to ambitious expansion plans and a huge volume of projects are in the pipeline, encompassing coal and gas fired thermal power plants alongside a large number of hydropower and non-hydropower renewable projects. The country is attracting considerable amounts of foreign investment and opportunities abound for a range of related industries, though we do note that some barriers to entry remain and corruption is an ongoing risk. Historically, projects have been subject to extensive delays, and while we do not expect government targets to be achieved within the stated timeframe, we do expect to see significant gains in terms of total capacity and generation over our forecast period to 2024.
Indonesia Real Estate
BMI View: Although we are forecasting no growth in rental rates in 2015 or 2016, we are optimistic on the Indonesian commercial real estate market's outlook for the longer term. Favourable demographic trends will boost demand within the country, driving development particularly in retail real estate. Meanwhile, the increasingly developed economy, international interest and closer integration with the rest of the Association of Southeast Asian Nations (ASEAN) will increase Indonesia's attractiveness to foreign investors.
We believe that Indonesia's economy will begin to pick up pace, with real GDP growth set to hit 6.0% in 2015, rising to 6.5% by the end of our forecast period in 2018. This growth will be supported by increasing consumer spending within the country, as well as an improving balance of payments situation. Although a strengthening...
BMI View: Growing international pressure on Indonesia to adopt a more stringent environmental policy will provide a boost to the country's renewable energy industry and facilitate greater inflows of investment from international financial institutions and governments. The country's underdeveloped geothermal sector will benefit significantly, and we maintain our view that Indonesia will emerge as Asia's largest geothermal market by the end of our forecast period in 2024.
BMI View: Indonesia is expected to weather both regional and global headwinds throughout our forecast period. A robust economy, combined with one of the world's largest populations, offers retailers with a lucrative market. The middle class will continue to expand, with more than 25mn households expected to earn more than USD10,000 by 202. As such, many retail sectors will enjoy double-digit growth, from housing and transport to education and health.
|Headline Household Spending|
BMI View: Both of Indonesia's main ports are set to experience positive growth in 2016. Consumer demand and economic growth are set to bolster the country's shipping services, although the ongoing slowdown in China's economy could hold Indonesia back from maximising its potential over the next couple of years.
Indonesia's economy is faring extremely well at present, with real GDP growth forecast to reach 5.6% in 2016, up from 4.8% (estimate) in 2015. Added to the country's overall growth is the high rate of per capita growth, which we estimate rose by 10.8% in 2015 and, despite contracting slightly to 9.4% in 2016, will remain steadily about 10% in our medium-term forecast to 2019. This high consumer demand led from favourable demographics, rising levels of urbanisation and greater household leverage all bode...
BMI View: Although current and ongoing investments are certainly helping to improve the country's fixed broadband infrastructure, geographical barriers due to Indonesia's archipelagic nature and high rollout costs will pose downside risks to the government's plans to develop the country's fixed broadband infrastructure. By engaging in 4G network and infrastructure sharing arrangements, Indonesia's mobile networks operators will benefit from efficiencies that will not only boost LTE rollout speeds, but also help the operators reduce costs. The proliferation of 4G mobile connections could have a dampening effect on demand for fixed broadband services. Having...
BMI View: The tourism industry in Indonesia is growing rapidly, benefiting from proximity to major regional markets, an expanding luxury hotel sector and greater international air connectivity. Also supporting growth in the tourism sector is ongoing and widespread government led investment in transport infrastructure which is gradually improving accessibility across Indonesia's many islands. We expect international arrivals to increase steadily throughout our five year forecast period, though at present we do not expect more ambitious government targets to be realised by 2019.