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Indonesia: Market Profile

Major Economic Indicators

Table: Major Economic Indicators of Indonesia
Table: Major Economic Indicators of Indonesia

Latest Development

  • After rising 5% in 2014, Indonesia’s GDP growth slowed further to 4.8% in 2015, the slowest pace of expansion since 2009. According to the IMF, Indonesia’s real GDP is expected to pick up slightly to 4.9% in 2016.
  • Indonesia's inflation rate eased to 3.6% year-on-year (YoY) in April 2016, after surging to 8.4% YoY in December 2014 after fuel subsidy cuts and food price increase.
  • President Joko Widodo took office in 2014 with an aim to boost the economy and he reshuffled the Cabinet in 2015 in the face of criticisms for failing to revive growth.
  • In April 2016, the Indonesian government announced the 12th economic stimulus packages to boost investment, streamlining approval and procurement procedures for SMEs.
  • China was Indonesia’s eighth largest FDI source in 2014, with FDI stock rising from US$1.15 billion in 2010 to US$6.79 billion in 2014. Most investment went to the mining, food manufacturing, transportation, warehouse and telecom and electronic sectors.
  • Indonesia is part of the China-ASEAN Free Trade Area and has also entered into separate double taxation agreements with the Chinese mainland and Hong Kong.  
  • Indonesia was Hong Kong’s 23th largest export market in the first three months of 2016. Hong Kong exports to Indonesia dropped by 10.9% YoY to US$588 million during this period.

Current Economic Situation

Economy

Indonesia is the largest economy in the 10-nation ASEAN[1] , followed by Thailand. Service and industry are Indonesia’s main economic drivers, accounting for 44% and 43% of GDP respectively, with the remaining 13% attributable to agriculture. Major sectors include manufacturing (tobacco, food and beverages, transport equipment and machinery), mining, construction, transport and communication, finance and real estate.

After rising 5% in 2014, Indonesia’s GDP growth eased to 4.8% in 2015, the slowest pace of expansion since 2009. This further slowdown arose in light of the export ban of raw materials imposed since 2014 and weakening exports of coal and crude palm oil amid sluggish external demand and falling commodities prices. Government spending on infrastructure was slower than expected, thus contributing to softer GDP growth. Household consumption, which accounts for more than half of Indonesia’s GDP, also eased slightly to 5% in 2015.  The IMF expects Indonesia’s real GDP to pick up slightly to 4.9% in 2016, supported by increased investment and government spending on transport and energy.

Indonesia’s consumer price inflation eased to 3.6% YoY in April 2016 from a peak of 8.4% in December 2014 after subsidy cuts and food price increase. The fuel subsidy cuts in late 2014 drove up petrol and diesel prices by some 30%. In the face of rising inflation and currency depreciation, Bank Indonesia (BI), the country’s central bank, raised the administered rate by 0.25 percentage points in November 2014 to 7.75%. In February 2015, the BI shoved the administered rate back to 7.50% and kept it there throughout the year. The BI embarked on a policy easing path and made three consecutive monthly 0.25 percentage points cuts from January 2016, bringing the policy rate down to 6.75% in March 2016 amid weak global economic growth.

President Joko Widodo (also known as Jokowi) took office in October 2014 with an aim to boost the economy and improve infrastructure and public services. In less than one year in into his term, Jokowi reshuffled the Cabinet in August 2015 in the face of criticisms for failing to revive growth, including the appointment of a former central bank governor as chief economic minister.

Since September 2015, the Indonesian government has been releasing a series of economic stimulus packages to boost investment through deregulation and fiscal incentives, including streamlining approval and procurement procedures for infrastructure projects, a temporary reduction in tax on revalued fixed assets and cuts to energy prices. In April 2016, the 12th package was released with a focus on enhancing the ease of doing business for SMEs by cutting the number of procedures for establishing a business from 94 to 49 and the number of permits from nine to six. To further stimulate the economy, the government plans to cut corporate income tax rate to 20% from 25%.

In 2016, the minimum wage of Indonesian saw an average increase of 12%, while Jakarta, the country’s capital, raised the minimum wage by 14.8% to IDR 3.1 million (about US$226). In addition to higher minimum wages, investors would have to take into account the country’s overall business environment. According to the World Bank’s Ease of Doing Business Index 2016, Indonesia ranked 109 out of 189 economies, advancing five places in the rankings compared with the previous year. In particular, starting a business and enforcing contracts are seen as the main difficulties of doing business in Indonesia.

External trade

Indonesia’s major trading partners include Japan, China, Singapore and the US. Major exports were mineral fuels, machinery and transport equipment and manufactured goods. The country’s exports remained weak in 2015, dropping by 14.6% to US$150.3 billion due to low commodity prices and a 12.3% fall in electrical machinery exports. In the same period, Indonesia’s imports contracted by 19.9% to US$172.7 billion. Major imports included machinery, electrical equipment, iron and steel.

In an attempt to boost the domestic mineral processing industry and encourage exports of higher value-added mineral products, the Indonesian government implemented a ban on exports of unprocessed mineral ores in 2014. Indonesia was the world’s largest exporter of nickel ore in 2013 and is home to the largest gold mine. The export ban is expected to spur foreign investment in Indonesia’s metal processing industry. According to the Energy and Mineral Resources Ministry, total investment in processing plants is projected to reach US$18 billion by 2017, including 6 alumina refineries and 30 nickel smelters.

Investment Policy

The Investment Coordinating Board of Indonesia (BKPM), the official foreign investment promotion agency, is responsible for issuing foreign investment licences and improving the investment climate. It provides one-stop services for foreign investors in the licensing process. Currently, FDI in Indonesia is governed by the Negative Investment List (DNI) under Presidential Regulation 39/2014, which stipulates the sectors that are open, wholly or partially to foreign investment. The DNI is reviewed every 3 years. In the latest revision (2014), a key change introduced by the latest DNI is the reduction of the permitted level of foreign ownership in storage, warehousing and distribution activities, which previously allowed 100% foreign ownership and are now capped at 33%. However, the sectors that are further liberalised include pharmaceuticals manufacturing, telecommunication services, and construction of public land transport and cargo terminals.

Investment incentives such as duty exemption on the import of machines and income tax reduction are provided to companies given their investments fall under the designated business fields. In August 2015, the Indonesian government announced an extension of tax holiday for pioneering industries, including oil refinery, infrastructure, maritime transport, telecommunications, downstream metal production and agriculture processing. For details of the investment environment and regulations, please refer to the official website of BMPM.

Foreign investment

Indonesia's FDI showed an increase of 19.2% to Rp365.9 billion in 2015, yet increasing by only 2.6% in US$ terms due to IDR depreciation. Major FDI sources included Singapore, Malaysia, Japan, the Netherlands and Korea. In 2015, most FDI went to the mining, telecommunication, and mineral-processing sectors.

China was Indonesia’s eighth largest FDI contributor in 2014 with its FDI stock in the country increasing from US$1.15 billion in 2010 to US$6.79 billion in 2014. Hong Kong’s cumulative FDI in Indonesia increased from US$924 million in 2010 to US$2.3 billion in 2012, based on UNCTAD statistics.

Trade Policy

Indonesia is a member of the World Trade Organisation (WTO) since 1995, and has since then been lowering tariffs and non-tariff trade barriers. Import tariffs are mostly imposed on an ad valorem basis in Indonesia. The import duty ranges between 0-20% for most items, except for certain food items, tobacco and cars, which have duties ranging from 30% to 150%.

Most of the imports are subject to value-added tax (VAT) in Indonesia. The standard rate of VAT is currently 10%. In addition, there is a luxury sales tax imposed on items, such as automobiles, yachts, aircrafts, properties and etc. At present, the luxury goods sales tax rates range from 10% to 75%. In June 2015, the Ministry of Finance announced to exempt electric appliances, sport equipment and certain branded goods from the luxury sales tax. In turn, these goods are subject to the standard VAT as well as an income tax that is equivalent to 10% of the purchase price.

However, exports to the free trade zones (FTZ) in Batam, Bintan and Karimun (south of Singapore) are free of import tariffs, VAT and luxury goods tax. These FTZ, particularly Batam, are popular offshore production bases for Singapore manufacturers.

A number of import items are subject to Indonesian restrictions such as special licences and limited import volume. For example, a special Importer Identification Number (NPIK), is needed for imports including textiles, footwear and electronics. In addition, certain goods are subject to Pre-shipment Inspection (PSI) as part of the Product Conformity Assessment (PCA) governed by Indonesia’s National Standardisation Agency (BSN). These products include ceramic goods, electronics, food and beverage, footwear, textiles and toys.

Free trade agreements

Indonesia is a member of ASEAN, and thus it is committed to the ASEAN Common Effective Preferential Tariffs (CEPT) scheme, under which all industrial products traded within ASEAN are subject to import duties of 0%-5% only. ASEAN has signed free trade agreements (FTAs) with China, Japan, Korea, India, Australia and New Zealand, while Indonesia has bilateral FTAs with Japan and Pakistan.

Under the China-ASEAN Free Trade Agreement (CAFTA), to which Indonesia is a signatory member, Chinese exports enjoy tariff-free access to the Indonesian market since 2005, and tariffs on most goods were eliminated by 2010. CAFTA tariff elimination is seen as conducive to further expansion of trade between the two countries. In 2015, bilateral trade between China and Indonesia reached US$44.5 billion. Under an upgraded agreement on CAFTA concluded in November 2015, ASEAN and China expect to raise bilateral trade to US$1,000 billion in 2020 from about US$480 billion in 2014.

In 2015, China was the second largest importer of Indonesia’s non-oil exports, trailing only the US. The share of Indonesian non-oil and gas exports to China increased from 8.5% in 2004 to 10% in 2015. The share of Indonesia’s non-oil imports from China increased from 11.6% in 2004 to 24% in 2015.

Indonesia has also entered into double taxation agreements (DTAs) with over 60 countries/territories including the US, japan, Singapore and China. It concluded with Hong Kong a Comprehensive Double Taxation Agreement in 2010, which came into force in 2012.

Hong Kong's Trade with Indonesia

Indonesia is Hong Kong’s 23th largest export destination and the sixth largest destination in ASEAN. In the first three months of 2016, Hong Kong’s exports to Indonesia dropped by 10.9% YoY to US$588 million. Major export items included telecom equipment & parts (34.6% share), knitted or crocheted fabrics (6.6%), computers (5.8%). During the same period, Hong Kong’s imports from Indonesia grew 2% to US$570 million. Major imports included jewellery (21.9 %), coal, not agglomerated (21.2% share), edible products and preparations (10%).

Table: Hong Kong Trade with Indonesia
Table: Hong Kong Trade with Indonesia

Indonesian Involvement in the Hong Kong Economy

According to the Census & Statistics Department of Hong Kong, there were 19 Indonesian companies setting up local offices in Hong Kong as of June 2015, taking care of local businesses for their Indonesian parent companies, which include Lippo Ltd, a member of the Indonesian conglomerate Lippo Group. In addition, a number of small and medium enterprises (SMEs) are established by Indonesians in Hong Kong, with businesses in restaurants, supermarkets, and courier services.

In the first three months of 2016, there were 94,797 Indonesians visiting Hong Kong, down 11.2% from the year-earlier period. 

As at 30 April 2016, there were 170,498 Indonesian nationals residing in Hong Kong.

More Information

More information on the Belt and Road countries’ economic and investment environment, tax and other subjects that are important in considering investment and doing business are available in The Belt and Road Initiative: Country Business Guides.


Related information: Indonesia infographics


[1]  ASEAN consists of 10 members: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam.

Content provided by Picture: Winnie Tsui