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Indonesia: Market Profile


Picture: Indonesia factsheet
Picture: Indonesia factsheet

1. Overview

Indonesia is the world's fourth most populous nation. It has maintained political stability and is one of Asia Pacific's most vibrant economies, emerging as a buoyant middle-income country. The country's economic planning follows a 20-year development plan (2005 and 2025). It is segmented into five-year, medium-term plans, called the Rencana Pembangunan Jangka Menengah Nasional (RPJMN), each with different development priorities. The current medium-term development plan – the third phase of the long-term plan – runs from 2015 to 2020. It focuses on, among other things, infrastructure development and social assistance programmes related to education and healthcare. To strengthen the country's investment climate and economic growth, the government continues to announce policy reforms intended to cut red tape and make it easier to conduct business.

Sources: World Bank, Fitch Solutions

2. Major Economic/Political Events and Upcoming Elections

June 2018
Regional and local elections were held on June 27, 2018 to elect 17 governors, 39 mayors and 115 regents across the country. The elections included gubernatorial elections for Indonesia's four most populous provinces: West Java, East Java, Central Java and North Sumatra.

September 2018
A major earthquake and tsunami killed more than 2,000 people on the island of Sulawesi, around the city of Palu.

December 2018
The eruption of Anak Krakatau caused another tsunami, killing over 420 people and displacing an additional 40,000.

April 2019
Parliamentary and presidential elections held. It was the first time in the country's history that the president, the vice president, members of the People's Consultative Assembly (MPR), and members of local legislative bodies were elected on the same day.

Sources: BBC Country Profile - Timeline, Fitch Solutions

3. Major Economic Indicators

Graph: Indonesia real GDP and inflation
Graph: Indonesia real GDP and inflation
Graph: Indonesia GDP by sector (2017)
Graph: Indonesia GDP by sector (2017)
Graph: Indonesia unemployment rate
Graph: Indonesia unemployment rate
Graph: Indonesia current account balance
Graph: Indonesia current account balance

e = estimate, f = forecast
Sources: IMF, World Bank
Date last reviewed: May 1, 2019

4. External Trade

4.1 Merchandise Trade

Graph: Indonesia merchandise trade
Graph: Indonesia merchandise trade

Source: WTO
Date last reviewed: May 1, 2019

Graph: Indonesia major export commodities (2018)
Graph: Indonesia major export commodities (2018)
Graph: Indonesia major export markets (2018)
Graph: Indonesia major export markets (2018)
Graph: Indonesia major import commodities (2018)
Graph: Indonesia major import commodities (2018)
Graph: Indonesia major import markets (2018)
Graph: Indonesia major import markets (2018)

Sources: Trade Map, Fitch Solutions
Date last reviewed: May 1, 2019

4.2 Trade in Services

Graph: Indonesia trade in services
Graph: Indonesia trade in services

Source: WTO
Date last reviewed: May 1, 2019

5. Trade Policies

  • Indonesia has been a member of the World Trade Organisation (WTO) since January 1, 1995 and a member of the General Agreement on Tariffs and Trade (GATT) since February 24, 1950.

  • Indonesia is a member of the Association of South East Asian Nations (ASEAN) and a signatory to the ASEAN Free Trade Agreement (FTA), which aims to reduce tariff and non-tariff barriers to trade between member states. ASEAN has also negotiated a FTZ with Australia, New Zealand, mainland China, India, South Korea and Japan. The latter has a separate bilateral FTA with Indonesia.

  • While Indonesia's membership of numerous regional and economic blocs and FTAs has resulted in the country having a very low applied average tariff rate of 2.3% (which is the sixth lowest in East and South East Asia), there are numerous other barriers to trading with the country. There is significant trade bureaucracy (time and costs) involved for supply chains when exporting out of and importing into Indonesia, with various permit and licensing requirements.

  • The Indonesian government provides various subsidies and tax incentives to local businesses and farms as it seeks to make local agriculture, manufacturing and labour-intensive industries more competitive.

  • Indonesia has imposed a variety of import bans on foreign companies, including bans on alcohol and foodstuffs such as meat and corn. Import quotas have also been imposed on other agricultural products, such as fruits and vegetables.

  • VAT is applicable on deliveries (sales) of goods and services within Indonesia at a rate of 10%. VAT on exported goods is zero-rated, while imported goods are subject to VAT at a rate of 10%.

  • In January 2017, Indonesia relaxed the ban on unprocessed mineral exports in an attempt to boost the economy and ease budgetary pressures. The ban was implemented in 2014 to promote the domestic mineral processing industry and encourage exports of high value-added mineral products.

  • In August 2018, the Indonesian government announced an increase in tariffs on over 500 consumer goods to 7.5% in order to reduce imports and improve the current account. Since the announcement, the planned number of goods affected by the tariffs has increased from 500 to 900, and some tariffs have increased to 10%. Affected products are primarily consumer goods, as opposed to raw materials, as imported consumer goods can easily be substituted for domestic ones.

Sources: WTO – Trade Policy Review, Global Trade Alert, Fitch Solutions

6. Trade Agreement

6.1 Trade Updates

  • In April 2018, the African Export-Import Bank and the Indonesia Export-Import Bank entered into an agreement to commit up to USD100 million to support businesses and trade activities between Indonesia and African countries.

  • Indonesia is set to become part of one of the largest Asian/southern hemisphere FTAs - the Regional Comprehensive Economic Partnership (RCEP). Major negotiations for the eventual conclusion of the RCEP occurred in April 2018.

  • In 2015 the ASEAN Economic Community (AEC) was launched, with member states being Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Cambodia, Laos, Myanmar and Vietnam. The AEC aims to integrate ASEAN member states in to a single market, which will provide a base for facilitating freer flows of goods, services, investment, educated labour and capital flow between these member states.

6.2 Multinational Trade Agreements

Active

  1. ASEAN Free Trade Area: The ASEAN Free Trade Area (AFTA) entered into force on January 1, 1993. AFTA reduces tariff and non-tariff barriers between member states; in particular, Indonesia's trade with Malaysia and Singapore is significantly boosted. The 10 members of the AFTA are Brunei, Indonesia, Malaysia, the Philippines, Singapore, Vietnam, Laos, Myanmar, Indonesia and Cambodia. AFTA particularly boosts Indonesia’s trade with Malaysia and Singapore.

  2. ASEAN-Mainland China FTA and Economic Integration Agreement: The FTA, which came into effect in January 2005 for goods and July 2007 for services, is a comprehensive economic cooperation agreement between ASEAN member states and Mainland China. The goal of the agreement is to eliminate tariffs and address behind-the-border barriers that impede the flow of goods and services. Mainland China is Indonesia’s second-largest export and largest import partner. The FTA is a major boost to trade between these countries.

  3. Indonesia-Japan Free Trade and Economic Integration Agreement: The FTA came into effect on July 1, 2008 and is aimed at facilitating, promoting and liberalising trade in goods and services between the parties. Japan is Indonesia's third largest export and import partner. This FTA provides a strong boost to trade ties and helps the country balance its reliance on Mainland China.

  4. ASEAN-South Korea Free Trade and Economic Integration Agreement: The FTA, which came into force on October 14, 2010, allows 90% of the products traded between ASEAN and South Korea to enjoy duty-free treatment. The agreement is significant given the high trade flows between the countries.

  5. ASEAN-India FTA: The FTA entered into force on January 1, 2010 and involves the liberalisation of tariffs on over 90% of products traded between the two regions, including the so-called special products, such as palm oil (crude and refined), coffee, black tea and pepper.

  6. ASEAN-Hong Kong FTA: The agreement came into force on January 1, 2019 but will take time for all members of ASEAN to comply as implementation is subject to completion of the necessary procedures. The deal aims to cover all aspects of trade in goods, such as tariffs, rules of origin, non-tariff measures, customs procedures and trade facilitation, trade remedies, technical barriers to trade, and sanitary and phytosanitary measures. Indonesia will eliminate customs duties of approximately 75% of its tariff lines within 10 years, whereas Hong Kong will grant tariff-free access to all products originating from ASEAN member states when the FTA takes effect.

Under Negotiation

  1. India-Indonesia Comprehensive Economic Cooperation Arrangement: The arrangement seeks to expand and develop bilateral relations and cooperation in the fields of trade, industry, investment and other economic fields.

  2. Indonesia-European Union (EU): Negotiations for an FTA between Indonesia and the EU were launched in April 2016, with six rounds held to date. The EU is Indonesia’s fourth largest trade partner. Indonesia already benefits from the EU’s Generalised Scheme of Preferences (GSP), with about 30% of Indonesia’s exports to the bloc subject to lower duties. Indonesia currently has a partnership and cooperation agreement with the EU, which has been in force since 2014.

  3. RCEP: RCEP is a proposed FTA between the 10 member states of ASEAN and the six states with which ASEAN has existing FTAs (Australia, Mainland China, India, Japan, South Korea and New Zealand). RCEP will cover trade in goods, trade in services, investment, economic and technical cooperation, intellectual property, competition, dispute settlement and other issues.

Note: Only major FTAs cited
Sources: WTO Regional Trade Agreements database, government websites, Fitch Solutions

7. Investment Policy

7.1 Foreign Direct Investment

Graph: Indonesia FDI stock
Graph: Indonesia FDI stock
Graph: Indonesia FDI flow
Graph: Indonesia FDI flow

Source: UNTCAD
Date last reviewed: May 1, 2019

7.2 Foreign Direct Investment Policy

  1. Since coming into power in 2014, the incumbent Indonesian President Joko Widodo, also known as Jokowi, has taken a pro-investment approach by seeking to attract foreign investment in order to boost the country's manufacturing sector and infrastructure. The Indonesian government has promoted some policies and initiatives to encourage foreign direct investment (FDI), particularly those that assist in developing the country's economy and skill base.

  2. The Foreign Investment Law regulates FDI in the country by granting licensing procedures principally controlled by the Indonesia Investment Coordinating Board (BKPM). It specifies that foreign investment should be in the form of a limited liability foreign investment company incorporated in Indonesia, in which the investor goes into partnership with an Indonesian person or entity as shareholders. The BKPM oversees FDI in Indonesia and is responsible for issuing investment licences to foreign entities. It opened an online portal in 2012 to streamline bureaucratic procedures associated with investment and opening a business. The BKPM is intended to act as a one-stop-shop for business licenses, but investment in the mining, oil and gas, plantation, and other sectors require further authorisation from relevant ministries.

  3. The government encourages FDI by offering a number of fiscal and non-fiscal incentives, including tax holidays, tax allowances, and the exemption of import duties for capital goods and raw materials required for investment. However, the economy remains significantly closed to foreign investment as a result of the multitude of barriers which exist for foreign investors.

  4. Foreigners cannot effectively own land in Indonesia in both urban and rural settings. They can, however, obtain formal rights to use the land for a certain period for purposes such as mineral expropriation, agriculture, building and commercial purposes by forming a legal entity (company) incorporated according to Indonesian law and domiciled in Indonesia. Businesses can purchase apartments and office space in Indonesia valid for a period of time if various stringent stipulations are complied with. It remains a difficult and time onerous process.

  5. Indonesia restricts foreign investment in some sectors through a Negative Investment List. The Negative Investment List aims to consolidate FDI restrictions from numerous decrees and regulations in order to create greater certainty for foreign and domestic investors. There are a number of business operations in which foreigners are explicitly barred from participating. These include the production of alcoholic beverages as well as the ownership of public museums, historical sites and casinos. In addition, FDI in other sectors faces a variety of restrictions, most of which include requirements for special licences and/or caps on foreign ownership. Some of these more restricted industries include mining and finance. The negative list was last revised in 2016, but is set for an update in 2019 to allow full foreign ownership in 25 industries so as to attract more investment in the country following disappointing FDI flows in 2017-2018.

  6. In order to conduct business in Indonesia, foreign investors must be incorporated as a foreign-owned limited liability company in Indonesia. Investors are also required to participate in the Workers Social Security Programme.

  7. The Indonesian government is attempting to ensure that it maintains a stake in the exploitation of the country's national resources by maintaining that foreign-owned mining companies must gradually divest 51% of its shares to Indonesian interests over 10 years, with the price of divested shares determined based on fair market value and not taking into account existing reserves. Under new proposed oil and gas laws, the state's national oil company will have the right of first refusal over any new oil and gas contracts in Indonesia.

  8. High regulatory uncertainty exists in the mining, oil and gas, and construction industries. Indonesia regularly issues and reverses various policies on export bans, taxes and licensing requirements, which creates significant investor uncertainty in these sectors.

  9. Various incentives are offered to companies which are located in bonded zones throughout the country, the largest of which is based on the island of Batam, south of Singapore. These include acceptance of 100% foreign ownership; exemption from import duties, income tax, VAT and sales tax; and fewer required permits and licences.

  10. Indonesia also has several special economic zones and industrial zones although development is sometimes limited. These provide further incentives for foreign investment.

Sources: WTO – Trade Policy Review, ITA, US Department of Commerce, Fitch Solutions

7.3 Free Trade Zones and Investment Incentives

Free Trade Zone/Incentive ProgrammeMain Incentives Available
Batam Island Free Trade Zone (FTZ)• Largest FTZ located just south of Singapore (bonded zone)
• Investors are not required to apply for additional implementation licenses (location, construction, and nuisance act permits and land titles)
• Foreign companies allowed 100% ownership
• Import duty, income tax, VAT and sales tax exemption on imported capital goods

Sources: US Department of Commerce, Fitch Solutions

8. Taxation – 2019

  • Value Added Tax: 10%
  • Corporate Income Tax: 25%

Source: Directorate General of Taxes

8.1 Important Updates to Taxation Information

  • A 57% excise tax on e-cigarettes was effective from July 1, 2018.

  • Inline with Indonesia's commitment to implement Base Erosion and Profit Shifting Action 13, Indonesian parent entities or Indonesian subsidiaries of multinational enterprises which meet certain conditions are required to prepare and file a Country-by-Country Report to the DGT starting with the 2016 tax year.

8.2 Business Taxes

Type of TaxTax Rate and Base
Corporate Income Tax
25%
Capital Gains Tax25% on profits
Withholding Tax (dividends)Dividends paid domestically to a resident:

- 15%; Dividends remitted to overseas shareholders are subject to a final 20% withholding tax, unless a tax treaty provides a lower rate
Withholding Tax (interest, royalities)Residents are subject to a creditable withholding tax of 15% with any balance being payable or refundable, while non-residents are subject to a final withholding tax of 20%.
Withholding Tax (branch profits tax)20%; This rate may be reduced under a double taxation treaty
Withholding Tax (payments to non-residents)20%
Value Added Tax10% standard rate; VAT on export of goods is zero-rated while the import of goods is subject to VAT at a rate of 10%
Transfer duty on land and buildingsmaximum rate of 5%, charged to the seller

Sources: Directorate General of Taxes, Fitch Solutions
Date last reviewed: May 1, 2019

9. Foreign Worker Requirements

9.1 Localisation Requirements

There are stringent localisation requirements in terms of workforce and supply-chain partners in a wide variety of sectors in Indonesia. This makes it much harder and more expensive, and presents higher risks for businesses wishing to hire foreign workers. Given the low levels of skills present in the Indonesian labour market, which makes the hiring of foreign workers for highly and technically skilled positions a necessity in many cases, this is a significantly likely risk for business operation.

A company can hire foreigners only for positions which the government has deemed open to non-Indonesians. Employers must have training programmes aimed at replacing foreign workers with Indonesians. The foreign worker must meet education, work experience and Indonesian language requirements and commit to the transfer of knowledge to an Indonesian counterpart.

9.2 Obtaining Foreign Worker Permits for Skilled Workers

Staying in Indonesia for work purposes for a long period (more than five weeks) requires the approval of the immigration office in Indonesia. Foreign workers must have the necessary visa and work and stay permits, all of which can be applied for at the immigration office by a sponsor or counterpart in Indonesia. Foreigners can only be issued with limited or temporary resident visas for a maximum period of 12 months, with the possibility of extension; this is again subject to approval from the immigration office. The process of obtaining a visa and work permit for foreigners in Indonesia is lengthy, taking an average of three months. It is also a bureaucratically complex process. The temporary resident visa can only be obtained if the applicant has a sponsor or counterpart in Indonesia to help them obtain the visa by applying to the Immigration Office.

9.3 Visa/Travel Restrictions

Given that Indonesia has a significant tourism industry, there are many countries (such as those in the European Union and those party to the Asia-Pacific Economic Cooperation Agreement) whose citizens can obtain visas on arrival in order to enter Indonesia for a periods of 30-60 days.

Sources: Government websites, Fitch Solutions

10. Risks

10.1 Sovereign Credit Ratings


Rating (Outlook)Rating Date
Moody's
Baa2 (Stable)13/04/2018
S&P GlobalBBB- (Stable)19/05/2017
Fitch Raings
BBB (Stable)14/03/2019

Sources: Moody's, S&P Global, Fitch Ratings

10.2 Competitiveness and Efficiency Indicators


World Ranking
201720182019
Ease of doing business Index
91/190
72/190
73/190
Ease of paying taxes Index
104/190114/190112/190
Logistics Performance Index
N/A46/160N/A
Corruption Perception Index
96/18089/180N/A
IMD World Competitiveness42/6343/63N/A

Sources: World Bank, IMD, Transparency International

10.3 Fitch Solutions Risk Indices


World Ranking
201720182019
Economic Risk Index
N/A37/202
42/202
Short-Term Economic Risk Score
68.169.2
68.3
Long-Term Economic Risk Score68.569.068.0
Political Risk IndexN/A94/20293/202
Short-Term Political Risk Score72.970.6
71.0
Long-Term Political Risk Score68.563.2
63.2
Operational Risk IndexN/A83/20181/201
Operational Risk Score52.2
52.6
53.2

Source: Fitch Solutions
Date last reviewed: May 1, 2019

10.4 Fitch Solutions Risk Summary

ECONOMIC RISK
Indonesia's short-term economic risk is constrained by an inefficient tax system and reliance on resource revenue, and its long-term economic risk is dragged down by the poor quality of government expenditure and the high volatility of its currency.

OPERATIONAL RISK
There are various opportunities for investment in Indonesia, which is South East Asia's largest economy. The manufacturing, ICT, financial services, oil and gas, and infrastructure sectors all represent attractive options for FDI, while portfolio investment, through increasingly sophisticated local financial markets, is a key source of capital inflows. Furthermore, businesses in Indonesia are able to make use of the country's strategic location on vital global shipping lanes which considered with the various port projects happening in Indonesia bodes well for the future.

Source: Fitch Solutions
Date last reviewed: April 30, 2019

10.5 Fitch Solutions Political and Economic Risk Indices

Graph: Indonesia short term political risk index
Graph: Indonesia short term political risk index
Graph: Indonesia long term political risk index
Graph: Indonesia long term political risk index
Graph: Indonesia short term economic risk index
Graph: Indonesia short term economic risk index
Graph: Indonesia long term economic risk index
Graph: Indonesia long term economic risk index

100 = Lowest Risk, 0 = Highest Risk
Source: Fitch Solutions Political and Economic Risk Indices
Date last reviewed: May 1, 2019

10.6 Fitch Solutions Operational Risk Index


Operational RiskLabour Market RiskTrade and Investment RiskLogistics RiskCrime and Security Risk
Indonesia Score53.254.453.356.848.4
East and Southeast Asia average55.255.956.753.854.4
East and Southeast Asia position (out of 18)1011
12811
Asia average48.549.748.246.050.1
Asia position (out of 35)1012
131018
Global average49.750.349.8
49.049.8
Global Position (out of 201)8174
8963101
Graph: Indonesia vs global and regional averages
Graph: Indonesia vs global and regional averages
Country
Operational Risk
Labour Market RiskTrade and Investment RiskLogistics RiskCrime and Security Risk
Singapore82.978.2
88.6
75.0
89.7
Hong Kong81.972.3
88.8
77.1
89.5
Taiwan73.665.5
76.2
73.4
79.2
South Korea72.565.9
71.4
79.8
73.1
Malaysia68.463.9
73.6
75.8
60.5
Macao62.161.7
66.5
52.1
68.0
Brunei62.061.6
60.7
55.1
70.6
Thailand59.1
55.7
67.2
68.5
45.2
Mainland China58.153.8
57.7
66.2
54.4
Indonesia53.254.4
53.3
56.8
48.4
Vietnam52.847.8
56.6
55.651.3
Mongolia51.256.0
53.8
40.9
54.1
Philippines45.457.1
50.7
42.5
31.3
Cambodia41.344.5
43.7
37.6
39.5
Laos36.540.6
34.5
34.1
36.7
Myanmar32.743.9
31.9
30.0
24.9
North Korea30.945.8
18.528.8
30.8
Timor-Leste29.437.9
27.8
19.6
32.5
Regional Averages55.255.956.753.854.4
Emerging Markets Averages4648.146.544.744.8
Global Markets Averages49.750.349.8
49.0
49.8

100 = Lowest risk, 0 = Highest risk
Source: Fitch Solutions Operational Risk Index
Date last reviewed: May 1, 2019

11. Hong Kong Connection

11.1 Hong Kong’s Trade with Indonesia

Graph: Major Export Commodities to Indonesia (2018)
Graph: Major Export Commodities to Indonesia (2018)
Graph: Major Import Commodities from Indonesia (2018)
Graph: Major Import Commodities from Indonesia (2018)

Note: Graph shows the main Hong Kong imports from/exports to Indonesia (by consignment)
Date last reviewed: May 1, 2019

Graph: Merchandise Exports to Indonesia
Graph: Merchandise Exports to Indonesia
 
Graph: Merchandise exports to Indonesia
 
Graph: Merchandise imports from Indonesia
Graph: Merchandise imports from Indonesia
 
Graph: Merchandise Imports from Indonesia
 
Graph: Merchandise imports from Indonesia
 

Note: Graph shows Hong Kong imports from/exports to Indonesia (by consignment)
Exchange Rate HK$/US$, average
7.76 (2013)
7.75 (2014)
7.75 (2015)
7.76 (2016)
7.79 (2017)
7.83 (2018)
Sources: Hong Kong Census and Statistics Department, Fitch Solutions
Date last reviewed: May 1, 2019


2017
Growth rate (%)
Number of Indonesia residents visiting Hong Kong482,022
3.8
Number of Indonesians residing in Hong Kong136,697
1.6

Sources: Hong Kong Tourism Board, United Nations Department of Economic and Social Affairs - Population Division


2017
Growth rate (%)
Number of Asia Pacific residents visiting Hong Kong54,482,5383.5
Number of East Asians and South Asians residing in Hong Kong2,784,870
1.6

Sources: Hong Kong Tourism Board, United Nations Department of Economic and Social Affairs - Population Division, Fitch Solutions
Date last reviewed: May 1, 2019

11.2 Commercial Presence in Hong Kong


2016
Growth rate (%)
Number of Indonesian companies in Hong KongN/AN/A
- Regional headquarters
- Regional offices
- Local offices


11.3 Treaties and agreements between Hong Kong and Indonesia

  • Indonesia has a double taxation agreement with Hong Kong that entered into force in March 2012.
  • Hong Kong has an air service agreement with Indonesia that entered into force on June 27, 1997.
  • Indonesia has a double taxation agreement with Mainland China that came into force in August 2003 and was amended in March 2016.

Source: Inland Revenue Department

11.4 Chamber of Commerce or Related Organisations

Indonesia Chamber of Commerce in Hong Kong
Address: 11/F, Nanyang Plaza, 57 Hung To Road, Kwun Tong, Kowloon
Email: info@inachamhk.com
Tel: (852) 2110 1645    
Fax :(852) 2110 1649

Source: INACHAMHK

Indonesia-Hong Kong Business Association
Email: jakarta.office@hktdc.org / idhkba@gmail.com
Tel: (62) 21 3005 2101
Website: www.idhkba.or.id
Please click to view more information.

Source: Federation of Hong Kong Business Associations Worldwide

Consulate General of the Republic of Indonesia in Hong Kong
Address: 127-129 Leighton Road, 6-8 Keswick Street, Causeway Bay, Hong Kong
Email: info@cgrihk.com
Tel: (852) 3651 0200
Fax: (852) 2895 0139
Website: Consulate General of the Republic of Indonesia in Hong Kong

11.5 Visa Requirements for Hong Kong Residents

Visa-free access valid for 30 days.

Source: Hong Kong Immigration Department
Date last reviewed: May 1, 2019

Content provided by Picture: Fitch Solutions – BMI Research