Indonesia

In 2014, the Ministry of Defence was the biggest recipient of state spending, in an effort to improve Indonesia’s Minimum Essential Forces (MEF) capacity. At the moment, even though increased compared to the previous year –US $6,9 billion, in 2014-, defence spending at 0.9% of the GDP (2015) is still far below the target of 1.5% (to be achieved by 2020). At the same time, increased security risks such as internal conflicts, border disputes, terrorism and transnational security issues, have justified the increase in the spending budget allocated for the national police, by 42%, for 2016.

It would be sufficient to look at a World Atlas in order to get an appreciation of the global geostrategic importance of the Republic of Indonesia; situated on the cross-roads of international maritime trade, constitutes one of the steadiest growing economies, in one of the fastest growing regions of the world.

The Republic of Indonesia’s economy has been widely appraised as one of the most consistent and best-performing in the world. Albeit Indonesian GDP lies below the growth rate of the East-Pacific region (5.4% on average since 2001), it is still far greater than the global average for the concerned period (2000-2014), withstanding the implications of the global financial downturn of the recent years.

The high growth rate of the GDP in Indonesia –$983.6 billion in 2014- is mainly attributed to the economic activity of the Java island. Split into four provinces - West Java, Central Java, Banten and East Java- Java is unevenly developed; the western part of the island, with its manufacturing zones and proximity to the capital city of Jakarta, has long been a magnet for industrial development and foreign investment. However, over the past decade (2004-2014), East Java has grown significantly, with an annual average rate of about 6.2%, having outpaced even the growth rate of the city of Jakarta, since 2008. Further, it cannot be overlooked that the East Java region’s emergence has been mostly driven by manufacturing overspill from West Java, as well as by improved connectivity across the island, where new high-speed roads, better rail networks and improved port facilities, make it easier to move goods and people around. For the continuity of regional growth, the President of Indonesia (2015) has additionally placed a priority, on the development of the country’s remote eastern regions, where consumer penetration remains negligible.

This growth has enabled the country to reduce its national debt from 95.1% of the GDP in 2000, to about 26% in 2014, as well as to move from the world’s 27th largest economy to the 16th place in 2015 an impressive achievement in just 15 years. In the meantime, Fitch and Moody's had upgraded Indonesia's credit rating to “investment grade” (Baa3).

The proximity to key international shipping lanes, has turned the Republic of Indonesia to a maritime trade connectivity provider, a fact that helps reduce its imports/exports costs. Recent infrastructure developments have helped the commodities circulation, allowing trade to inflate, despite small fluctuations between 2012 and 2014. In the same period, there was a slightly negative trade balance, mostly attributable to the decrease of the nation’s exports.

In contrast, Indonesia’s trade balance in 2015 recorded a surplus of US$7.52 billion – having improved by US $9.4 billion, compared to 2014. According to the Indonesian Ministry of Finance (MoF), this improvement was boosted by the increased trade surplus of non-oil and gas products, as also of the decreased trade deficit of oil and gas related products.

Nowadays, Indonesia is a leading exporter of numerous high value commodities, such as palm oil and thermal coal. According to the Ministry of Trade, the main exporting commodities of Indonesia are: Textiles, Electronics, Rubber and Articles thereof, Palm Oil, Forest Products, Footwear, Automotive, Shrimps, Cocoa and Coffee (see Chart below). Influenced by both cost and market factors, regional investments into new plants and new product categories, have helped towards the rapid growth of the electronics and automotive industries. The shift of production of big companies (such as Mitsubishi, Hitachi, Suzuki, etc.) from China and the Philippines to Indonesia, soon will introduce new products in the market and result in a further increase of the country’s exports.

It should further be highlighted that since Indonesia’s economic activities generate high trade flows, they have created interesting opportunities for foreign investment, in a number of industries. Therefore, the country has over the years experienced high Foreign Direct Investment (FDI) inflows –US $26.35 billion current dollars- (in 2013, Indonesia received 15% of the total FDI of the ASEAN countries, after Singapore that received 51%), mostly in relation to sectors such as mining, oil and gas, manufacturing and infrastructure, where the national government offers incentives in order to encourage greater foreign involvement.

Despite the aforementioned, the still existing high levels of bureaucracy, numerous trade barriers, endemic corruption and poor enforcement of Intellectual Property (IP) laws, do not constitute the ‘friendliest’ of environments for businesses, as reported by industry analysts.

Consequently, Indonesia still has a long distance ahead to cover in terms of economic reforms. The country’s authorities have recently appreciated that the lack of a well-organized logistics network may stand as a major barrier to economic growth. In this direction, in the last four years the country managed to demonstrate tremendous progress, climbing from the 75th place in 2010 to the 53rd place in 2014, on the World Bank’s logistics performance index (LPI) (see chart below). However, the associated logistic costs still remain high and the continued regulatory uncertainties, moderate the positive investment climate.

The recent banning of exports of various metal ores by the government, in conjunction with a push to develop palm oil biodiesel, could well result in East Java becoming a centre for natural resources processing. In this direction, investment by Freeport-McMoRan, the largest miner in the Republic of Indonesia, so as to develop a copper-smelting plant, is already in the planning phase. Such ‘initiatives’ are further supported by projects, such as the construction of a 3,000 hectare Java Integrated Industrial and Ports Estate (JIIPE).

Growing at a rapid pace, industry is becoming more diversified, and job requirements are more complex and demanding than ever before. Therefore, it is imperative to focus on developing a highly skilled labour force, in order to establish a more competitive and of sustainable growth economy. In 2015, 33% of the local labour force was employed in agriculture, 21.6 % in Industry and 45.4% in services, while the unemployment rate reached 6%.

If reforms proceed as expected, the Republic of Indonesia is forecasted by 2030, to have the world’s 7th largest economy, surpassing both the UK and Germany, while in 2040, the country will constitute the 4th largest economy in the world, behind only China, India and the US. Along this trajectory, there is no doubt that the Republic of Indonesia will benefit greatly from the rebalancing of the global economy towards the Asia-Pacific region, as also from the demographic dividend of the country’s growing young working population.