Worldbox Country Risk Climate October 2024
INDONESIA
Summary
| Overall Risk Score 24 (Stable)
Political risk: Stable 8/10 Economic risk: Stable 8/10 Commercial risk: Stable 8/10 The risk assessment of a country is made up of 3 components, being Political, Economic and Commercial. Each component is scored out of 10 with 1 being the highest risk and 10 the lowest. |
ESG Risk: 6/10 (Stable)*
*Environmental, social and governance (ESG) issues are becoming increasingly important to companies, investors and consumers in Southeast Asia. That is why we are now preparing a separate ESG score and section with our quarterly country risk reports. We explain how each country rates, looking at the E, S and G individually, and outline recent developments. |
Political Risk – Stable at 8
The Republic of Indonesia was created in 1945 after a long period of Dutch colonial rule and Japanese occupation during the Second World War. Indonesia is today the world’s third largest democracy (and largest Muslim democracy). A directly elected president serves as both head of state and of government. There is a maximum two-term (five years per term) limit on the presidency. A directly elected House of Representatives (the lower house of the bicameral People’s Consultative Assembly) acts as a counterweight to the president.
While now a thriving democracy, Indonesia has experienced long periods of authoritarian rule. The mercurial and charismatic dictator Sukarno ruled the country from 1945 to 1967. General Suharto overthrew Sukarno in 1967, ruling until 1998 when he stepped down amid widespread unrest.
Defence Minister Prabowo and his vice-presidential running mate, Gibran Rakabuming Raka, emerged victorious from the February 2024 presidential election. Prabowo is expected to take over from the current president, Joko Widodo (popularly known as Jokowi), this month. Jokowi effectively endorsed Prabowo and there are unlikely to be any significant changes in policy. Jokowi consistently achieved popularity ratings of over 80% but was constitutionally prohibited from seeking a third term.
However, Jokowi will exert considerable influence and has ambitions to create a political dynasty. His son, the 36-year-old Gibran Rakabuming Raka, was elected as vice president at the February poll and may well succeed Prabowo at some point. Indeed, the 72-year-old Prabowo may only serve one term in office given his age.
Some analysts have expressed concern that the election of Prabowo could affect Indonesia’s democratic credentials. The Diplomat, for example, queried in March whether Prabowo, a military man, “might pivot the country towards a greater military involvement in civilian life”. It failed to provide a definitive answer. But the political environment will clearly require careful monitoring in the coming years to see whether Prabowo is manoeuvring to give the military a greater role in the country’s political environment.
Economic Risk – Stable at 8
A strong post-pandemic rebound has pushed Indonesia back into the upper-middle income band of countries, the World Bank reported in July 2023. Gross national income per capita climbed to US$4,580 in 2023, according to the bank from US$4,140 in 2022. The latest rankings should bolster Indonesia’s ambition to become a high-income country by 2045, the main aim of Jokowi’s economic platform.
The economy is much more dependent on domestic demand than other regional economies. Private consumption powers over half of Indonesia’s GDP. Exports account for just 20% of GDP, compared to 60% for Thailand and 176% for Singapore. Investment expenditure accounts for around 30 percent of total GDP in Indonesia – the second-largest contributor after consumer spending – with foreign direct investment a key driver of investment spending.
In a report on the economy published in July 2024, the World Bank said it expected growth to remain resilient in the coming years. Key drivers include a pickup in public spending, rising business investment and steady consumer demand. Indonesia’s gross domestic product growth is forecast to average 5.1% per year from 2024 to 2026, the World Bank’s Indonesia Economic Prospects report said, despite headwinds from a subsiding commodity boom, increased volatility in food and energy prices, and rising geopolitical uncertainty.
The World Bank identified four emerging structural challenges: rising concentration in the manufacturing sector; a slowdown in reducing regional income disparities; weaker wage growth and rising inequality since the COVID-19 pandemic; and limited geographic mobility of the labour force, which makes it harder to match workers with jobs and locations that lead to improved living standards.
Commercial Risk – Stable at 8
Corruption remains a challenge and acts as a major deterrent to business and investment. Indonesia was ranked 115th (out of 180 countries) in Transparency International’s Corruption Perception Index (CPI) for 2023, with a CPI score of 34 – sliding down from 38 and a ranking of 96th in 2021. In terms of the Association of Southeast Asian Nations (ASEAN), Indonesia lies behind Singapore, Malaysia, Vietnam and Thailand.
Indonesia’s economic freedom score (from the Heritage Foundation) is 63.5, and it ranks 53rd in the 2024 Freedom Index, moving up from 60th in the 2023 Index. Indonesia is ranked 10th out of 39 countries in the Asia-Pacific region. The country’s economic freedom score is higher than the world and regional averages. Indonesia’s economy is considered “moderately free”, according to the 2024 Index.
Indonesia has undertaken wide-ranging reforms to address structural weaknesses in the economy and improve competitiveness, according to the Heritage Foundation. Recent reforms have put a greater emphasis on improving regulatory efficiency, enhancing regional competitiveness, and creating a more vibrant private sector through decentralization. However, institutional shortcomings continue to undercut momentum for more dynamic economic development. In the absence of a well-functioning legal and regulatory framework, corruption remains a serious impediment to the emergence of a more dynamic private sector.
October Bulletin
Political Risk – Stable at 8
Indonesian legislators cancelled plans to ratify revisions to election laws after thousands of people protested in front of the parliament building in the capital and in other Indonesian cities. If implemented, the changes could have further enhanced the political influence of the outgoing president, Joko Widodo. Critics said the changes were aimed at installing a political dynasty.
The revisions would have included amending an age limit that prevents people under 30 from running for regional governorships. That limit would have prevented Widodo’s son Kaesang from running in a regional contest in Central Java. Kaesang, aged 29, had been tipped for an influential post in November’s regional contests.
The protests followed accusations of nepotism after Widodo’s eldest son, Gibran Rakabuming Raka, 36, was elected as Indonesia’s youngest vice president. Widodo is also charged with helping to install his replacement, defence chief Prabowo Subianto. The publication Foreign Policy, for example, says some state institutions have appeared to help Prabowo, who has pledged to continue Jokowi’s legacy.
Although there is little doubt that Jokowi and Prabowo were keen to amend the rules governing elections, both have distanced themselves from the bills proposed by their supporters in parliament.
Foreign Policy said that, while students and workers’ groups took the lead among the crowds, many experienced activists claimed that the protests attracted more people not usually inclined towards activism.
Economic Risk – Stable at 8
In September 2024, Bank Indonesia (BI) unexpectedly cut its key interest rate for the first time in more than three years in anticipation of a Federal Reserve pivot to easing monetary policy: the Federal Reserve indeed cut rates by an unusually large 50 basis points shortly after the BI acted on 18th September. Cuts in US interest rates should ensure that the rupiah does not come under pressure as BI eases. The fact that Indonesia’s currency was trading at close to its strongest level versus the dollar in a year at the time of the rate cut gave BI some room for manoeuvre. The BI rate now stands at 6%, down by 25 basis points.
BI anticipates the Fed will deliver three 25-basis-points cuts this year and another four in 2025, suggesting there is considerable scope for Indonesian borrowing costs to fall further as long as inflation remains under control. That should help alleviate the pressure on businesses and consumers. Tight financial conditions in Indonesia after 275 basis points of rate hikes in the past two years had led to a softening of consumer sentiment, hiring and manufacturing data.
BI forecasts GDP growth of 4.7% to 5.5% this year. Lower rates will also support credit expansion and government financing, according to BI. Loan growth stood at 11.4% year-on-year in August, the slowest pace in six months.
A World Bank report in June said rising food prices lifted headline inflation this spring. Consumer prices rose by 2.8% from a year earlier in May, up from a 2.6% year-on-year increase in January. Adverse climate conditions reduced domestic rice harvests and affected food prices more broadly. The World Bank expects headline inflation will average around 3% in 2024.
In July, the ratings agency S&P followed Fitch Ratings in highlighting concerns about fiscal policy under Prabowo. While S&P affirmed Indonesia’s ratings at BBB investment grade with a stable outlook, it warned that, despite assurances from key figures in the new administration, policy uncertainty would remain until the next government unveiled its fiscal plans in detail.
Commercial Risk – Stable at 8
Indonesia’s biggest banks could see their earnings growth start to slow in the coming years due to an expected fall in interest rates, in turn putting pressure on net interest margins, the ratings agency S&P forecast in April. However, it added that the country’s economic growth will support lenders’ asset quality and performance in 2023, while lower credit costs have also bolstered profitability.
The agency added that the country’s four biggest banks by assets — PT Bank Mandiri (Persero) Tbk, PT Bank Rakyat Indonesia (Persero) Tbk, PT Bank Central Asia Tbk and PT Bank Negara Indonesia (Persero) Tbk — are expected to see year-over-year increases in net income for 2024 and 2025, though the pace of growth will likely slow.
Environmental, Social and Governance (ESG) – Stable at 6
The United Nations’ Sustainable Development Goals (SDGs) are recognized as a beneficial framework for responsible investment. The Sustainable Development Report from Cambridge University Press assesses the progress of all UN Member States on the SDGs. It provides a useful means of ranking Southeast Asian countries on their ESG progress.
Indonesia is ranked 78 out of 166 in the 2024 report, with a score of 69.4.
Environment: Issues facing Indonesia include deforestation, water pollution from industrial waste and sewage, and air pollution in urban areas. The expansion of agriculture, particularly clearing land for palm oil production, is the major cause of deforestation. However, the logging industry is also a significant contributor to deforestation, with illegal logging occurring in many protected areas. Mining activities, such as coal and gold mining, have also led to the destruction of large areas of forests and the pollution of waterways.
The problem of air pollution is worsening, with Jakarta routinely ranked at the top of the list of the world’s most polluted major cities. Forest fires, pollution from coal-fired plants, emissions from cars, open burning, and biomass burning for cooking and heating are among the main causes. Environmentalists have expressed concern that the Prabowo administration will worsen the environmental situation, given Prabowo’s signalling of strong support for boosting mining industries and sectors that exploit natural resources.
Social: The law provides, with some restrictions, provides for the rights of workers to join independent unions, conduct legal strikes, and bargain collectively. The law prohibits antiunion discrimination. Most workers are not covered by the minimum wage laws. However, the authorities only enforce labour regulations, including minimum wage regulations, in the formal sector, which employs around 4 in 10 workers. Those in the informal sector have few protections.
Governance: Indonesia continues to bring its legal, regulatory, and accounting systems into compliance with international norms and agreements. However, the regulations and enforcement are not yet up to international standards for shareholder protection. Indonesian businesses are required to undertake responsible business conduct (RBC) activities under Law No. 40/2007 concerning Limited Liability Companies
October Bulletin
Environmental, Social and Governance (ESG) – Stable at 8
The Jakarta Post reported in August 2024 that Indonesia’s sustainability-reporting landscape is showing promising gradual progress, according to PwC, with businesses embracing sustainability initiatives and the government creating new regulations to promote sustainability.
Latest economic data
f forecasts
* Worldbox Business Intelligence
** Official Figures
Source: Asian Development Bank, except where stated
Useful Links
https://www.adb.org/countries/indonesia/main
https://www.transparency.org/en/cpi/2021
https://www.imf.org/en/Countries/IDN
https://www.thejakartapost.com/
https://www.abc.net.au/news/topic/indonesia
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