Indonesia economic conditions

8/3/2019 Indonesia economic conditions

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IILM INSTITUTE FOR HIGHER

EDUCATION

REPORT ON

INDONESIAN ECONOMIC CONDITIONS

Submitted to: Submitted by:

Mr. Abhijit Mukopadhyay Group 9

Alka Agrawal

Ankit Sharma

Dheeraj bishnoi

Harshveer Singh

Nihaar SethSweety Mulani


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ACKNOWLEDGEMENT

Achieving milestone for any person alone is extremely difficult however; there are motivators

who across the curvaceous path of life cross us like twinkling stars in the sky & make our

task easier it become our foremost duty to acknowledge all of them.

We express our sincere gratitude to Mr. Abhijit Mukhopadhyay for making us understand the

different macroeconomic concepts and national income accounting. We are highly indebted

to him for his meticulous guidance throughout. Memories of his benevolent supervision shall

ever be preserved in our mind.

We also wish to thank all those who have in one way or other helped us in the successful

completion of our project report. We would like to express our gratitude to the staff for

economics at IILM for encouraging us to take up a challenging task and learn more about

different countrys business environment situations and future potential in various activities.

Studying Indonesia made us realize the internationalisation and economy importance for a

better business ahead in accordance with Indias economy status.


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CONTENTS

Executive summary

Introduction

Indonesia: at a glance

o Geology

o Demographics

o History

Economy

o Indonesian economic condition

o Challenges

o Growth

Indonesian industries

Recent developments

Business environment in Indonesia

Business opportunities in Indonesia

Conclusion

References


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EXECUTIVE SUMMARY

The following report on Indonesia entails the major business and economy highlights wherein

it talks about its various trade and other opportunities and its growth in future. Indonesias

economic performance through mid-2011 has been positive. Solid growth has been

accompanied by further portfolio capital and foreign direct investment inflows. Public and

financial sector balance sheets remain strong. However, events over the past quarter serve as

a reminder of a number of Indonesias ongoing policy challenges. At the same time, the

launch of the Governments Master Plan 2011-2025 has focused attention on the Investments

and policy reforms which can help Indonesia reach its future growth potential.

Indonesia's overall macroeconomic picture is stable. Although the economy slowed

significantly in 2009 from the 6%-plus growth rate recorded in 2007 and 2008, by 2010

growth returned to a 6% rate. During the recession, Indonesia outperformed its regional

neighbours and joined China and India as the only G20 members posting growth.

Indonesia is a dynamic emerging economy, playing an increasing role on the international

stage through, for example, its G20 membership and current Chairmanship of ASEAN.

However, events over the past quarter are a reminder of the current challenges which are


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faced and the need to put in place, and implement, the policies and investments necessary for

Indonesia to reach its potential as a leading global growth driver of the next few decades.

INTRODUCTION

INDONESIA: AT A GLANCE

Indonesia is the worlds most populous Muslim-majority democracy. As a member of the G-

20, Indonesia is playing an increasingly important role in international economic policy

discussions. In recent decades, Indonesia has been viewed as one of Southeast Asia's

successful highly performing and newly industrializing economies, following the trail of the

Asian tigers (Hong Kong, Singapore, South Korea, and Taiwan) (see Table 1). Although

Indonesia's economy grew with impressive speed during the 1980s and 1990s, it experienced

considerable trouble after the financial crisis of 1997, which led to significant political

reforms. Today Indonesia's economy is recovering but it is difficult to say when all its

problems will be solved. Even though Indonesia can still be considered part of the developing

world, it has a rich and versatile past, in the economic as well as the cultural and political

sense.

In the years since 1998, when long-standing authoritarian ruler General Suharto stepped

down, Indonesias nearly 250 million people have enjoyed the blossoming of a wide range of

political freedoms, and the level of participation in the political process is high. President

Susilo Bambang Yudhoyono has cracked down on corruption and tried to encourage much-

needed foreign investment, but the weak rule of law remains a major impediment to attracting

capital.


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Population: 231.5 million

GDP (PPP):

$962.5 billion

4.5% growth5.6% 5-year compound annual growth

$4,157 per capita

Unemployment: 7.7%

Inflation: 4.8%

FDI Inflow: $4.9 billion

DEMOGRAPHY

The population ofIndonesia according to the 2011 national census is 245.6 million, with 58%

living on the island ofJava, the world's most populous island. Residents of Indonesia are

known as resident-friendly, polite and not individualistic. The population is expected to grow

to around 254 million by 2020 and 288 million by 2050.Indonesia includes numerous ethnic,

cultural and linguistic groups, some of which are related to each other. Since

independence, Indonesian (a form ofMalay and official national language) is the language of

most written communication, education, government, and business.

Population

245,613,043 (July 2011 est.)

Age structure

0-14 years: 27.3% (male 34,165,213/female

32,978,841)

15-64 years: 66.5% (male 82,104,636/female
http://en.wikipedia.org/wiki/Indonesiahttp://en.wikipedia.org/wiki/Javahttp://en.wikipedia.org/wiki/Indonesian_languagehttp://en.wikipedia.org/wiki/Malay_languagehttp://en.wikipedia.org/wiki/Indonesiahttp://en.wikipedia.org/wiki/Javahttp://en.wikipedia.org/wiki/Indonesian_languagehttp://en.wikipedia.org/wiki/Malay_language


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81,263,055)

65 years and over: 6.1% (male 6,654,695/female 8,446,603) (2011 est.)

Population growth rate:1.069% (2011 est.)

Urbanization

Urban population: 44% of total population (2010)

Rate of urbanization: 1.7% annual rate of change (2010-15 est.)

Ethnic groups

Javanese 40.6%,

Sundanese 15%, Madurese 3.3%,

Minangkabau 2.7%,

Betawi 2.4%,

Bugis 2.4%,

Banten 2%, Banjar 1.7%,

other or unspecified 29.9% (2000 census)

Religions

o Muslim 86.1%,

o Protestant 5.7%,

o Roman Catholic 3%,

o Hindu 1.8%,


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o other or unspecified 3.4% (2000 census)

Languages

o Bahasa Indonesia (official, modified form of Malay),

o English,

o Dutch,

o local dialects (of which the most widely spoken is Javanese)

Literacy

o Definition: age 15 and over can read and write

o total population: 90.4%

o male: 94%

o Female: 86.8% (2004 est.)


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HISTORY

The 17,000 islands that make up Indonesia were home to a diversity of cultures and

indigenous beliefs when the islands came under the influence of Hindu priests and traders in

the first and second centuries A.D. Muslim invasions began in the 13th century, and most of

the archipelago had converted to Islam by the 15th century. Portuguese traders arrived early

in the next century but were ousted by the Dutch around 1595. The Dutch United East India

Company established posts on the island of Java, in an effort to control the spice trade.

After Napoleon subjugated the Netherlands in 1811, the British seized the islands but

returned them to the Dutch in 1816. In 1922, Indonesia was made an integral part of the

Dutch kingdom. During World War II, Japan seized the islands. Tokyo was primarily

interested in Indonesia's oil. Indonesia declared its independence after Japan's surrender, but it

required four years of intermittent negotiations, recurring hostilities, and UN mediation

before the Netherlands agreed to transfer sovereignty in 1949. Free and fair legislative

elections took place in 1999 after decades of repressive rule. Indonesia is now the world's

third most populous democracy, the world's largest archipelagic state, and home to the

world's largest Muslim population.

Current issues include:

alleviating poverty, improving education,


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preventing terrorism,

consolidating democracy after four decades of authoritarianism,

implementing economic and financial reforms,

stemming corruption,

holding the military and police accountable for human rights violations,

Addressing climate change, and controlling infectious diseases, particularly those of

global and regional importance.

ASIAN FINANCIAL CRISIS

The Asian Financial Crisisthat began to affect Indonesia in mid-1997 became an economic

and political crisis. Indonesia's initial response was to float the rupiah, raise key domestic

interest rates, and tighten fiscal policy. In October 1997, Indonesia and theInternational

Monetary Fund (IMF) reached agreement on an economic reform program aimed at

macroeconomic stabilization and elimination of some of the country's most damaging

economic policies, such as the National Car Program and the clovemonopoly, both involving

family members of President Suharto. The new program also has a range of economic,

structural reform and governance targets.

The effects of the financial and economic crisis were severe. In 1998, real GDP contracted by

13.7%. The economy reached its low point in mid-1999 and real GDP growth for the year

was 0.3%. Inflation reached 77% in 1998 but slowed to 2% in 1999.

In late 2005 Indonesia faced a 'mini-crisis' due to international oil prices risesand imports.

The government was forced to cut its massive fuel subsidies, which were planned to cost $14billion for 2005, in October. This led to a more than doubling in the price of consumer fuels,

resulting in double-digit inflation. The situation had stabilized, but the economy continued to

struggle with inflation at 17% in 2005.
http://en.wikipedia.org/wiki/1997_Asian_Financial_Crisishttp://en.wikipedia.org/wiki/1997_Asian_Financial_Crisishttp://en.wikipedia.org/wiki/International_Monetary_Fundhttp://en.wikipedia.org/wiki/International_Monetary_Fundhttp://en.wikipedia.org/wiki/International_Monetary_Fundhttp://en.wikipedia.org/wiki/Clovehttp://en.wikipedia.org/wiki/Clovehttp://en.wikipedia.org/wiki/Oil_price_increases_since_2003http://en.wikipedia.org/wiki/Oil_price_increases_since_2003http://en.wikipedia.org/wiki/1997_Asian_Financial_Crisishttp://en.wikipedia.org/wiki/International_Monetary_Fundhttp://en.wikipedia.org/wiki/International_Monetary_Fundhttp://en.wikipedia.org/wiki/Clovehttp://en.wikipedia.org/wiki/Oil_price_increases_since_2003


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For 2006, Indonesia's economic outlook was more positive. Economic growth accelerated to

5.1% in 2004 and reached 5.6% in 2005. Real per capita income has reached fiscal year

1996/1997 levels. Growth was driven primarily by domestic consumption, which accounts for

roughly three-fourths of Indonesia's gross domestic product. The Jakarta Stock Exchange was

the best performing market in Asia in 2004 up by 42%.

The unemployment rate in February 2007 was 9.75%.Despite a slowing global economy,

Indonesias economic growth accelerated to a ten-year high of 6.3 percent in 2007.

ECONOMY

Indonesia, a vast polyglot nation, has weathered the global financial crisis relatively smoothly

because of its heavy reliance on domestic consumption as the driver of economic growth.

Increasing investment by both local and foreign investors is also supporting solid growth.

Although the economy slowed to 4.5% growth in 2009 from the 6%-plus growth rate

recorded in 2007 and 2008, by 2010 growth returned to a 6% rate. During the recession,

Indonesia outperformed most of its regional neighbours.

o It has a market-based economy in which the government plays a significant role.

There are 139 state-owned enterprises, and the government administers prices on

several basic goods, including fuel, rice, and electricity.

o In the mid-1980s, the government began eliminating regulatory obstacles to economic

activity. The steps were aimed

primarily at the external and

financial sectors and were

designed to stimulate

employment and growth in the

non-oil export sector.

o Annual real gross domestic

product (GDP) growth averaged

nearly 7% from 1987-97 and
http://en.wikipedia.org/wiki/Jakarta_Stock_Exchangehttp://en.wikipedia.org/wiki/Jakarta_Stock_Exchange


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most analysts recognized Indonesia as a newly industrializing economy and emerging

major market. The Asian financial crisis of 1997 altered the region's economic

landscape. In the aftermath of the 1997-98 financial crises, the government took

custody of a significant portion of private sector assets via debt restructuring, but

subsequently sold most of these assets, averaging a 29% return.

o Indonesia has since recovered, albeit slower than some of its neighbours, by

recapitalizing its banking sector, improving oversight of capital markets, and taking

steps to stimulate growth and investment, particularly in infrastructure.

o Indonesia was the third-fastest growing G-20 member, trailing only China and India.

Growth has rebounded in 2010, with the consensus forecast for growth of 6.0%.

Poverty rate falling to 13.3% (March 2010) from 14.2% a year earlier and the

unemployment rate falling to 7.4% (February 2010) from 7.87% (August 2009).

Agriculture (15.3% of GDP, 2010):Products--timber, rubber, rice, palm oil,

coffee.Land--17% cultivated.

Manufacturing (24.8% of GDP, 2010): Garments, footwear, electronic goods,

furniture, paper products, and automobiles.

Trade:Exports (2010)--$158 billion including oil, natural gas, crude palm oil,

coal, appliances, textiles, and rubber.

Major export partners--Japan, U.S., China, Singapore, Malaysia, and Republic of

Korea.Imports (2010)--$136 billion including oil and fuel, food, chemicals,

capital goods, consumer goods, iron and steel.

Major import partners--Singapore, China, Japan, U.S., Malaysia, Thailand, and

South Korea. Natural resources (11.2% of GDP, 2010): Oil and gas, bauxite,

silver, tin, copper, gold, coal.

As a G-20 member, Indonesia has taken an active role in the G-20 coordinated response

to the global economic crisis.

ECONOMIC CHALLENGES


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Indonesia had been an excessively poor country between 1945 and 1960s. It was only until

changes in government in 1965 that triggered off essential progress in lowering the countrys

poverty rate. From a steep recession in 1965 with an 8% decline in GDP, the country began to

develop economically in the 1970s, earning much benefit from the oil shock. Despite this

development, an estimated 13.33% of the population (2010) remains below the poverty line.

LABOUR UNREST

As of 2011 labour militancy was increasing in Indonesia with a major strike at the Grasberg

mine and numerous strikes elsewhere. A common issue was attempts by foreign-owned

enterprises to evade Indonesia's strict labour laws by calling their employees contract

workers. One factor in the increase of militancy is increased awareness via the internet of

prevailing wages in other countries and the generous profits foreign companies are making in

Indonesia.

INEQUALITY

Poverty rate has since been higher in the outer islands. Java, Bali, and Sumatra have benefited

more due to the rise of manufacturing and better infrastructure of the inner islands. Economic

disparity and the flow of natural resource profits to Jakarta have led to discontent.

Geographically, the poorest fifth regions account for just 8% of consumption, while the

richest fifth account for 45%. While there are new laws on decentralization that may address

the problem of uneven growth and satisfaction partially, there are many hindrances in putting

this new policy into practice.

INFLATION

Inflation has long been another problem in Indonesia Even though the economy recovered

very quickly, never once was the inflation less than 10% annually. The economy was again

experiencing rapid growth between 1989 and1997, due to the improving export-oriented

manufacturing sector, still the inflation rate was higher than economic growth, and this

caused widening gap among several Indonesians. The inflation peaked in 1998 during
http://en.wikipedia.org/wiki/Grasberg_minehttp://en.wikipedia.org/wiki/Grasberg_minehttp://en.wikipedia.org/wiki/Independent_contractorhttp://en.wikipedia.org/wiki/Independent_contractorhttp://en.wikipedia.org/wiki/Grasberg_minehttp://en.wikipedia.org/wiki/Grasberg_minehttp://en.wikipedia.org/wiki/Independent_contractorhttp://en.wikipedia.org/wiki/Independent_contractor


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the Asian financial crisis, with over 58%, causing the raise in poverty level as bad as the

1960s crisis. During the economic recovery and growth in recent years, the government has

been trying to decline the inflation rate. However, it seems that Indonesian inflation has been

affected by the global fluctuation and domestic market competition. To date; inflation is

affecting Indonesian lower middle class, especially those who can't afford food after price

hikes.

ECONOMIC GROWTH

Indonesias economic performance through mid-2011 has been positive. Solid growth has

been accompanied by further portfolio capital and foreign direct investment inflows. Publicand financial sector balance sheets remain strong. However, events over the past quarter serve

as a reminder of a number of Indonesias ongoing policy challenges. At the same time,

the launch of the Governments Master Plan 2011-2025 has focused the attention on the

investments and policy reforms which can help Indonesia reach its future growth potential.

GDP growth projections for 2011 and 2012 remain the same as in the March 2011 IEQ at 6.4

percent and 6.7 percent respectively.

Growth is projected to rise gradually through 2011 and 2012

2009 2010 2011 2012

Gross Domestic

Product

(Annual

Percentage

change)

4.6 6.1 6.4 6.7

Consumer Price

Index

(Annual

Percentage

change)

2.6 6.3 5.7 5.9


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Budget Balance Percent of GDP -1.6 -0.6 -1.8 n.a

Major trading

partner growth

(Annual

Percentage

change)

-1.0 6.6 4.3 4.7

Owing to the flourishing business and economic condition of the country, the inflation rate of

the country has also dropped down significantly. It is also a positive sign for the investors.

Indonesiainflation rate 2011 in the month of May was reported to be 5.98 percent which is

quite low compared to those of the previous years. The government of the country is taking

steps to reduce the inflation rate further. From 9.3 percent, the unemployment rate of the

country was reported to be 6.8 percent in February, this year. Indonesia unemployment rate

2011 has also dropped down significantly as the vacancies in different companies have

increased and more people are finding jobs according to their eligibility as well as

preferences.


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INDONESIAN INDUSTRIES

AGRICULTURE SECTOR

About 45% of Indonesian workers are engaged in agriculture, which accounts for 17% of

GDP in 2001. Some 31 million ha (76.6 million acres) are under cultivation, with 35% to

40% of the cultivated land devoted to the production of export crops. Some 60% of the

country's cultivated land is in Java because the population is rapidly increasing; the

government seeks to achieve food self-sufficiency through expansion of arable acreage,

improved farm techniques (especially the use of fertilizers and improved seeds), extension of

irrigation facilities, and expanded training for farmers.


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o Production of rice, the staple food, has been gradually increasing, and production

comes close to meeting domestic requirements. Due to the rapid growth of the

industrial sector, the agricultural contribution to GDP is expected to decline to 11.8%

by 2003.

o Rice is the primary staple crop; production in 2001 totalled 50,461,000 tons. Other

staple crops in 1999 included cassava (15,422,000 tons), corn (9,139,000 tons), and

sweet potato (1,928,000 tons).

o Vegetable production in 2000 included 1,366,410 tons of cabbages, 772,818 tons of

shallots, and 454,815 tons of mustard greens. Sugar is the largest commercial crop,

with production reaching 26,000,000 tons in 1999.

o About 1,564,000 tons of rubber was produced in 1999.

o In 2001/02, Indonesia was the world's fourth largest producer of coffee (after Brazil,

Colombia, and Viet Nam); some 369,600 tons of coffee were grown that year, as

compared with 188,900 tons in 1972 and an annual average of 120,400 tons during

196065.

BANKING SECTOR:

o Indonesia has 122 commercial banks (May 2010), of which 10 are majority foreign-

owned and 28 are foreign joint venture banks. The Indonesian central bank, Bank

Indonesia (BI), announced plans in January 2005 to strengthen

the banking sector by

encouraging consolidation and improving prudential banking and supervision. BI

hopes to encourage small banks with less than Rp 100 billion in capital to either raise

more capital or merge with healthier "anchor banks.

o In October 2006, BI announced a single presence policy to further prompt

consolidation. The policy stipulates that a single party can own a controlling interest

in only one banking organization. BI planned to adopt Basel II standards beginning in

2009 and to improve operations of its credit bureau to centralize data on borrowers.


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o Another important banking sector reform was the decision to eliminate the blanket

guarantee on bank third-party liabilities. BI and the Indonesian Government

completed the process of replacing the blanket guarantee with a deposit insurance

scheme run by the independent Indonesian Deposit Insurance Agency (also known by

its Indonesian acronym, LPS) in March 2007.

EXPORTS AND TRADE:

o Indonesia's exports were $116.5 billion in 2009, down 14.8% from a record $136.8

billion in 2008. The largest export commodities for 2009 were oil and gas (16.3%),

minerals (14.3%), crude palm oil (12.5%), electrical appliances (8.2%), and rubber

products (5.0%).

o The top four destinations for exports for 2009 were Japan (12.3%), the U.S. (10.7%),

China (9.1%), and Singapore (8.2%). Total imports in 2009 were $96.86, down from

$128.8 billion in 2008. Indonesia is currently our 28th-largest goods trading partner

with $18.0 billion in total (two-way) goods trade during 2009.

RETAIL TRADE:

o Retail and wholesale trade continues to be one of the main drivers of growth on the

production-side, reflecting the strength of domestic consumption. Agriculture growth

weakened while that of mining and construction fell.

o The construction sector recorded very low growth in Q1, growing at its weakest rate

in almost 10 years, perhaps reflecting the problems with government capitalexpenditure disbursements. Cement sales, which can be seen as a proxy for


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construction activity actually grew quite strongly in the quarter, rising by over 15

percent over the year in March 2011.

o The contribution of manufacturing to quarterly growth dipped after the strength of the

fourth quarter but on a year-on-year basis growth has been above 5 percent for the last

2 quarters, the first time since 2007.

o Textiles, iron and steel, and transport equipment have been the primary contributors.

OIL AND MINERALS SECTOR:

o Indonesia left the Organization of Petroleum Exporting Countries (OPEC) in 2008, as

it had been a net petroleum importer since 2004. Crude and condensate output

averaged 948,000 barrels per day (bpd) in 2009, down slightly from 2008.

o In 2009, the oil and gas sector is estimated to have contributed $19.8 billion of

government revenues, or 19.5% of the total. U.S. companies have invested heavily in

the petroleum sector. Indonesia ranked tenth in world gas production in 2009.

o Despite the declining oil production, Indonesia's oil, oil products, and gas trade

balance was negative in 2008 with a $1.4 billion deficit, but became positive again in

2009 with a $29.4 million surplus, according to official statistics.

o Indonesia has a wide range of mineral deposits and production, including bauxite,

silver, and tin, copper, nickel, gold, and coal.

o

o

o In 2007 Indonesia ranked fifth among the world's top gold concentrate producers.

Although coal production has increased dramatically over the past 10 years, the

number of new metals mines has declined.


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INVESTMENT:

o President Yudhoyono and his economic ministers have stated repeatedly their

intention to improve the climate for private sector investment to raise the level of

GDP growth and reduce unemployment.

o In addition to general corruption and legal uncertainty, businesses have cited a number

of specific factors that have reduced the competitiveness of Indonesia's investment

climate, including: corrupt and inefficient customs services; non-transparent andarbitrary tax administration; inflexible labour markets that have reduced Indonesia's

advantage in labour-intensive manufacturing; increasing infrastructure bottlenecks;

and uncompetitive investment laws and regulations.

o In 2010, the Overseas Private Investment Corporation (OPIC) updated its 1967

investment support agreement between the United States and Indonesia by adding

OPIC products such as direct loans, coinsurance, and reinsurance to the means of

OPIC support which U.S. companies may use to invest in Indonesia.

RECENT DEVELOPMENTS: ECONOMY CONTINUES TO DRIVE

AHEAD DESPITE EFFECT OF GLOBAL RECESSION

The global recession that devastated economies worldwide did not wreak as much havoc in

Indonesia. The country still grew at a healthy rate of 4.5% annually in 2009, making

Indonesia one of the fastest growing economies in the G20 League of Nations. This was a


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step down from the 6.1% growth recorded the year before, but it confirms Indonesias status

as a premier emerging economy. Such is Indonesias economic momentum that growth is

only expected to quicken in 2010, and accelerate further in 2011, once the lingering effects of

the global recession are finally stamped out.

Jakarta, with a population of more than 23 million people is the largest city in Indonesia

and the home of the Jakarta Stock Exchange.

Monetary policy has been generally accommodative and it is expected to stay that way

for a while. Much like other central banks in the region, the Indonesian central bank

had cut interest rates to stimulate economic expansion.

With inflationary concerns remaining fairly low, the Indonesia central bank has kept

its benchmark rate unchanged at 6.5% for seven straight months (April 2010). The

bank has commented that it remains comfortable with current inflation levels,

expected to be in the range of 5.5% to 5.7% in 2010.

Indonesia has enjoyed good harvests, and an appreciating rupiah contributed to

lowered consumer prices. Domestic consumption remains robust. Private consumption


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grew by 4.9% in 2009, a significant figure during times when public confidence was

at its lowest.

Indonesias economic performance remains positive, and future potential is high, but

recent developments have highlighted ongoing challenges and risks around the outlook

GOVERNMENT STIMULUS BOOSTS ECONOMY

Alarmed by the events of 2008 and 2009, when economies around the world creaked

and threatened to collapse, Indonesias government introduced a $6 billion stimulus

package. President Susilo Bam bang Yudhoyono expects the countrys economy to

grow an average 6.6% annually over the next five years.

Yudhoyono has also promised extensive reforms, and already his vision is starting to

take a few steps towards fruition. Facing a chronic power shortage, Indonesias

electricity board has always struggled to match demand with supply. Now, with a newlaw that was passed in 2009, which allows for private investors to produce and sell

electricity without any intervention from the state, the power

situation in the country might see some improvement.

MASTER PLAN FOR THE ACCELERATION AND EXPANSION OF INDONESIA'S

ECONOMIC DEVELOPMENT (MP3EI)

On May 27, 2011 the GOI unveiled its "Master Plan for the Acceleration and

Expansion of Indonesia's Economic Development (MP3EI)". The MP3EI aims to

grow the Indonesian economy in order to reach "advanced economy" status by 2025.

The plan focuses on 22 economic activities and 6 economic corridors throughout the

country. Moreover, MP3EI outlines strategies to strengthen national and international

connectivity while enhancing human resource capacity.


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The plan is quite ambitious and reflects the current optimism in Indonesia today.

Although the plan aims to significantly elevate Indonesia's economy and standard of

living, it makes a number of assumptions that must be fulfilled to be successful.

Additionally, policies related to MP3EI may affect businesses in unforeseen ways.

The first pillar of the plan is the development of six regional economic corridors

through investments in sectors with high growth prospects and in which a region has

comparative advantages. This requires support from the second and third pillars,

namely improving connectivity and strengthening human resources and science and

technology. The Master Plan targets investments of USD 468 billion over 2011-2025

of which 45 percent are in infrastructure.

BUSINESS ENVIRONMENT IN INDONESIA

Business understanding and capitalising on cultural influences are more likely to succeed than

those simply coping with them. Investing in relationships is critical to succeeding in

Indonesia. Establishing a relationship requires time, preferably with face to face contact with

a person of similar age and status. The longer term returns of investing in relationships can be

significant and include:

Expediting bureaucratic processes where the relationships is with a governmental

official


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Accessing information and distribution networks

Opening joint venture opportunities, especially in manufacturing

The groups welfare predominates in Indonesian culture, so the local community isvery important.

The Indonesian business environment is not easy payment risks, lack of

transparency and security concerns all need careful consideration.

POLICY TOWARDS FOREIGN INVESTMENT

2006-07: Government efforts to encourage foreign investment are stepped up; tax incentives

in key sectors are likely to be offered, and procedures simplified. Attempts at judicial

reform begin in earnest.

2008-10: Liberalisation in the utilities sectors (including power) will provide attractive

opportunities for foreign investors.

FOREIGN TRADE AND EXCHANGE CONTROLS

2006-07: Some restrictions on imports primarily of agricultural goods remain in place, but,

barring a crisis, capital controls will not be contemplated.

2008-10: Liberal foreign-exchange policies will remain in force, and the trade regime will be

deregulated further.

TAXES

2006-07: The government proposes an overhaul of the tax schedule, which will attempt to

lower the corporate tax burden, reduce tax evasion and increase coverage.

2008-10: Efforts to improve tax collection and coverage will continue.

FINANCING


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2006-07: The high level of foreign participation in the banking sector encourages

competition, modernisation and a more transparent operating regime.

2008-10: Improvements in the health of the corporate sector will encourage banks to increase

lending to companies.

BUSINESS OPPORTUNITIES

Working in Indonesia probably does not evoke images of tall skyscrapers filled to the brim

with offices and busy men and women dressed in business attire there are many expats

working in Indonesia.

For its population size of more than 240 million, there is only a 7% rate of unemployment,

which speaks for itself in terms of people working in Indonesia. Despite the rather hard-

hitting Asian financial crisis of 1997, Indonesias economy recovered rather quickly and is

still showing significant economic growth.

The Indonesian economy relies heavily on domestic consumption, and it has seen increasing

investment by local and foreign investors. Generally speaking, however, the economy is very

mixed. The private sector and the government play a large role in the economy.

With a Gross Domestic Product at 1.03 trillion USD, Indonesia is a member of the G-20

major economies. Jakarta is Indonesias largest export centre in part due to its many ports and

proximity to Asia and Australia. In fact, the Port of Jakarta is not only Indonesias largest

seaport, but one of the largest ports in the entire Java Sea basin.

Indonesias main industries are

petroleum and gas,

textiles and apparel,

footwear, mining,

cement,

chemical fertilizers,

plywood, rubber,


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food, and

Tourism.

Originally with a much larger labour force employed in the agricultural sector,

Indonesia has moved towards the services sector (now 49% of the Indonesian work

force) with open arms. Yet, the agricultural sector remains strong, with almost 40%

of those working in Indonesia employed in the agribusiness or subsistence farming.

TRADE AND BUSINESS OPPORTUNITIES

Business people and entrepreneurs from around the world are now focusing on the various

industry sectors in Indonesia to expand their businesses. The successful economy and

potential human resources have created a lucrative national market for businesses dealing

with various goods and services, making it possible for one to easily set up a flourishing trade

or business in this region.

Indonesia also sees many foreign investors looking to finance new ventures and start up

companies in the country giving businessmen all the more incentive to do business with

Indonesia. There are a number of business opportunities available in the country in fields like

agriculture, fashion and technology.

Since the early days of spice trading, Indonesia has been known for its spices, seafood and

other food-based exports. Traders from other countries looking to set up

an import-export

business here will be able to establish a freight enterprise and forge successful trade

relationships between Indonesia and their home country. Another important trade opportunity

in Indonesia involves handicrafts, as the country has many artisans who create intricate piece

of artwork for export purposes. Indonesia encourages this form of trade as this helps the

economy of the country and boosts an awareness of the regions culture for tourism.


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The economy of Indonesia is currently dependent on tourism and as a result there is great

demand for the improvement and enhancement of the existing infrastructure for tourists.

Getting involved in airport construction and maintenance is a good business opportunity in

Indonesia as foreign investors are allowed a 95% ownership of companies that build public

airports.

Some international business people also choose to start restaurants, hotels and other

entertainment centres like malls, nightclubs and cafes for tourists, bringing in their expertise

and adapting it to suit the traditions and culture of Indonesia.

FOREIGN INVESTMENT OPPURTUNITIES

Indonesias foreign investment regime is more open than before the crisis, generating

potential opportunities in an environment of ongoing reform because Indonesias

foreign direct investment, FDI, has not yet recovered from post crisis falls. Already,

investors can operate 100 per cent foreign owned enterprises in most sectors and no


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longer need to sell down equity at a later date. Only a few sectors restrict foreign

investment; in most of these joint ventures are possible.

The outlook for foreign investment in Indonesia also is assisted by the sale of state

held assets and enterprises, more competitive export-oriented and import substitution

sectors due to the weaker rupiah and a more open economy.

Opportunities are diverse. Foreign investors can purchase assets from IBRAs sizeable

bank equity holdings, operate retail outlets, distribute goods produced locally and

apply to import and distribute other products.

They also can enter joint ventures to supply educational, medical and infrastructure

services including telecommunications.

The sale of corporate assets under IBRAs control also should generate significant

foreign investment opportunities. The Government also is selling many state

enterprises.

Major issues for investors include the difficulty of valuing distressed assets given

weak accountancy standards, workforce management and sometimes political

resistance to sales, and legal and sovereign risks.

INVESTMENT OPPORTUNITIES IN INDONESIA.

Indonesia is often thought to be the crossroad of two continents: Asia and Australia. It is also

situated between the Indian and Pacific Oceans, which makes its location an advantage with

regards to geographical strategies. Here are some of the advantages of the investment

opportunities in Indonesia:

The economy is an open market, which allows for easy foreign currency exchange.

The country is fertile and endowed with many, rich natural resources, including: plantations,

gas, fish, agricultures etc. Indonesia has a population of more than 200 million people, many

of whom adapt to progress and active competition in the work force. The convenient location

provides ample, international communication opportunities.


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REAL ESTATE

There are great real estate investment opportunities in Indonesia, particularly in Bali. It is

quite common these days for foreign investors to buy villas in Bali. The profits one can

expect in return are much higher than in other Asian countries. The price of an existing,

luxury villa with a swimming pool will as much as triple or even quadruple over the next fewyears! Even renting a luxury villa out to tourists can bring significant profits to the investor.

While most foreign investors prefer to buy existing villas, some have the time and knowledge

to invest in the development and construction of a new home. Some do not think they will be

able to handle such investment opportunities in Indonesia because they do not understand the

language or the laws. Each investor has his or her own risk level and there are many different

ways to make money in the Bali real estate market

FOREIGN EXCHANGE

The Indonesian foreign exchange market has been gradually increasing and evolving from

tight government control towards a more free exchange system. The exchange rate itself is

slowly moving towards a flexible system at a pace reflecting economic conditions. This

means that the Forex market overall is opening up more doors to foreign exchange investors.


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Indonesian banks always take the international and global financial markets into

consideration when adjusting portfolios. Bank Indonesia does a good job at implementing

diversification in its portfolios, in both its own securities and foreign currencies. Investment

opportunities in Indonesia with regard to foreign currency exchange provide steady and

consistent profits.

Overall, the economic and financial outlook of the Indonesian stock market, real estate, and

foreign exchange market is excellent. Its location and diverse agriculture makes it a very

unique country when it comes to versatile, strategic planning. The job market is steady, and

foreign investors are helping to create employment opportunities.

CONCLUSION

We hereby conclude that Indonesia is an emerging economy ahead with a lot of future

potential. A latest report issued by the World Bank (WB) said that Indonesia is among the six

emerging economies that will lead the world's economy with more than half of all global

growth by 2025Its capability of facing challenges and risks has been high throughout. We see

that The Governments recently released Master Plan for the Acceleration and Expansion of


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Indonesias Economic Development 2011-2025 aims to move Indonesia into one of the

largest global economies by 2025

In 2010 and 2011 we have seen a massive inflow of capital, FDI and portfolios to Indonesia.

The automotive industry, steel, tires, textiles and garments, shoes, personal care products, ice

cream and many other items have enjoyed a rapid expansion. Unilever Indonesia, for

example, experienced a massive capital investment not seen in many years. The company was

able to double its sales in the last five years and has determined to repeat the feat in the next

four to five years.

Today Indonesia's economy is recovering but it is difficult to say when all its problems will

be solved. Even though Indonesia can still be considered part of the developing world, it has a

rich and versatile past, in the economic as well as the cultural and political sense.

With such dynamic activities, it is no surprise that the countrys economy will expand further

next year. If such a rate of growth continues, we will see Indonesias nominal GDP rise again

in 2012 to a level of around Rp 8,500 trillion, an increase of 15 percent. With the

strengthening rupiah against the US dollar, Indonesias GDP may translate to a level of over

$1 trillion in 2012. That means that the Indonesian economy will join the league of $1 trillion

economies that comprises countries like Australia, South Korea, Mexico and perhaps India.

This GDP level will propel the economy further to approach the big 10 countries soon.

In a recent study Global Growth Generators: Moving beyond Emerging Markets, Citibank

predicted that the Indonesian economy will become the fourth-largest economy by 2040,

while in 2030 Indonesia will be seventh in global economic rankings.

REFRENCES

http://en.wikipedia.org/wiki/Economy_of_Indonesia

http://www.rsj-international.co.uk/News/2010/Trade-business-opportunities-Indonesia.html

http://shrewd-investment.com/investment-opportunities-in-indonesia-the-overall-outlook-is-

great/

http://www.internations.org/indonesia-expats/guide/working-in-indonesia-15413
http://en.wikipedia.org/wiki/Economy_of_Indonesiahttp://www.rsj-international.co.uk/News/2010/Trade-business-opportunities-Indonesia.htmlhttp://shrewd-investment.com/investment-opportunities-in-indonesia-the-overall-outlook-is-great/http://shrewd-investment.com/investment-opportunities-in-indonesia-the-overall-outlook-is-great/http://www.internations.org/indonesia-expats/guide/working-in-indonesia-15413http://en.wikipedia.org/wiki/Economy_of_Indonesiahttp://www.rsj-international.co.uk/News/2010/Trade-business-opportunities-Indonesia.htmlhttp://shrewd-investment.com/investment-opportunities-in-indonesia-the-overall-outlook-is-great/http://shrewd-investment.com/investment-opportunities-in-indonesia-the-overall-outlook-is-great/http://www.internations.org/indonesia-expats/guide/working-in-indonesia-15413


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http://www.state.gov/r/pa/ei/bgn/2748.htm

http://www.economist.com/topics/indonesia

http://www.thejakartapost.com/news/2011/05/09/indonesia-towards-a-one-trillion-dollar-

economy.html

http://www.theodora.com/wfbcurrent/indonesia/indonesia_economy.html
http://www.state.gov/r/pa/ei/bgn/2748.htmhttp://www.economist.com/topics/indonesiahttp://www.thejakartapost.com/news/2011/05/09/indonesia-towards-a-one-trillion-dollar-economy.htmlhttp://www.thejakartapost.com/news/2011/05/09/indonesia-towards-a-one-trillion-dollar-economy.htmlhttp://www.theodora.com/wfbcurrent/indonesia/indonesia_economy.htmlhttp://www.state.gov/r/pa/ei/bgn/2748.htmhttp://www.economist.com/topics/indonesiahttp://www.thejakartapost.com/news/2011/05/09/indonesia-towards-a-one-trillion-dollar-economy.htmlhttp://www.thejakartapost.com/news/2011/05/09/indonesia-towards-a-one-trillion-dollar-economy.htmlhttp://www.theodora.com/wfbcurrent/indonesia/indonesia_economy.html

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