Complete country profiling and risk analysis of Indonesia for new entrants to tap the market for business opportunities

1. INDONESIA RISK PROFILE AND ANALYSIS
Presentation by:
GARUDA Advisory LLC

2. GARUDA Advisory LLC
Established in 2018 as a start-up by students of the
prestigious S. Rajaratnam School of International studies,
the consultancy specialises in disseminating information on
and providing risk analysis for Asian countries. The domain
areas of expertise includes political, economic, operational
and security risks for businesses.
OUR TEAM
Tanika Bansal,
Analyst, Operational Issues
Anugya Chitransh,
Indonesia Specialist
Bhavya Laul
Analyst, Economics
Unaesah Rahman
Analyst, Political Issues
Unaesah Rahman
Analyst, Security Issues
GARUDA Advisory LLC

3. FACT FILE AND BACKGROUND INFORMATION

4. INDONESIA FACT SHEET
▪ 16th largest country: 1,904,569 sq.km (735,358 sq.miles)
▪ Natural resources: Petroleum, tin, natural gas, nickel, timber, bauxite, copper, coal
▪ 4th most populous country: 260,580,739 (July 2017)
▪ Over >300 ethnic groups: Javanese (40.1%), Sudanese (15.5%), Malay (3.7%)
▪ Over >700 languages: Bahasa Indonesia, English, Javanese, Sudanese, Minangkabau
▪ Religions: Muslim (87.2%), Christian (9.9%), Hindu (1.7%), Buddhism (0.7%)
▪ Currency: Rupiah (14,811.27 Rp = $1 on Sept. 21, 2018)
▪ 7th highest GDP (IMF): $3.481 trillion (2018 estimate)

5. POLITICAL STRUCTURE
Presidential Republic
Executive
(elections 2019)
President: Joko
Widodo (Oct 2014)
VP: Jusuf Kalla
Legislative (MPR)
(election 2018/19)
Regional
Representative Council
(DPD) 132 seats
People's
Representative Council
(DPR) 560 seats
Judiciary
Chief Justice of SC:
Muhammad Hatta
Ali
Chief Justice of
Constitutional Court:
Anwar Usman
Judicial Commission
(7 members)
High court, district court, religious court
Audit Board
Chairman: Prof. Dr.
Moermahadi Soerja
Djanegara

6. KEY POLITICAL FACTS AND TIMELINE
Presidential elections on April 17, 2019
Jokowi (PDI-P) & Ma’ruf Amin (NU)
Prabowo (Gerindra) & Sandiaga Uno
(Deputy Gov. of Jakarta)
Indonesian Survey Circle: 52.2% for
Jokowi, 29.5% Prabowo (Aug. 2018)
1949: Sukarno becomes first president of independent Indonesia
1966: General Suharto comes to power
1998: Public protests and riots oust Suharto post-AFC
2004: First-ever presidential elections. Former General Susilo Bambang Yudhoyono wins

7. KEY SECURITY LEADERSHIP
▪ Global Firepower 2018: 15th strongest military force in the world
▪ Defense budget: US $6.9 billion (0.84% of GDP in 2017)

8. KEY SECURITY FACTS
▪ IS-associated groups Jemaah Anshorut
Daulah (JAD), Mujahidin Indonesia
Timur (MIT), Mujahidin Indonesia Barat
(MIB) and al-Qaeda-affiliated Jemaah
Islamiyah (JI)
▪ Free Papua Movement (OPM) in Papua
▪ Production of cannabis, meth and
ecstasy
▪ Human trafficking via Malaysia and
Singapore
DOMESTIC EXTERNAL
▪ At least 9 outstanding disputes with
Malaysia in North and West Kalimantan
▪ Border disputes: Timor-Leste in Nusa
Tenggara Timor province; China over
Natuna islands EEZ
▪ 43 actual and attempted piracy attacks in
2017 (ICC IMB)
▪ Cross-border terrorism from Philippines
▪ Drug trafficking from Thailand,
Cambodia and Malaysia
May 2000 Christian militants kill 165 in Muslim dominated villages of Poso town
October 2002 Bombing in Kuta Beach nightclub district in Bali kills 202
September 2004 Car bomb explodes outside Australian embassy in Jakarta kills 9, injures 180
July 2009 Twin suicide bombings at JW Marriott and Ritz-Carlton in Jakarta kills 9
January 2016 IS claims explosions near a shopping centre in central Jakarta kills 5
May 2017 IS claims suicide bombing at Kampung Melayu bus station in Jakarta kills 3
May 2018 Spate of IS-claimed bombings in Surabaya kills at least 25

9. ECONOMIC TIMELINE AND KEY FIGURES
1949: Inherits a crippled economy. Sukarno-era sees 1,000% annual inflation and chaos.
1966: Suharto’s New Order brings inflation down, stabilizes currency, reschedules foreign debt and
attracts FDI.
AFC 1997: Government takes over some private sector assets and introduces inflation target
Global Recession 2008: Outperforms regional neighbors and posts growth
2012: Slowdown in growth due to end of commodities export boom
GDP per capita $4,116 (GDP $1,092.14 billion)*
GDP growth rate 5.3% *
Government gross debt 29.19% of GDP *
Inflation 3.9% *
Current account balance - $19.65 billion (-1.8% of GDP)*
Labor force 125 million (2016)** – 47.1% in services
Unemployment rate 5.2% *
Exports $168,641M ** (13.7% with China)
Imports $166,290M** (21.9% with China)
Multilateral involvement APEC, ASEAN, AFTA, WTO, ILO, G20, ADB, IMF, OECD
(enhanced engagement)
*2018 IMF estimates ** 2016 figures WTO, World Bank

10. GOVERNMENTS’ MEDIUM AND LONG-TERM PLANS
▪ National Long‐Term Development Plan (RPJPN 2005-2025) Divided into four 5-year
stages. Includes institutional restructuring to become a developed and self-reliant, just
and democratic, peaceful and united country
▪ National Medium‐Term Development Plan (RPJMN 2015-2019) Third phase of the RPJPN.
Aimed at consolidation of development in all fields. Emphasis on economic
competitiveness and quality of human resource
▪ Masterplan for Acceleration and Expansion of Indonesia's Economic
Development (MP3EI) Implemented in 2011 to assist and accelerate the RPJPN. Includes
US$470B investment from private sector to become the world’s largest economy by 2025
MINISTER OF FINANCE
Sri Mulyani Indrawati

11. KEY OPERATIONAL FACTS
EASE OF DOING BUSINESS
Ease of doing business has improved: For e.g. it takes 22 days to set up a company in Jakarta,
compared to regional average of 22.7 days (2018)
Road density 26.1 km per 100 sq.km (2011)
Aviation 673 airports (2013), 29 registered air carriers (2015)
Rail density 0.25 km per sq.km (2014)
Ports 9 major seaports, 2 container ports, 3 LNG import
terminals, 2 LNG export terminal
Power generation capacity 59 GW (end-2016)
Electrification Urban areas: 94%; Rural areas: 66% (2013)

12. OPERATIONAL FACTS – NATURAL DISASTERS
▪ Sits on the Pacific Ring of Fire: Extremely vulnerable to macro, mezzo, and micro events
▪ 38th most at risk country for disaster: UN
▪ Extreme wet or dry seasons affect food harvest
▪ 2017: 2,341 disasters including landslides, floods, storms, earthquakes and volcanic
eruptions
▪ Worst affected areas are southern and western islands, i.e. Java and Sumatra

13. POLITICAL RISKS SECURITY RISKS
ECONOMIC RISKS OPERATIONAL RISKS
INDONESIA – TOP LINE BUSINESS RISKS – THE 4 Cs
Corruption
Elections 2019
Decentralization
Cyberattacks
Terrorism
Mass Conflicts
Currency
Policy Risks
Public Spending
Connectivity, Infrastructure
Natural Disasters
Bureaucratic inefficiency

14. POLITICAL RISKS
Corruption
Elections 2019
Decentralization
Moderate risks
Social Activism
Hashtag Activism
Media Censorship

15. POLITICAL CORRUPTION
French giant Alstom SA paid US$722M in the
U.S. after it pled guilty to paying bribes to
win power-plant contracts (2014) – breach of
Foreign Practices Act. In Indonesia it paid
politician Izedrik Emir Moeis (sentenced to 3
years in prison)
• More than 8 out of 10 Indonesians: Corruption is widespread in the government
• Businesses say “grey expenditure” recorded as operational expenses or legal fees
BUSINESSES FINED BUSINESSES CLOSED
Corruption Eradication Commission (KPK)
has investigated corruption in over 4,000
mines and shut down 721 mines
(Greenpeace, as of Feb. 2016)

16. ELECTION 2019
POPULIST POLICIES AHEAD OF ELECTION
▪ Mandatory Halal Labelling will alter the comparative
landscape and could be used as non trade barrier to
benefit domestic producers
CONSERVATIVE ISLAM
▪ To counter Subianto’s ‘Keumatan’ (peoplehood) claims,
Jokowi picked Amin, a conservative Muslim cleric, as his
vice-presidential candidate
RISE OF NATIONALISM
▪ May 12-15, 2018 riots in Jakarta, Solo and Medan –
protestors targeted property and businesses of ethnic
Chinese Indonesians

17. DECENTRALIZATION
▪ Increased cost of doing business: Local government (LG) increasing taxes as they’re pushed to
increase their PAD (local owned revenues)
▪ Complex approval and operational mechanisms: Dealing with multiple stakeholders
▪ Non-standardized internal procedures: Minimum wage, pricing & cost variation across regions
▪ Increased corruption: Regent/mayor has tremendous authority and lacks of oversight

18. SOCIAL ACTIVISM
PUBLIC INITIATIVES SMEAR CAMPAIGNS
Jakarta, 2017: PepsiCo, Unilever and Nestlé
were accused of using palm oil from
illegally deforested rainforests in Sumatra.
Protests by Greenpeace activists outside
local offices of Nestle in Jakarta
PALM OIL LGBTQ ISSUES
Indonesian Ulema Council,
Muhammadiyah and other prominent
Muslim councils urged customers to
boycott Starbucks because of the
company’s pro-LGBTQ views
#boikotstarbucks starts trending on Twitter
Shareholders of the company lose support

19. RISE OF HASHTAG #ACTIVISM
▪ #2019gantipresiden (Replacing the president in 2019): Twitter movement in
response to #JokowiDuaPeriode campaign (Jokowi for two terms). Supported by
Prabowo and has financial backing.
▪ Widodo’s supporters have filed a lawsuit against it
▪ Police and Regional National Intelligence Agency crackdown on public events
▪ Supporters stopped from attending events and harassed

20. MEDIA CENSORSHIP
▪ 2008 Law on Electronic Information and
Transactions (ITE Law): Criminal penalty on
libel, online defamation and censorship of
past news articles
▪ The revised Law of Representative
Assemblies (MD3) allows parliamentarians
to ask for the arrest of people on charges
of defamation and libel
▪ Journalists visiting Papua and West Papua
closely monitored. BBC Indonesia bureau
chief Rebecca Henschke deported (2018)
▪ Telekomunikasi Indonesia Tbk (Telkom) developed a crawling system for internet
censorship: Has blocked over 800,000 sites since 2017
▪ Egs. Reddit, Netflix, LGBTQ reporters
EXAMPLES

21. SECURITY RISKS
Cyberattacks
Terrorism
Mass Conflicts (Crime and Safety)

22. CYBER ATTACKS
▪ Extremely vulnerable due to poor cybersecurity system and lack of experts
▪ Microsoft study in Indonesia - companies can face up to $34 billion in direct losses (2017)
▪ Almost 7 out of 10 companies saw job losses within 12 months
▪ Ranked 2nd among countries where cyber attacks are launched: 2012-15 nearly 500 arrested
on suspicion of cybercrime
▪ 2017: Around 205,502,159 cyber attacks against with over 36M malware attacks
▪ Dharmais Hospital in Jakarta struck by WannaCry ransomware (2017)

23. TERRORISM
▪ ISIS sleeper cells pan-Indonesia: TNI chief
General Gatot Nurmantyo (2017)
▪ Target and perpetrator profile is changing
▪ 1,031 suspicious digital transactions traced
by Financial Transaction Reports and
Analysis Center (PPATK) in first five months
of 2017
▪ Impact on stock market and rupiah has
weakened as large-scale attacks are rare
and markets have become immune
TERRORISM RISK HIGH
▪ Post-2002 Bali bombing stock market fell
by more than 10%
▪ Government has poor approach to
tackling spread of extremism and
radicalization
▪ Widening socio-economic inequality
leads to prey rich-environment
▪ Employee affiliation to radical Islamist
organizations a concern
TERRORISM TRENDS

24. CRIME AND SAFETY
▪ Most crimes were found in the Jakarta Regional Police (43,842 cases), North
Sumatra Regional Police (37,102 cases) and the West Java Regional Police (29,351
cases)
▪ Political turmoil common in Central Sulawesi Province, Maluku Province, Papua and
West Papua. Results in strikes, riots, sabotage, civil unrest and property damage

25. CRIMES AND SAFETY
FIGHT BETWEEN LOCALS SEPARATISTS
ETHNIC CONFLICTS
▪ 11 provinces: Increase in number of
villages where continuous mass fighting
occurred from 2008, 2011, to 2014
▪ Most in Jakarta (29.97), Maluku (14.71)
and North Maluku (15.55)
▪ Active in Papua since 1971. High
chances of civil-military conflict as army
and police are deployed in the region
▪ July 25, 2018: Attacks against police
officers at the Kenyaam Airport in Nduga
▪ More or less ceased since 2002 with no
conflict reported since 2016. However,
there is an increase of anti-Chinese
sentiments
▪ Sept. 8, 2018: Fight between foreign
workers from China and local works at
the electric steam power plant (PLTU)
Serang
RELIGIOUS CONFLICTS
▪ 236 cases of violent attacks on religious
minorities in 2015 recorded by Setara
Institute for Democracy and Peace
▪ Targets are Shia, Ahmadiyah and
Christian minorities
▪ Perpetrated by local administrations
▪ Officials predict more religious attacks
due to upcoming elections in 2019

26. ECONOMIC RISKS
Moderate risks
Turn to protectionism? Export risks
Dominant role of SOEs
Unskilled labor
Currency
Policy Risks
FDI norms
Resource/Economic Nationalism
Public Spending

27. STABLE DOMESTIC ECONOMY
Real GDP growth (%)
Fiscal deficit (%)
Inflation (%)
▪ At 5.27%, Indonesia’s GDP growth remains stable. Led
by domestic consumption
▪ Growth momentum expected to continue until 2019 in
the face of increased election spending, stabilisation of
commodity prices and interest rate hikes
▪ Government follows prudent fiscal policy - budget deficit
cannot exceed a legally mandated ceiling of 3% of GDP
per annum
▪ This has resulted in a tightly controlled fiscal deficit
▪ Inflation largely within target range
▪ Allowed central bank to reduce interests rates, so
far, to promote growth.
Data Source: Bank Indonesia

28. Current account deficit (in US$ Bn.) US$/IDR exchange range
FRAGILE EXTERNAL ECONOMY
Rupiah fallen to unsustainable levels: Warrants strong policy response
Over-reliance on exports
(particularly minerals) makes
it extremely vulnerable on
foreign exchange and
commodity prices. External
debt and current account
deficit need to be controlled.
0
100
200
300
400
2011 2012 2013 2014 2015 2016 2017
Government & Monetary Authority
Private
External Debt Outstanding (in US$ Bn.)
IDR has depreciated to
record lows. The
government has hiked
interests rates and is
proposing to impose import
tariffs to resurrect the
falling currency
A tightly controlled fiscal
deficit with increased public
spending has meant an
increasing sovereign debt.
However, public debt is far
from being unsustainable
Data Source: Bank Indonesia

29. MACRO ECONOMIC RISKS
CURRENCY RISKS
▪ In end-Aug 2018, Rupiah touched a two-decade low – weakest since AFC
▪ Government targeting to correct it via interest rate hike, forex market
intervention and potential increase in import tariffs for 900 consumer goods
▪ However, in the face of US interest rates increase and the global trade war,
steeper efforts may be needed
▪ This may have significant implications – eg. profit repatriation
TURN TO PROTECTIONISM? EXPORT RISKS
PUBLIC SPENDING
▪ Indonesia is a consumption led economy that is eyeing to promote domestic
industries and manufacturing
▪ The recent import tariff hike on consumer goods targets to not only ease the
pressure on exchange rate but also provide an opportunity window for
encouraging domestic production
Piccourtesy:TheEconomist
▪ In light of a fiscal deficit cap, shortfalls in revenue collections may lead to cuts in
public spending
▪ Further, with upcoming elections, most of the spending is in the form of social
assistance and subsidies
▪ Indonesia is in a dire need for infrastructure investments to promote economic
activity. Public spending cuts and misallocations may delay projects further

30. MICRO ECONOMIC RISKS
DOMINANT ROLE OF SOEs
▪ Carried forward as a Suharto-era legacy when they were
rent-seeking opportunities
▪ Strategically important sectors of the economy continue
to be under inefficient state control, including energy,
banking, pharmaceuticals, etc
▪ The balance sheets of SOEs, particularly in power and
construction is deteriorating on account of extensive
borrowing to match infrastructure development plans
UNSKILLED LABOUR
▪ Large young, working-age population. However, workforce
remains largely unskilled
▪ Compounded by out-migration of skilled labor, lack of
capacity to train
▪ Minimum wage fluctuates depending on provinces. Was
IDR 1,332,400 a month ($100) in 2013 (ILO)
▪ Need to account for costs of importing workforce
Source: ILO
Contribution to GVA (in %)

31. POLICY RISKS
FOREIGN DIRECT INVESTMENT
▪ Efforts made by Jokowi government between
2015-17 to improve the business climate in
the country
▪ On the surface, government has been
supportive of foreign investments, however,
on- ground, there is sufficient deterrence
▪ There are frequent changes to policies and
regulations making for an unstable
environment
▪ The “negative investment list” restricts/caps
sectors open to foreign investors
▪ President Joko Widodo has emphasized on the
‘reclamation of strategic resources’ as a key
campaign agenda ahead of next year elections
▪ This rent-seeking attitude of the government is
being unveiled at a time when commodity
prices are soaring
▪ For instance, new rules introduced in 2017
requiring foreign miners to switch from long-
term contracts to a mining licensing system
▪ Recently ordered oil producers to sell crude to
PT Pertamina as it sought to cut imports
ECONOMIC/RESOURCE NATIONALISM
60% 40% 51% 49%
Grasberg copper mine – case study
A three way deal has been concluded as per which
Indonesia’s state miner Inalum will own 51% of the
Grasberg copper mine with the remaining stake owned
the largest global copper Freeport-Mamoran

32. OPERATIONAL RISKS
Connectivity, infrastructure
Natural Disasters
Bureaucratic inefficiency
Moderate risks
Arbitration
Land acquisition
Environmental hazards

33. BUREAUCRATIC INEFFICIENCY
▪ ‘Power centre’ resisting reform efforts and therefore slowing down
▪ Widespread bribery, incompetent and unaccountable civil servants
▪ Policies formulated at macro level fail implementation at micro level
due to overlapping regulations and accountable civil servants
COMPLEX BUREAUCRATIC SYSTEM
WIDESPREAD CORRUPTION
▪ Regular feature of business life despite monitoring by KPK
▪ Risks of encountering bribery or attempted bribery is relatively
high in Indonesia
▪ Corrupt practices hinders in fully tapping economic potential
▪ Leads to bureaucratic red-tape

34. ▪ Costs 0.3% of GDP annually. Weak existing infrastructure as a result of
mismanagement, limited financial resources affected by even moderate earthquakes
▪ High population density in metros aggravates earthquake casualties
▪ Volcanic eruption damages local small and medium businesses involved in tourism,
agriculture, plantation and livestock
▪ Floods and landslides affect distribution channels and supply chains
▪ Monsoon season in January and February sees inflationary pressure
NATURAL DISASTERS – BUSINESS RISKS

35. HARD INFRASTRUCTURE
• Penetration remains low making most areas inaccessible
• Deficit in term of road network quality: 43% of Indonesian roads are
unpaved
• Ports suffer from poor infrastructure and underinvestment, resulting
in severe congestion and lack of adequate facilities
• More than 60 Indonesian airlines banned from operating within EU
due to poor safety standards
TRANSPORT
BUILDING INFRASTRUCTURE
POWER
• Existing building standards not met due to lack of knowledge,
finance, competency, and aesthetics over structural strength
• Building Reliability Advisory Team (TPKB) only in Jakarta and
Tangerang
• Comparatively low electrification for a middle-income country
• World Bank's Enterprise Surveys found that businesses lost 1.9% of
total sales due to outages in 2015

36. ARBITRATION
▪ Judicial system weak and resists reform - Lack competent
judges, particularly in commercial disputes
▪ Bribery in exchange for favorable rulings common
▪ In case of bankruptcy, courts reluctant to protect foreign
creditors
▪ State Courts involved in commercial disputes for favorable
judgement since judges unfamiliar with them
▪ Contracts much less detailed and often renegotiated and
reinterpreted
▪ Signatory of Paris Convention, WIPO and TRIPS agreement for
IP- protection Laws yet enforcement is limited
LAND ACQUISITION LAW
▪ Biggest obstacle to infrastructure development
▪ Tough process (lengthy and costly) as landowners either
refuse to sell their or demand high prices
▪ Lack of regulations leads to disputed or canceled projects
▪ Foreigners cannot effectively own urban or rural land
▪ Foreign companies can obtain rights for set period of times
to use land for mining, agriculture, building and
commercial purposes
▪ Investors establish LLCs to engage in property business

37. ENVIRONMENTAL HAZARDS
AIR POLLUTION
ENVIRONMENTALLY HAZARDOUS INDUSTRIES
WATER POLLUTION
• Forest fires in Sumatra and Kalimantan lead to suspended
operations due to haze
• Palm plantation land clearing accounts US$16B in economic losses
• Efforts to stop fires are hindered by large profits, increasing
demands for palm oil and social reach of profiteers
• Increased toxicity in local water levels, accumulation of algae,
downstream silting, and mangrove thickets creation impact
development of coastal commercial areas
• Major risk in the mining and oil & gas sectors due to fear of leaks
or contamination
• Uprising against dependence on fossil fuels
• Textile and apparel industry contribute to water pollution and
destruction of rice fields especially in Bandung
• Practices like deforestation by mining and palm oil industries place
investors under scrutiny, present a risk of reputational damage

38. RISK SUMMARY AND RECOMMENDATIONS

39. KEY RECOMMENDATIONS
Wait and watch: Upcoming elections have seen the government resort to populist measures.
Security by design: Assess threats and risks, build and configure cyberspace with security
in mind. Same for building compliance in disaster-prone areas.
Hedging: Prevent loss of economic value due to exchange rate fluctuations.
Domestic demand surveys: Adapt to changes in ‘tastes and preferences’ of the
growing middle-income population.
Target long-term holistic goals: CSR initiatives/community engagement to enhance
skills of local labor, retain human capital, improve brand image.
Political risk insurance: Look at multiple options for best insurance coverage.
Invest in private infrastructure/firms: Small-scale energy grids/microgrids or connecting roads.
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40. Corruption
Election
Corruption
Election
Cyber
attack
Terrorism
Crime &
Safety
Currency
State Owned
Enterprises
Labour
Policy &
Regulation
Public
spending cuts
Protectionism
Connectivity
Infrastructure
Bureaucracy
Land
Acquisition
Natural
Disasters
Arbitrage
Environment
Hazards
Political Security Economic Operational
Decentralisation
Social
Activism

41. Terima Kasih!!
THANK YOU !!
GARUDA Advisory LLC