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Indonesia

Politics:

  • Analysis

    Indonesia politics: Quick View - Golkar and PD struggle for electoral momen

    Event

    Both Golkar and the Democratic Party (PD) have held high-level meetings recently to address growing concerns about their ability to compete at the next parliamentary and presidential elections in 2014.

    Analysis

    There are greater reasons for the PD leadership to be concerned. The PD is still relatively young, but became the largest party in parliament in 2009 because it understood the public's desire for a campaign against corruption in the country's institutions. The fact that the independent Anti-Corruption Commission (KPK) has turned its focus to the PD itself in recent years has therefore been a huge embarrassment. The resignation of the sports and youth minister, Andi Mallarangeng, from the cabinet and the PD's advisory board after being named as a suspect by the KPK has intensified the pressure on the party, which is currently haemorrhaging support in public opinion polls. In response, the president and PD leader, Susilo Bambang Yudhoyono, convened a meeting of senior members on December 9th ahead of its annual National Assembly to discuss strategy.

    The PD is also struggling to maintain internal party unity. After one of its MPs, Ruhut Sitompul, was removed from his position within the party's communications division, he made public a feud with the PD chairman, Anas Urbaningrum, by suggesting that Mr Urbaningrum's poor leadership was behind Mr Yudhoyono lowering the party's target to winning 15% of the vote in the next parliamentary election. (The PD received over 20% of the vote in the 2009 poll.)

    Meanwhile, Golkar leaders met on December 17th to discuss an open letter written by a former party chair, Hadjri Thohari, which suggested that the party needed to keep a close eye on the popularity of its chair and presidential candidate, Aburizal Bakrie. Mr Bakrie was chosen as the party's nominee for the presidency earlier this year, but in recent opinion polls has drawn a lower level of support than his party. The lack of alternatives, and the embarrassment that would be created, means that the party is highly unlikely to reverse its decision, but it reflects a current lack of public enthusiasm for Mr Bakrie.

    December 21, 2012

  • Background

    Indonesia: Political and institutional effectiveness

    The entrenchment of Indonesia's democratic system and the strengthening of associated values, which have been clear trends since the fall of the dictator of 31 years, Soeharto, in 1998, will continue in the forecast period. The first step in this process was the separation of powers between the executive (in the form of the presidency) and the legislature, followed in 2002 by a constitutional amendment mandating direct presidential elections. The 2004 elections saw and high turnout by voters and markedly independent decision-making, in which patronage-based politics was rejected and there was a willingness to support newer parties. In 2005 direct elections commenced for regional posts, such that governors and district chiefs are increasingly accountable to the local population rather than to the influential elites in regional capitals. An election law passed in early 2009 improved the mechanism by which parties assigned seats to candidates for the legislature, improving accountability in parliament and reducing the influence of moneyed interests.

    The anti-corruption campaign has focused on the president's party

    Corruption is rife in Indonesia and extends to most levels of government and throughout the judiciary. Pervasive graft means that the legal system is unpredictable and frequently favours local interests. The Anti-Corruption Commission (KPK) was one of the successes of Mr Yudhoyono's first term, bringing corruption cases against former ministers, retired generals and senior civil servants, among others. However, in recent years the KPK has become a victim of its own success. Its investigative budget was cut in 2011, and the appointment of a relatively low-profile law professor, Busyro Muqoddas, as the commission's new head in 2010 suggested that Mr Yudhoyono was losing faith in its ability to tackle graft. Yet in the past 18 months the KPK has secured two high-profile convictions: of a middle-ranking tax official, Gayus Tambunan, and a former treasurer of the PD, Muhammad Nazaruddin. The exposure of graft in the bureaucracy, and more damagingly, the president's party has highlighted how much work has still to be done to reduce the incidence of corruption. Mr Nazaruddin was keen to blow the whistle on other PD members, and it is therefore possible that the KPK's focus on Mr Yudhoyono's party will continue in the forecast period. The commission will remain unpopular with many DPR members, some of whom have participated in a long-running campaign to strip it of many of its powers. Proposed amendments to the 2002 law that established the KPK would remove its authority to prosecute suspects, restrict its ability to collect evidence through wire taps and abolish a provision that prohibits the body from dropping a case once it has begun an investigation (this ensures that the KPK launches investigations only after it has gathered strong evidence, and prevents the judicial process from being halted by bribes paid to officers and judges). In May 2012 it was proposed in parliament that the commission be banned from investigating graft allegations altogether and forced to focus only on the prevention of corruption. The hostility of the legislature to the KPK is easy to understand, as the commission has so far prosecuted over 40 lawmakers. However, if the proposed amendments are passed, the KPK's powers and the wider campaign against corruption will be greatly weakened.

    The government's introduction of a 20% tax on exports of raw mineral ores by firms that are in possession of mining permits (IUPs, which are distributed by local governments) but which lack contracts of work (which are granted centrally) reflects a desire at central government level to reduce the power of local administrations. The number of IUPs granted has grown rapidly in recent years, and the majority of ore exporters now fail to pay royalties. The tax is a precursor to a moratorium on mineral ore exports in 2014, which the government hopes will force small mining firms to merge and invest in processing facilities. With regard to decentralisation, concerns persist about local financial management and inadequate skills among local officials. However, direct elections for the heads of regional and local administrations have noticeably improved the accountability and responsiveness of local government in many areas.

    June 11, 2012

  • Structure

    Indonesia: Political structure

    Official name

    Republic of Indonesia

    Form of government

    Power has historically been concentrated in the hands of the president, but recent constitutional amendments have given the legislature an expanded role

    Executive

    The presidency is the highest executive office, with authority to appoint the cabinet

    Head of state

    The president, Susilo Bambang Yudhoyono

    National legislature

    The People's Consultative Assembly (MPR) consists of a 550-member House of People's Representatives (DPR) and a 128-member Regional Representatives' Council (DPD)

    National elections

    April 2009 (DPR); July 2009 (presidential). Next elections: 2014 (DPR and presidential)

    National government

    Mr Yudhoyono's second-term government contains representatives of the Democratic Party (PD), Golkar, the National Mandate Party (PAN), the Prosperous Justice Party (PKS), the National Awakening Party (PKB) and the United Development Party (PPP)

    Main political organisations

    There are three nationalist secular parties: the PD, Golkar and the Indonesian Democratic Party-Struggle (PDI-P). The other main parties—the PPP, the PKB, the PAN and the PKS—have an Islamic orientation

    Key ministers

    President: Susilo Bambang Yudhoyono

    Vice-president: Boediono

    Agriculture: Suswono

    Co-ordinating minister for the economy: Hatta Rajasa

    Co-ordinating minister for people's welfare: Agung Laksono

    Co-ordinating minister for political, security & social affairs: Djoko Suyanto

    Culture & tourism: Mari Pangestu

    Defence: Purnomo Yusgiantoro

    Education: Muhammad Nuh

    Energy & mineral resources: Jero Wacik

    Finance: Agus Martowardojo

    Foreign affairs: Marty Natalegawa

    Forestry: Zulkifli Hasan

    Health: Ali Ghufron Mukti (acting)

    Home affairs: Gamawan Fauzi

    Industry: M S Hidayat

    Justice & human rights: Amir Syamsuddin

    Manpower & transmigration: Muhaimin Iskandar

    Public works: Djoko Kirmanto

    Religious affairs: Suryadharma Ali

    Social affairs: Salim Segaf Aljufri

    Trade: Gita Wirjawan

    Transport: Ernst Evert Mangindaan

    Central bank governor

    Darmin Nasution

    December 01, 2012

  • Outlook

    Indonesia: Key developments

    Outlook for 2013-17

    • It is too soon to write off the remainder of his presidency, but there are now clear signs that Susilo Bambang Yudhoyono is becoming a lame duck ahead of the presidential election in 2014.
    • A requirement of the election law means that the next president is most likely to be the nominee of one of the country's three main political parties, but it is possible that the candidate of one of the smaller parties will secure the post.
    • Bank Indonesia (BI, the central bank) has left its main policy interest rate at a record low of 5.75% since February 2012. BI will be able to keep monetary policy loose until mid- to late 2013 owing to moderate inflation.
    • The fiscal deficit will widen to the equivalent of an estimated 2.5% of GDP in 2012, but the shortfall will then narrow steadily, reaching 0.5% by 2017 as more Indonesians are brought under the tax net.
    • The Economist Intelligence Unit forecasts that real GDP growth will pick up to 6.4% in 2013, before accelerating to an average of 6.5% a year in 2014-17, driven by an improvement in export growth as the global economy recovers.
    • Despite a merchandise trade surplus, the current account will record a deficit equivalent to 1.3% of GDP on average in 2013-17. The repatriation of earnings by foreign-owned firms will lead to a widening of the income deficit.

    Review

    • On November 13th the Constitutional Court ruled that the country's upstream energy regulator, BP Migas, was unconstitutional, in a move that jeopardised existing contracts and projects.
    • Following the ruling Mr Yudhoyono issued a decree that declared that all contracts remained valid and that all processes managed by BP Migas would now come under the jurisdiction of the energy minister, Jero Wacik.
    • In an unusual move, the state enterprise minister, Dahlan Iskan, reported eight members of parliament to the legislature's ethics committee for allegedly demanding payments for approving cash injections to state enterprises.
    • At a recent Association of South-East Asian Nations (ASEAN) summit a statement on the South China Sea was disputed by the Philippines, demonstrating the lack of progress made towards a regional consensus.
    • Despite declining international commodity prices and depressed demand for exports, Indonesia's real GDP slowed only to 6.2% year on year in the third quarter, compared with an average of 6.4% in the first half of 2012.
    • In the third quarter of 2012 the current-account deficit narrowed to US$5.3bn (equivalent to 2.4% of GDP), from a revised US$7.7bn in the second quarter.

    December 01, 2012

Economy:

  • Background

    Indonesia: Country fact sheet

    Fact sheet

    Annual data2011aHistorical averages (%)2007-11
    Population (m)245.6Population growth1.2
    GDP (US$ bn; market exchange rate)846.8bReal GDP growth5.9
    GDP (US$ bn; purchasing power parity)1,124.6Real domestic demand growth5.8
    GDP per head (US$; market exchange rate)3,448Inflation6.3
    GDP per head (US$; purchasing power parity)4,579Current-account balance (% of GDP)1.1
    Exchange rate (av) Rp:US$8,770bFDI inflows (% of GDP)1.7
    a Economist Intelligence Unit estimates. b Actual.

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    Background: Republican forces led by Soekarno declared independence from the Netherlands in 1945. Economic collapse and political conflict prompted the army, led by General Soeharto, to oust Soekarno and take power in 1967. Soeharto presided over three decades of authoritarian government, before being forced to resign in 1998 amid economic and social crisis. Indonesia then experienced a time of far-reaching political reform, known locally as the reformasi period, which ushered in more democratic government, including direct presidential elections. Susilo Bambang Yudhoyono was elected president in 2004, succeeding Megawati Soekarnoputri, the daughter of Soekarno. Mr Yudhoyono won a second term in July 2009; he must stand down in 2014.

    Political structure: In 2004 the president and vice-president were directly elected for the first time. Since that year the directly elected People's Consultative Assembly (MPR) has comprised the 550-member House of People's Representatives (DPR, the legislature) and the 128-member Regional Representatives' Council (DPD). Since the fall of Soeharto in 1998, the role of the DPR has been expanded and its power has increased.

    Policy issues: The government has emphasised the need to boost economic growth and investment and to create jobs. Its other stated priority is to stamp out corruption, which significantly raises producers' costs and deters investment. The government has expressed a desire to link local fuel prices to movements in global oil prices, but a switch to market pricing of fuel is unlikely. The government is growing increasingly nationalistic about the extractive sector, limiting foreign ownership of local mines and preparing to impose a moratorium on exports of raw resources.

    Taxation: The rate of tax on annual taxable income up to Rp25m (US$2,800) is 10%, rising to 15% on income of Rp25m-50m and 30% on income above Rp50m. An 11% value-added tax is levied on most goods and services, and a special sales tax of up to 35% is imposed on many luxury items. The corporate tax rate is 28%.

    Foreign trade: In 2011 merchandise exports (fob) rose by 27.5% to US$201.5bn. Import growth was faster, at 30.3%, but the merchandise trade surplus still expanded, reaching US$35.3bn, compared with US$30.6bn in 2010. Owing to a wide deficit on the income account, the 2011 current-account surplus was relatively small, at US$2.1bn.

    Major exports 2011% of totalMajor imports 2011% of total
    Mineral fuels, lubricants & related materials33.9Machinery & transport equipment31.6
    Machinery & transport equipment12.5Mineral fuels, lubricants & related materials23.0
    Crude materials, inedible, except fuels11.9Manufactured goods14.6
    Animal & vegetable oils, fats & waxes10.8Chemicals & related products12.5
     
    Leading markets 2011% of totalLeading suppliers 2011% of total
    Japan16.6China14.8
    China11.3Singapore14.6
    Singapore9.1Japan11.0
    US8.1South Korea7.3

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    November 06, 2012

  • Structure

    Indonesia: Economic structure

    Data and charts: Annual trends charts


    December 01, 2012

  • Outlook

    Indonesia: Country outlook

    Indonesia: Country outlook

    FROM THE ECONOMIST INTELLIGENCE UNIT

    POLITICAL STABILITY: After successfully guiding Indonesia through the 2008-09 global financial crisis, the president, Susilo Bambang Yudhoyono, showed that he had retained the backing of voters by winning a second five-year term in the July 2009 election. However, he has since lost much of that support. Mr Yudhoyono's promises to clean up politics now sound hollow amid a corruption scandal besetting his Democratic Party (PD). The central figure in this, a former treasurer of the party, Muhammad Nazaruddin, was sentenced to almost five years' imprisonment in April 2012. Although the president himself has not been implicated in the affair, Mr Nazaruddin has made wide-ranging allegations against several senior members of the PD, including its chairman, Anas Urbaningrum, who appeared before the Anti-Corruption Commission (KPK) in June to deny allegations of involvement in a separate graft scandal.

    ELECTION WATCH: Indonesia will elect a new president to succeed Mr Yudhoyono in 2014. Parliamentary elections will be held earlier that year and will have a bearing on the outcome of the presidential poll. According to the 2009 presidential election law, only political parties (or groups of parties) that win at least 20% of parliamentary seats or 25% of the vote in the legislative election are eligible to nominate presidential candidates. Although the DPR is expected to relax the rules before 2014, the next president is still likely to be the nominee of one of the three main parties-the PD, Golkar and the Indonesian Democratic Party-Struggle (PDI-P).

    INTERNATIONAL RELATIONS: Indonesia has become more prominent in international organisations in recent years, serving as a non-permanent member of the UN Security Council in 2006-08 and taking a seat at meetings of the G20. As the world's advanced economies are set to grow slowly in 2013-17, Indonesia will rely increasingly on China as an export market. But there will be opposition to closer economic ties with China, as shown by the backlash among local manufacturers against a free-trade agreement between China and the Association of South-East Asian Nations (ASEAN) that came fully into effect in 2010. The government's foreign policy will continue to be influenced by the principle of non-alignment, and it will resist becoming too closely associated with either the US or China. This stance has been evident in its neutral position in recent regional disputes over territorial claims in the South China Sea. There will be intermittent disputes with Malaysia and Singapore over a range of long-standing issues.

    POLICY TRENDS: Since recovering from the 1997-98 Asian financial crisis, Indonesia has achieved stable GDP growth of 5-6% per year, but legislation aimed at addressing the shortcomings of the country's business environment and moving the economy onto a faster growth path will move forward in a stop-start manner, reflecting conflicting views on reform within the governing coalition. The anti-corruption drive will continue, but fierce opposition to investigations into senior police officers has demonstrated that the KPK will have to remain resolute. Several changes, including reform of Indonesia's labour laws and the ending of energy subsidies, may not prove politically feasible.

    ECONOMIC GROWTH: As exports account for a relatively small proportion of its GDP, Indonesia should cope better than most of its neighbours with the subdued global economy in 2013, when the Economist Intelligence Unit expects the country's real GDP to grow by 6.4%. With the external environment improving, Indonesia should then see more rapid economic expansion, at an average of 6.5% a year in 2014-17. Private consumption will remain the main engine of growth in the forecast period, expanding by an annual average of 5.4% in 2013-17. After years of banking and corporate-sector restructuring following the 1997-98 Asian financial crisis, the conditions finally appear to exist for sustained growth in gross fixed investment, which we expect to expand by 9.6% a year on average in 2013-17, supported by stronger private consumption and increased inflows of foreign investment. We estimate that growth in exports of goods and services slumped to just 3.6% in 2012, but the forecast period will see a recovery to growth of 5.9% in 2013 and then to 9.5% a year on average in 2014-17. Growth in imports of goods and services will average 9.9% annually during the forecast period.

    INFLATION: At an estimated 4.3%, average consumer price inflation in 2012 was dampened by weaker economic growth, an ample domestic rice harvest and declines in several international commodity prices. In 2013 we expect inflation to pick up to 5.4%, and then to an annual average of 6.2% in 2014-17 as the economy maintains its strong growth momentum. Continued increases in minimum wages and tighter restrictions on the import of cheap foreign goods will spur inflationary pressures, as will a double-digit increase in commercial electricity prices in 2013. Our forecast would be significantly affected if the government was able to make progress in reforming its various energy subsidies. In 2012 the government managed to secure a minor reform from the DPR, which gave it the authority to raise petrol prices in the event that global oil prices (dated Brent Blend) exceed US$105/barrel by 15% over a six-month period, but this concession has not been extended for 2013. The assumption in the 2013 budget is that global oil prices will average US$100/b, slightly below our forecast.

    EXCHANGE RATES: The rupiah is expected to be one of Asia's worst-performing currencies in 2012, depreciating by 6.6% in nominal terms against the US dollar, owing to Indonesia's weaker balance-of-payments position, lower real interest rates (and hence reduced real rates of returns on local assets) as inflation accelerates, and increased risk aversion on the part of global investors. The rupiah will weaken by a further 4.1% against the dollar in 2013, before appreciating by 1.1% a year on average in 2014-17. Maintaining the stability of the rupiah amid volatile flows of foreign capital will remain a priority for officials, but restrictions on short-term capital flows imposed in 2010-11 are unlikely to be tightened significantly.

    EXTERNAL SECTOR: Indonesia's merchandise trade surplus is estimated to have more than halved in 2012, to US$15.1bn, from US$35.3bn in 2011, owing to weak external demand and strong domestic appetite for imports. The diminished trade surplus will have fed through to the rest of the external balance, meaning that after 14 years of current-account surpluses, Indonesia will have recorded a deficit equivalent to 2.3% of GDP in 2012. Although the trade surplus will begin to rise again in 2013 (and throughout the forecast period), the current account will record a deficit equivalent to 1.3% of GDP on average in 2013-17, mostly as a result of a widening income deficit. Indonesia's interest payments on its foreign debt have declined in recent years, but foreign direct investment is rising relatively quickly, leading to an increase in the repatriation of profits and dividends by foreign-invested firms. The services account will remain in deficit, but limited employment opportunities in the country will force more Indonesian workers-and particularly skilled workers-to seek jobs overseas, leading to an increase in the transfers surplus.

    December 01, 2012

  • Forecast

    Indonesia: Country forecast summary

    Country forecast overview: Highlights

    • Susilo Bambang Yudhoyono has lost some of the popular support that enabled him to win re-election as president in July 2009. His promise to rid Indonesian politics of corruption has begun to sound hollow following the conviction of a former treasurer of his Democratic Party (PD) for accepting a kickback. Although he has not been implicated personally, the president's credibility as an anti-corruption campaigner has been tarnished.
    • The chairman of the Golkar party, Aburizal Bakrie, is a contender to succeed Mr Yudhoyono at the next presidential poll, in 2014. As one of the country's richest pribumi (ethnic-Indonesian) businessmen, Mr Bakrie would be a controversial choice, given the risk of conflicts of interest. Other potential candidates include a former president, Megawati Soekarnoputri, and a former special forces (Kopassus) general, Prabowo Subianto.
    • Since the 2002 Bali bombings, Indonesia has waged a successful counter-terrorism campaign against groups such as Jemaah Islamiah, a once-extensive regional terrorist organisation. However, the bombing of two hotels in the capital, Jakarta, in 2009 underlined the continued threat from terrorism. There have recently been several attacks against local targets, and in 2012 the police foiled apparent terrorist bombings on Bali and against the US and Australian embassies.
    • Relations with the US should improve in 2013-17. The US government appears to view the country as a potential bridge between the developed and Islamic worlds. Diplomatic ties with neighbouring Singapore and Malaysia are likely to continue to be punctuated by spats. Links with China are expected to strengthen.
    • Bank Indonesia (the central bank) has left its main policy interest rate at a record low level of 5.75% since February 2012. The Economist Intelligence Unit believes that it will hold the rate steady until mid- to late 2013. Interest rates will continue to rise in 2014-15.
    • Real GDP is expected to grow at an average annual rate of 6.5% in 2013-17, up from an average rate of 5.9% a year in 2007-11. Private consumption and fixed investment growth are expected to be the main contributors to expansion.
    • Consumer price inflation is forecast to rise to an average of 5.7% next year, from an estimated 4.4% in 2012, and to accelerate to 6.2% a year on average in 2014-17. The current account is expected to move into deficit for the first time in 14 years in 2012 and to remain in the red throughout the forecast period.

    Country forecast overview: Key indicators

    Key indicators201220132014201520162017
    Real GDP growth (%)6.06.36.46.66.76.4
    Consumer price inflation (av; %)4.45.75.86.26.36.5
    Budget balance (% of GDP)-2.4-1.7-1.2-0.8-0.7-0.5
    Current-account balance (% of GDP)-2.4-2.3-1.8-1.0-1.0-0.9
    Deposit rate (av; %)6.07.07.98.28.28.3
    Exchange rate Rp:US$ (av)9,3689,7129,6939,5259,4119,299
    Exchange rate Rp:¥100 (av)11,79711,75711,17810,70310,21110,172

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    November 06, 2012

Country Briefing

Land area

1,904,443 sq km

Sea area (exclusive economic zone)

3,166,163 sq km (before deductions for sea area now under the control of Timor-Leste)

Total area

5,070,606 sq km

Population

238m (Statistics Indonesia 2010 census)

Main towns

Population in ‘000 (2010 census)

Jakarta (capital): 9,608

Medan: 2,098

Surabaya: 2,765

Palembang: 1,445

Bandung: 3,179

Semarang: 1,556

Climate

Tropical

Weather in Jakarta (altitude 8 metres)

Hottest months, April-May, 24-31°C (average daily minimum and maximum); coldest months, January-February, 23-29°C; wettest months, January-February, 300 mm average rainfall

Languages

Indonesian (Bahasa Indonesia), as well as some 250 other regional languages and dialects. English has replaced Dutch as the main second language and is widely spoken in government and business circles

Measures

Metric system

Currency

Rupiah (Rp). Average exchange rate in 2011: Rp8,770:US$1

Time

Western Zone 7 hours ahead of GMT, Central Zone 8 hours ahead, Eastern Zone 9 hours ahead

Fiscal year

January 1st-December 31st (since 2001)

Public holidays

New Year, January 1st; Chinese New Year, January 23rd; Mouloud, February 4th; Nyepi, March 23rd; Good Friday, April 6th; Waisak Day, May 6th; Ascension Day, May 17th; Lailat Al Miraj, June 16th; Independence Day, August 17th; Idul Fitri, August 19th; Idul Adha, October 26th; Islamic New Year, November 15th; Christmas Day, December 25th

March 06, 2012

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