President Joko Widodo is likely to be re-elected for a second term in the April 2019 general elections. Indonesia’s economic growth remains relatively stable, but its relatively high proportion of external debt increases its exposure to tightening global liquidity conditions. Ahead of the elections, there is an elevated risk that local firms will receive preferential treatment over foreign competitors.
The risk of civil unrest is likely to rise as Widodo and his opposition challenger, nationalist former general Prabowo Subianto, are likely to appeal to identity politics. Protests are most likely to occur in Jakarta but commercial operations are unlikely to be specifically targeted. There is a moderate risk of cargo disruption due to labour strikes, which may also block highways.
In August 2017, over 600 workers at the Jakarta International Container Terminal went on strike for over 72 hours, causing temporary disruption at Tanjung Priok Port.
The threat of terrorism has increased in recent years as former Islamic State (IS) militants return to Indonesia, but attacks are likely to remain low-capability in nature. IS-linked individuals are suspected to have carried out a bombing attack in Jakarta in May 2017 that killed 3 police officers and suicide bombings in Surabaya in May 2018 that killed around 30 people.
However, Indonesia has enhanced its security measures by establishing a national cyber-security agency and strengthening its anti-terrorism laws.
Real GDP growth is forecasted to remain relatively stable at around 5% in 2018 and 2019, but Indonesia’s economic potential is likely to be constrained by growing headwinds. Rising US interest rates, global trade tensions and Indonesia’s dependence on capital inflows are undermining the performance of the rupiah, which has lost over 7% of its value against the US dollar in the year-to-date.
The central bank has demonstrated its willingness to defend the rupiah, having raised its benchmark interest rate by 175 basis points since May 2018. In order to support its currency, Indonesia has also increased import taxes on over a 1,000 consumer goods, announced new fiscal stimulus measures and intervened in the foreign-exchange market.
Between January and September 2018, foreign exchange reserves fell by almost 15% but are still adequate, providing around 5.4 months of current external payments. The rupiah remains freely convertible and there are no capital controls in place.
Indonesia’s government debt-to-GDP ratio stands at a modest 31% and is forecasted to gradually fall over the coming years. While capital spending is constrained by weak government revenue collection, Indonesia is likely to continue to adhere to its budget deficit cap of 3% of GDP. The fiscal deficit is forecasted to narrow gradually to 2.3% in 2018 and 2.1% in 2019 due to additional scrutiny on public spending, which will limit GDP growth but mitigate the impact of rupiah depreciation on the debt burden.
Indonesia’s debt servicing costs are highly exposed to the risk of sudden shifts in investor sentiment, as around 40% of general government debt is denominated in foreign currency and a similar proportion of government securities are held abroad. However, this risk is mitigated by the long-term tenor of the country’s debt.
Indonesia’s agribusiness sector is expected to post annual growth of 5.6% until 2022 as the country seeks to achieve self-sufficiency in a number of food staples. Over the coming years, the sector’s growth will primarily be driven by gains in wheat, palm oil and sugar production.
However, foreign-backed investments, particularly those funded by China, may become a contested political issue in the lead-up to the 2019 elections as President Widodo is likely to placate nationalist demands. There is a risk that local firms will receive preferential treatment over foreign competitors, and the threat of contract alteration is particularly high in the mining sector.
However, the Indonesian government has not expropriated any assets owned by foreign investors since 1967. Due to widespread corruption, investors may struggle to have contract disputes resolved in the Indonesian legal system. Enforcing a contract can be costly in Indonesia, with the World Bank estimating that it takes 390 days at a cost of almost 75% of the claim.
In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Brazil, Indonesia, Ukraine and Thailand all of which have been the subject of recent enquiries from JLT's client base.
The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.
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For further information, please contact Eleanor Smith, Senior Political Risk Analyst on +44 (0)121 626 7837 or email email@example.com.
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