Indonesia Business Forecast Report

Q4 2009

Publication Date	September 2009
Publisher	Business Monitor
Product Type	Report
Pages	62
ISBN Number	not applicable
Product Code	BMI02718

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Summary

A Brighter Outlook Ahead Indonesia's economy is holding up very well in spite of the strong global headwinds. The economy grew by a real 4.0% y-o-y in Q209, barely slowing from the 4.4% growth registered in the preceding quarter and vastly outperforming its regional peers. On account of the strong economic performance in H109, we have revised up our forecast of real GDP growth for 2009 from 3.6% to 4.0%, and for 2010, from 4.6% to 4.8%. Underpinning the strong performance will be the expected continued robustness of private consumption, boosted by an aggressive fiscal policy. Meanwhile, the improving outlook on the external front should also provide considerable positive spillover effects into the economy going forward.

Incumbent President Susilo Bamabang Yudhoyono's re-election offers considerable scope for further political and economic reforms over his second term. Indeed, with his choice of former central bank governor Boediono as vice president and the renomination of respected Finance Minister Sri Mulyani Indrawati, we expect Yudhoyono to name a technocratic new cabinet. This bodes well for policy continuation and we foresee more efforts to clamp down on corruption and enact more pro-business reforms. However, the bombing of hotels in Jakarta in July also highlights the lingering threat of extremism in the country.

Meanwhile, the monetary easing cycle has come to a close. In line with our view, Bank Indonesia (BI) left its benchmark policy rate unchanged at a four-year low of 6.50% in the latest monetary policy meeting on September 3. This marks the end of the nine-month rate-cutting cycle which began in December 2008, bringing the cumulative rate reduictions to 300bps. Underpinning this decision is the growing confidence in Indonesia's economy and an awareness that inflation has been on an uptick in the last few months. As further rate cuts would potentially undermine BI's efforts at maintaining price stability, we expect policymakers to hold the benchmark rate at 6.50% for the rest of 2009, before embarking on gradual monetary tightening to our projected rate of 7.50% for end-2010.

Indonesia's scores a dismal 40.2 in our business environment ratings, dragged down by poor scores of 32.7 (out of 100) and 22.5, in the infrastructure and institutions subcomponents respectively.

Although efforts have been stepped up to combat graft in recent years, it was revealed that the Corruption Eradication Commission (KPK) has only looked into 143 out of the 30,000 complaints received since 2003, raising questions about the agency's effectiveness. Nonetheless, the KPK has been credited with the arrests of several high profile figures and will continue to play a pivotal role in curbing corruption in the coming years.

Content

Executive Summary
A Brighter Outlook Ahead
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- Domestic Politics
- Yudhoyono's New Government To Further Economic Reforms
- President Susilo Bambang Yudhoyono's new government bodes well for further economic reforms
- Table: Indonesia Political Overview
- Long-Term Political Outlook
- Outlook Improved, But Uncertainty Lingers
- Although Indonesia has returned to relative orderliness since the post-Suharto chaos of the late 1990s and early
- 2000s, the country faces multiple challenges and threats to its stability that could flare up again if President Yudhoyono
- or his successor proves incompetent or if improved governance fails to take hold
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- Economy Bottoming Out, 2010 Outlook Bright
- Indonesia's economy is facing brighter prospects ahead, owing to the country's resilient domestic demand and an
- improving global economic outlook
- table: ECONOMIC ACTIVITY
- Monetary Policy
- BI's Next Concern: The Re-Emergence Of Inflation
- The monetary easing cycle in Indonesia is at an end and we expect Bank Indonesia (BI) to leave its benchmark policy
- unchanged at 6.5% through the rest of 2009 amid re-emerging signs of inflation
- table: MONETARY POLICY
- Balance Of Payments
- Balance Of Payments Position Secure In H209
- Indonesia's balance of payments will continue to stabilise in H209. Barring a sudden increase in risk aversion, we expect
- the overall balance of payments to remain in surplus in 2009 amid a continued global economic recovery
- table: CURRENT ACCOUNT
- Investment Outlook
- Island Leases To Boost Tourism
- Island leasing to foreign investors appears to be a viable method for Indonesia to develop tourism in the outlying islands
Chapter 3: 10-Year Forecast
- The Indonesian Economy To 2018
- Great Potential, But Average Performance Anticipated
- Indonesia has considerable potential, but further institutional reform and large-scale infrastructure investment is
- essential to realising this over the medium-to-long term
- table: INDONESIA Long-Term Macroeconomic Forecasts
Chapter 4: Special Report
- The Fate Of ???Chindia'
- Overview
- Although China and India will continue to grow during the global recession of 2009-2010, they are not immune to the
- downturn, and face a number of risks in the near term
- China And India SWOT
Chapter 5: Business Environment
- SWOT Analysis
- BMI Business Environment Risk Ratings
- Business Environment Outlook
- TABLE: BMI BUSINESS AND OPERATIONAL RISK RATINGS
- Institutions
- TABLE: BMI LEGAL FRAMEWORK RATINGS
- Infrastructure
- TABLE: LABOUR FORCE QUALITY
- Table: Asia, FDI Annual Inflows
- Market Orientation
- BMI TRADE RATINGS
- Operational Risk
- TABLE: TOP EXPORT DESTINATIONS
Chapter 6: Key Sectors
- Textiles & Clothing
- Executive Summary
- Indonesia, which BMI estimates to be ranked 14t h in the world by T&C manufacturing value added, faces some
- significant challenges, made more acute by the current global economic growth downturn
- Table: Textiles And Clothing Production And International Trade, 2006-2013
- Shipping
- Executive Summary
- BMI forecasts that a gradual recovery at Indonesia's ports is set to begin in 2010. Tanjung Priok's tonnage
- throughput is set to increase by 2.25% to 41.6mn tonnes in 2010. Container throughput at the port is set to
- increase by 3.52% to 3.181mn TEUs
- TABLE: MAJOR PORT DA TA
Chapter 7: BMI Global Assumptions
- Global Outlook
- Goodbye World Recession
- TABLE: GLO BAL ASSUMPTIONS
- Table: GLO BAL And REGIONAL REAL GDP GROWTH