Indonesia Business Forecast Report Q2 2008

Publication Date	April 2008
Publisher	Business Monitor
Product Type	Report
Pages	55
ISBN Number	1745-0586
Product Code	BMI01195

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Summary

Still Facing The Same Old Constraints

Overall, we retain a positive outlook towards the Indonesian economy. In the past decade the economy has entered a period of sustained growth, which has improved the country's ability to attract new investment, both foreign and domestic. A recognised need for further privatisation, and the fact that 80% of the money needed to upgrade and expand the country's infrastructure will require private sector financing, mean that in the next ten years there will be plenty of opportunities for overseas firms doing business in Indonesia. However, we continue to stress the need for further improvements to the country's infrastructure if it is to reach its full potential and push its way up towards a higher growth path. Given its limitations, we project average GDP growth of 6.0% over our five-year forecast period (2008-12).

Indonesia's political risk ratings reflect both the opportunities and the limits facing a country which has, on the one hand, enjoyed a successful transition to democracy following three decades of autocratic rule and, on the other, is still struggling to rid itself of the vestiges of an authoritarian regime. Our long-term political risk rating for Indonesia is, for example, pretty low for a democracy, which tend to score higher than autocracies given the inherent strengths of a democratic system (i.e. social stability). The reason for this stems from the structural weaknesses inherited from the Suharto presidency as well as ethnic considerations which have thus far gone unaddressed.

Further monetary policy loosening in H208 should help the economy grow above 6.0% for a second consecutive year, but it will not bring about the structural changes necessary to sustain these levels. This long-held view is supported by the World Bank's recent assertion that Indonesia is still not firing on all cylinders, and substantially higher FDI is necessary to repair and develop infrastructure to allow for the 8%+ growth the government yearns for. In the nearer term, the current global economic climate and concerns about unemployment have begun to weigh on sentiment, suggesting that consumer spending could moderate over the coming quarters.

Despite the improvements made to Indonesia's business environment in the past decade, reform has been slow and continues to be hamstrung by a weak executive, whose powers have been substantially curtailed as part of the country's transition to democracy. Poor infrastructure and high levels of corruption remain the key obstacles to bringing in greater overseas investment, but there has been significant progress worth mentioning vis--vis improvements in the country's business environment. For one, the new political system has improved long-term prospects for doing business in the country, as it has corresponded with an anti-corruption drive that is, slowly but surely, re-establishing trust in government institutions.

Content

Executive summary
- Still Facing The same old Constraints
Chapter 1: Political Outlook
- SWOT analysis
- BMI Political Risk Ratings
- Domestic Politics
- Assessing Political Risks
- Indonesia's short-term political risk rating is relatively high, reflecting its successful transition to democracy
- and the government's peaceful handling of secessionist movements.
Chapter 2: Economic Analysis
- SWOT analysis
- BMI economic Risk Ratings
- Economic Activity
- 2007 GDP Growth Rate Unsustainable
- The Indonesian economy expanded at its fastest pace in a decade in 2007 and, in our view, has reached its
- medium-term growth potential.
- Monetary Policy
- Rising CPI Limits Rate options
- The opportunity for Bank Indonesia (BI) to cut the Target Rate by 25bps after the US Fed's aggressive rate
- reductions in Q108 has been offset by spiralling inflation.
- Fiscal Policy
- Oil Prices Force Budget Rethink
- Rising oil prices have forced President Susilo Bambang Yudhoyono's administration to recalculate its budget
- estimates, which has taken the projected deficit for 2008 to 2.1% of GDP.
- External Debt
- Investment Grade In 2010?
- Indonesia's debt profile has improved markedly in the past decade on the back of reform measures enacted by
- the current administration, which has encouraged fiscal discipline as well as long-term foreign investment into
- the economy.
Chapter 3: special Report
- Looking Beyond 2008
- The Future of The World, In Three acts
- We believe that a substantial, multi-year shift in the US external accounts is under way.
- Us: The Rebalancing act
- Unwinding The Imbalances
- China: What If We're all Wrong?
- Our Core scenario For China
- We are retaining our positive headline growth projections for China across the forecast period to 2012, with our
- expectations of the continued success of the urbanisation process and export-driven growth model underpinning
- our assumptions.
- Japan: Immigration Key To Long-Term Growth
- Demographic Woes Portend Long-Term decline
- Immigration remains the only realistic way that Japan can overcome its long-term economic challenges.
Chapter 4: Business Environment
- SWOT analysis
- BMI Business environment Risk Ratings
- Business environment outlook
- Institutions
- Infrastructure
- Market orientation
- Top export destinations
- Operational Risk
Chapter 5: Key Sectors
- Power
Executive Summary
- Indonesia's power consumption is expected to increase from an estimated 173twh in 2007 to 338twh by the
- end of the forecast period in 2012, leaving a shortfall in generation rising from an estimated 44twh in 2007 to
- 170twh in 2012, assuming 4.6% annual groth in generating capacity
- IT
- Market overview
- The Indonesian IT market should grow at a compound annual growth rate (CAGR) of at least 11% between 2006
- and 2011, with computer sales strong in 2007 despite government moves to crack down on software piracy.
List of Tables
- Table: Indonesian: Cabinet & other Key Posts
- Table: Economic Activity
- Table: Monetary Policy
- Table: Fiscal Policy
- Table: Foreign Debt
- Table: BMI Business and operational Risk Ratings
- Table: BMI Legal Framework Ratings
- Table: Indonesia FDI
- Table: BMI Trade Ratings
- Table: Indonesia Power - Historic data & Forecasts
- Table: Indonesia's IT Industry - Historical data and Forecasts (Us$mn unless otherwise stated)