Institute for Integrated Learning in Management Graduate School of Management.

Project on Country Report of INDONESIA

SUBMITTED TO PROF. Raj kishan Nair

SUBMITTED BY Amit Singh (1014) Bashistha Sharma(1031) Sachin Kumar (1047) Group: - 13 sec: - A

INDEX

1.

Overview of INDONESIA History Geographical Condition Demographic Condition Relation with International SACHIN KUMAR

Organization Political condition

2. System

Economic

Situation

of

the

Country Gdp (last 5 years) Economic Growth Economic liquidity And Payment AMIT SINGH Government Policy Natural Resources. Export& Import

3.

Analysis of Business and Business

opportunities existing in the country FDI Trade Policy Monetary Policy Fiscal Policy Doing Business Projects Bashistha Sharma

4.

Conclusion

Overview of Indonesia
History: Indonesia is the worlds fourth most populous country .it is situated in south east part of Asia. First Dutch people arrived in Indonesia in 1512 and landed on Benton shore in java. Dutchs mainly trade with valuable spices. Soon the Spanish, Dutch and English sent ships to the Indonesia in search of wealth. Although they occupied Melaka, the Portuguese soon could not control the growing volume of trade. In shipping transport, an important contribution was made by the KPM (Koninklijke Paketvaart-Maatschappij, Royal Packet boat Company) that served economic integration as well as imperialist expansion. The crisis of the 1930s hit badly the export economy severely. The outbreak of world war -2 badly affects the trade in Indonesia and disrupted and dislocated the economy. After the independence the major challenge for Indonesia is to overcome from the hardships which they were facing. After 1966, the authority of the country come in the hands of, general Soeharto, he restored the inflow of western capital, brought back political stability along with economy stability with a strong role for the army, and led Indonesia into a period of economic expansion. In this period industrial production increased, these include steel, aluminum, and cement but also products such as food, textiles and cigarettes. From the 1970s onward the increased oil price on the world market provided Indonesia with a massive income from oil and gas exports. Wood exports shifted from logs to plywood, pulp, and paper, at the price of large stretches of environmentally valuable rainforest. Suharto invests this revenue in the technologically advanced manufacturing. World Bank in 1993 terms this growth as EAST Asian Miracle and appreciate macroeconomic stability and investment in human capital. In the year-1997, country trapped into the Asian financial and economic crisis, accompanied with drought which affected the livelihood of people and price fell sharply for export commodity. As the exchange rate changed from a fixed to a managed float to fully floating, currency (IDR or Rp) depreciated in value, inflation boomed significantly, and capital flight started.

After the resignation of Suharto', B.J. Habibie, became Indonesia's third President. Habibie again established International Monetary Fund (IMF) and working for economic stabilization. He released several prominent political and labor prisoners, political parties, and labor unions, started investigations into the unethical, and lifted controls on the press.

In 2009 again legislative election held for president and on October 20, Susilo Bambang Yudhoyono become president for his second term.

Geography of Indonesia Area of country: 2 million sq. km, about three times the size of Texas. Maritime area: 7,900,000 sq. km. Cities: capital-Jakarta . Other cities-Surabaya , Medan , Bandung . Terrain: More than 17,500 islands; 6,000 are inhabited; 1,000 of which are permanently settled. Large islands consist of coastal plains with mountainous interiors. Climate: Equatorial but cooler in the highlands. Indonesia is the largest archipelago consisting of more than 17000 islands, come between Indian Ocean and Pacific Ocean. The land of Indonesia formed mainly by the eruption of volcanoes so the soil of the land of Indonesia is very fertile for the agriculture. The whole country divided into three parts, the east Indonesia, smaller sunda island which consist Lombok and Komodo part, greater sunda island which consist Major Island like Sumatra, Sulawesi, and Java, Bali. The total area covered by country is 1904569 square km of which 80% is water. Much of the area of the country covered by tropical rain forest. Indonesia is the abundant resource of natural gas and oil, due to these resources the country lead to a great oil and gas industry, apart from oil and gas country also have reserve of Coal, Bauxite and Nickel reserves.

Most of the part of the country is mountainous and near at the equator, it has large resource of water so it leads to micro hydro run of river. As we know country is located near the equator line so the climatic condition of the country is temperate throughout the year. The average rainfall is very high during the monsoon and humidity is high. The weather of the country also affected by active volcanoes. There are some natural hazards are also become obstacle in the growth of the country i.e. occasional floods, severe droughts, volcanoes eruption, tsunamis, earthquakes.

Demographic condition Population of Indonesia

Indonesia is the fourth most populous country of the world with population 245,613,043. Males population is slightly greater than the females population. Average life expectancy of individual is 70 years. The government had implemented many policies to reduce the population size and it shows a positive result in the population. Countrys population consist 27% 0-14 age group, 66% 15-64 age group and rest of the population include above the age of 65.

Growth rate of population Indonesia has shown a growth rate of 1.069% , 44% of total population living in urban area while rest of the population living in rural part of the country. if we look at the unemployment rate-it is quite high in the Indonesia after having so much natural resources. The per capita income of family very low it is about 1200 USD/year. Poverty level of country decreased from 1976 to 1996 by 40.01% to 11.30%, but Asia crisis again increased the poverty level in the country. Literacy rate in 2007 was 95.22% and 88.62% for male and female respectively. it clearly shows that there are unequal opportunity for the education between two genders

Population below poverty line

Government and political condition Indonesia is a republic country based on the 1945 constitution. It defined for a separation of executive, legislative, and judicial power. Valuable changes have been happened after the resignation of President Suharato in 1998. after the resignation of president Suharto ,Habibie come in power for a very short time.habibe government brought some changes in political reform and improved electoral system of country MPR works as a powerful authority because it could recommend for a president and also could impeach for the same seat. Though the political scenario have been changed now the president elected on the basis of voting and for five year term. The contestant who get maximum vote would consider for president and vice president.

Relation with international organization: Indonesia seeks domestic as well as international interest to build up relationship with other countries. the government in foreign policy of Indonesia come up with decision that their country do not want to be issue of international conflict by aligning to a particular country, but we want our country decide its decision by his own power. they want to develop relation with other countries at the cost of their own independence.: Outline of foreign relation: For the fulfilment of above objective resolution no. 2/MPR/1993 of the peoples consultative assembly outline Indonesias foreign relation as follows. Foreign relation should be developed on the basis of independent and national interest so that it would help in development of country. The aim should be to corporate other nation so that it strengthen the relation of two countries. Any international activity which threat or challenge the peacefulness of any country should watched carefully so that appropriate steps can be taken to prevent negative impact. Relation with neighbour: Indonesia is a founding member of ASEAN and seen as keystone of the organization. it is keen to promote corporation between ASEAN countries and often come up with political issue and human rights. Relation with Malaysia: Indonesia relationship with Malaysia are bilateral and many time gone with ups and downs.There have been disputes over maritime territorial, Ambalate and Sulawesi sea. some other issue are like illegal immigration So both countries need to take initiative to reduce differences and should resolve it . it is important that both countries has to sustained a good relationship and it is also beneficial to both countries and ASEAN. Relation with East Timor: Indonesia occupied Timor from 1975 to 1999. On 15 July 2008 president of both countries, Susilo Bambang Yudhoyono and Jose ramos-horta received the report of the joint commission on truth and friendship .both countries accept each others finding conclusion and recommendation and recognize earlier violation

against human rights in 1999.after that both countries took several steps to sustain peaceful relation with each other. Relation with UK: there are bilateral relation exist between Indonesia and UK and both countries show strong interest in the area of corporation .political relation exist in both the countries since 1949. Britain show his interest in the development of Indonesia in order to strengthen ASEAN for the stability in south east Asia. Relation with USA: Indonesia share a very good relation with US and also played a crucial role in the independence of Indonesia in late 1940.by that time to today both country maintained corporative relation and no formal issue of security exist. The U.S. is committed to strengthen Indonesias democratic development and supports the territorial integrity of the country. About 50000 people from Indonesia want a non immigrant visa every year. Indonesia get development assistance from the US since 1950.when US started to help Indonesia that time mainly poverty level in Indonesia is very high and US provided food ,health care ,infrastructure,rehabillation and training. USAIDs Program Strategy for Indonesia for 2009-2014 responds to Indonesias remarkable democratic transformation of the last decade and its progress toward becoming a strong, prosperous, and inclusive nation.

Economic Situation of the Country.

Economic Growth.

Indonesia as one of the high-growth emerging Asian economics, has bounced back to a high growth with 6.1%GDP growth in 2010 Significant improvement in key areas such as higher export, increased investment and strong consumer spending help to propel the economic growth. Given that the ratio of public debt to GDP has gone from 94% to 27% in one decade, the continued effort to reduce the government`s external debt base has helped to make Indonesia a popular investment destination for foreign investors.

BBC World Service Survey ranked Indonesia as a country that has the best Culture in the world for the people who start new businesses. Investment growth reached estimated 10% supported by favourable investment climate and hopeful global recovery. Areas such as the trade, hotel and restaurant sectors and transport and communication have continued to dominate the growth of business performance. Since the beginning of 2010, the Rupiah has experienced firm appreciation against the greenback, mostly attributable to a high rate of capital flows supported by surging record foreign capital inflows and steady improvement in economic fundamentals. The Rupiah has appreciated 4% in the past year and reached Rp. 8,991 in the end of 2010. To keep the Rupiah Stable the Central Bank has been guarding the currency at its fundamental level of Rp. 8,900 9,300 against US$ and intervening by buying foreign currencies to control the local currency volatility.

The outlook for economy has encouraged greater bank lending at the end of 2010 as at the same time; the low interest rate policy set by Bank of Indonesia has helped commercial bank reduce their lending rate.

GDP.

GDP (Growth rate % change)

7 6 5 4 3 2 1 0 2006 2007 2008 2009 2010 2011

Indonesia Gross domestic product showed an upward trend from 2006 to 2007 wherein the economy was in boom period. From 2008 to 2009 Economy GDP fell drastically 6.10% to 4.30% change which was contributed by global recession started in U.S. According to the Indonesia Country Report, the Indonesia economy survived the global economy crisis well, the Economy grew 6.4% year on year in third quarter of 2011 after growth of 6.1% in 2010 on the back of continued strong domestic consumption (accounting for 60 % of GDP), private consumption increased 4.8 %, government consumption 2.5 % and investments rose 7.1 % year-on-year and also different sector also contributed Agriculture 15.3%, Industry 47%, Service 37.6% also play a major role in the development of the country and the GDP growth of the country. Exports also contributed to growth and also large balance of payments surplus and improved financial sector performance.

Indonesia GDP Per capita stands at $4200 in 2010, $4000 in 2009, $3900 in 2008 according to the World Bank which indicates that there is increasing trend in the GDP per capita of the country.

INFLATION RATE.

INFLATION HISTORY
14 12 10 8 6 4 2 0 2006 2007 2008 2009 2010 2011 INFLATION HISTORY

After reaching 9.9 % in 2008, inflation declined to 4.8% in 2009 as the price of commodities and staple items decreased. The largest increased pressure to the change in CPI annual inflation came from Rise in the cost of food, air fares and petrol. The downward trend in CPI between from 2008 to 2009 came from decrease in cost of food; electricity and gas. Consumer prices rose slightly in 2010, but increased by only 4.4 % year-on-year in October 2011. Overall, inflation is expected to be around 5.6 % for 2011. In October2011, Bank Indonesia lowered its benchmark interest rate by 25 basis points - to 6.50 % - to support the economy amid signs of weakening global economic growth and the decelerating trend of inflation. It has repeated this step in November 2011, lowering the interest rate to 6.00%.

UNEMPLOYEMENT RATE.

UNEMPLOYEMENT RATE
14 12 10 8 6 4 2 0 2006 2007 2008 2009 2010 UNEMPLOYEMENT RATE

As from the above data it is clear that unemployment rate in Indonesia is decreasing as compared to 2006 to 2010 and it decreased to 5.4% which indicates that the government allowing foreign investors to invest in the country. The main reason for the boost in the employment growth is: Employment growth has been achieved through the removal of market barriers which led to the entry of new market participants which in turn increased the employment rate of the country. The increase in the competition led to the effective use of resources which ultimately increased the innovation and investment in the market and which also help to create employment opportunities in the country. Structural reforms like liberalization of transport sector and plans to expand the flexibility of the long-distance bus transport system shows the reason for boost in the employment of the country.

Economic liquidity And Payment System. The foreign exchange (FX) reserves have received a boost by the foreign capital flows. FX reserves are expected to arrive at USD 131.6bn by end-2011, which would mean that reserves have more than doubled in three years. It would cover about 80% of the total external debt, which has declined in relative terms in the past years, to a little below 20% of GDP. Also, other liquidity indicators have improved, e.g. import cover is now close to 6.6 months and the liquidity ratio is expected to be around 140% in 2011/12. The improved liquidity position puts Indonesia in a better position in case of foreign investment reversal and global economic downturn. As emphasized above, low revenue mobilization hinders economic development by limiting investment in infrastructure and social development. Indonesia most important planning is a major change in the regulatory architecture by creating an integrated Supervisory agency.

Government Policy. In 2008, Indonesia finalized its Economic Partnership Agreement (EPA) with Japan, a significant trade partner and Indonesia's biggest foreign investor. The agreement is Indonesia's first bilateral free trade deal and exempts Indonesia from 90% of Japanese import duties

In anticipation of a global slowdown and the fall-out effects on Indonesia, the central bank has lowered interest rates twice in the past month. The first rate cut of 25bps seemed proactive, the second of 50bps was a surprise and perhaps too aggressive. Growth in the third quarter was above expectation and credit growth remains above the central banks target (27% yoy in first nine months vs. 22% target). The latter could lead to a quality decline in the banking sector.

Certain changes are made due to the implementation of competition law and policy that heading to deregulation, market openness, and privatization on some areas. Deregulation was made in strategic sectors such as, telecommunication, airline transportation, oil and gas, etc.

In early 2010, the Government of Indonesia also formally decided to become a candidate country of the Extractive Industries Transparency Initiative (EITI), which will increase accountability and transparency in energy revenue transactions between the government and oil, gas, and mining firms.

The Government of Indonesia has announced a series of economic policy packages aimed at stimulating investment and infrastructure improvements and implementing regulatory reform.

The framework for monetary operations, the management of system liquidity by the central bank, and money market development are all interlinked, and all contribute to the effectiveness of monetary policy.

Natural Resources. Petroleum, tin, natural gas, nickel, timber, bauxite, copper, fertile soils, coal, gold, silver are the natural resources of INDONESIA. The Total natural resources rents (% of GDP) in Indonesia was 5.86 in 2009, according to a World Bank report, published in 2010. The Total natural resources rents (% of GDP) in Indonesia were reported at 11.42 in 2008.

Export& Import.

IMPORT DATA
180 160 140 120 100 80 60 40 20 0 2006 2007 2008 2009 2010 2011 IMPORT DATA

Indonesia imports were worth 15625 Million USD in October of 2011. Indonesia major imports are: machinery and equipment; chemicals, fuels and food. Main import partners are Singapore, China, European Union, Japan and Malaysia.

EXPORT DATA
180 160 140 120 100 80 60 40 20 0 2006 2007 2008 2009 2010 2011

Export Data

Indonesia exports were worth 16804 Million USD in October of 2011. Indonesia major exports are: gas, plywood, textiles and rubber. Indonesia is the world's largest tin market. Although minerals production traditionally centred on bauxite, silver, and tin, Indonesia is expanding its copper, nickel, gold, and coal output for export markets. Until 2007 Indonesia has been an oil exporter. Main export partners are: Japan, European Union, United States and Singapore.

From the above figures of Export and Import of Indonesia we can conclude that at the time of recession both the exports and imports have declined considerably from the period Jan 2009 to Jan 2010. But because of the competency among the companies of Indonesia and technological improvement they were able to recover it. Balance of payment: Indonesias balance of payments position has been strengthening since 2009 when the global economic recovery began. The BOP surplus in 2009-2010 reached USD 39bn, it happen due to the stable inflows from the current account and foreign direct investment which contributed to 60% of the BOP surplus from 2009 to 2010.Portfolio and other investments, which are volatile in nature, accounted for the remaining 40%. Factors influencing developments in the Indonesia balance of payments during third quarter of 2011 include: Diversifying across multiple trading partners bolstered a remained robust export performance during the quarter, despite some slackening in prices for major export commodities. A buoyant economic growth of 6.5% in third quarter of 2011 on the back of brisk expansion in household consumption and investment at 4.8% and 7.1%. The upbeat trend in domestic demand fuelled accelerated growth in nonoil and gas imports. Rising oil production and a modest reduction in domestic consumption of oil-based fuels narrowed the deficit in the oil trade balance.

BUSINESS ENVIRONMENT & OPPURTUNITIES HIGHLIGHTS: Indonesias Overall Doing Business Ranking has decreased in 2011, reflecting lower scores for six indicators.

The latest Enterprise Survey (2009) reflects the major constraints involved to investment in Indonesia. Of the firms surveyed, 65% report competing with the unregistered or informal firms. Only 18% report of having a loan or a line of line credit from a financial institution.

Indonesias Economic freedom score is 56, making it the 116th freest economy in the 2011 index. Indonesias score has improved by 0.5 points from the last year and has reported an improvement in half of the measured economic freedom. It is also ranked 22nd among the 41 countries in the Asia-Pacific region.

GLOBAL RANKINGS

(Reference: worldbank.org)

FOREIGN DIRECT INVESTMENT. From the last two decades, Foreign Direct Investment has become increasingly critical to the developing world, with the increasing number of the developing countries succeeding in alluring substantial and rising amounts of inward FDI. Indonesia has taken over a decade in the prevailing difficult situations to reform itself both politically and economically. These reforms have the Indonesian economy resilient

which has entailed the democracy to firmly establish itself and growing at a steady pace in spite of the global financial crisis. This has in turn proved to ameliorate the investment climate of Indonesia. FDI has been an important element in the economic development of Indonesia. Even though the share of FDI in total GDP has been low, however it plays an important role in generating exports and promoting employment and overall productivity. FDI has created almost half the new jobs in recent years and since 1990 the exports from the foreign multinationals have accounted for increase in share of the entire nations exports. Since the 1990s Indonesia has enjoyed impressive success in the overcoming political and economic obstacles. The new economic laws and policies, which were formulated are now bearing fruit for the country in the form of stable growth and increasing foreign direct investment. Indonesias government saw foreign direct investment at 118.4 trillion rupiah ($13.4bn) in 2010, which has substantially increased by 22% from the last year.

The investment climate and domestic economic performance has provided a lift to foreign investor confidence for direct investment into the Indonesian economy.

The chunk of the foreign direct investments has come from the expanding share of the non-oil and gas sector.

Within the non-oil and gas sector the foreign direct investors have targeted primarily manufacturing, mining and quarrying, trade and communications.

Foreign Investors face significant restriction form the Indonesian government. The industries on the Negative List are closed to foreign investment or are subjected to market conditions.

Subject to approvals and restrictions, residents and non-residents may indulge into foreign exchange and capital transactions. Non-residents are restricted form purchase of real estate.

FIG: FDI Composition.

FOREIGN INFLOWS The inflow of Foreign Capital into the Indonesian Economy has been substantially strong ever since the global recovery last year enticed by the countrys promising economic prospects, a positive sovereign rating and high yields.

From April 2009 to September 2010 the magnitude of foreign holdings of the Indonesian government bonds has increased a cumulative USD 13.5 billion.

The value of foreign holdings as percentage of the total tradable rupiah government bonds has risen from 15% (April09) to a record high of 28%.

The aggregate foreign inflows into the Indonesias bond, equity and SBI markets have reached USD 22bn.

Foreign net purchase of equity has been reported to be USD 3.6bn over the past 18 months. The amount of foreign holdings of the Central Bank Certificates (SBI) alas registered an increase of USD 4.7bn.

TRADE POLICY Indonesian exports have doubled from $29 billion to $60 billion between 1990 and 1997. In spite of the slump in 1998-99 because of the Asian financial crisis, growth in export value resumed, reaching $151 billion in 2008 before dipping to $130 billion in 2009 as a result of the recent global recession. Gross capital formation was almost to 31% of GDP in the year 2009, no higher than the investment rate in 1990. The investment recovered after the dilapidation to 17% of GDP in 1998 and 11% in 1999; however the recovery was slow, until 1999 when it regained its 1990 share of GDP. Incidentally, other ASEAN countries have also had trouble maintaining high rates of national investment since 1999. In 2009, Indonesia had 33% rate which was significantly higher than the investment rates of the other countries in the region like that of Malaysia (14%), the Philippines (15%), and Thailand (22%). Vietnam remains to be the only country where the rate of investment soared from 13% in 1990 to 43% in 2007 before declining to 38% in 2009. Indonesia scores 73.8 (2010) among the entire global economies from the aspect of trade freedom. Indonesias weighted average tariff rate was 3.1% in 2009. The Indonesian trade and investment policy and performance, carried out by the OECD in 2010, showcased the long-term trend toward opening up the economy. FDI in Indonesian economy has recovered since the Asian financial crisis and more specifically on the advent of the Investment Law in 2007. Indonesia has exhibited a new resilience to global shocks by maintaining a reasonably high capital inflow during the recent global economic crisis. In the Indonesian economy FDI has historically been a small fraction of gross capital formation, it has been important for raising productivity and employment and for generating exports.

For promoting further policy and economy reform for maintaining openness and accelerating the growth of investment and exports consummating to faster economic growth has taken few important steps.

Firstly, Indonesia tends to rejuvenate its campaign against freedom. Earlier in the Yudhoyono regime, robust steps were taken to prosecute corrupt officials, business people, and judges thereby focussing on the reduction of the major barrier of investment.

Secondly, Indonesia is trying to further capitalize on the substantial improvement by liberalizing investment rules and simplifying regulatory procedures that impinge on businesses.

Thirdly, Indonesia is plans to invest in roads, power, communications, water and sewerage, ports, and airports. Public and private investments are expected to accelerate in the near future through public-private partnership.

MONETARY POLICY Inflation in Indonesia has moderated; averaging 6.1% between 2007 and 2009. The central bank has cut its interest rates from 9.5% in November 2008 to 6.5% in July 2009 to help both the businesses and consumers endure the global downturn. Subsidies are granted toward fuel, housing, and health care whereas the prices of gasoline, electricity, liquefied petroleum gas, rice, cigarettes, cement, hospital services, potable/piped water, city transport, air transport, telephone charges, trains, salt, toll-road tariffs, and postage are set by the government. The current policy reaction from Bank Indonesia is aimed at tolerating certain appreciation in the rupiah, increasing open market operations and hiking the reserve requirement ratios to take care of the increased liquidity in the economy. It also takes into consideration regulatory measures to directly guide inflows. The main steps undertaken were specifically: The dollar/rupiah rate was allowed to dip below 9000.

From Apr09 to Sep10, the open market operations have been increased by USD 6.9bn.

The banks reserve requirement ratio was raised by 300 basis points in Sep10.

For the foreign investments into the Central Bank Certificates a minimum holding period of one month was imposed on the foreign investors (Jun10).

However, the policy mix has not been sufficient enough to prevent capital inflows resulting into the expansion of domestic liquidity supply. The base money still has expanded by USD13.2bn from Apr09 to Sep10. The YoY growth in the base money has surged on to be 20%, ever since the last quarter of 2009, dominating the nominal GDP growth trend of 18.7% (avg. 04-09). The Bank of Indonesias credit has expanded too reaching 20% growth rate from Jul10. During M2 growth approached 20%, CPI Inflation stayed above 6%, including the period which was unaffected by the inflation from fuel prices.

FIG: Base Money Expanding.

FIG: Money Supply versus Inflation.

FIG: INDONESIA INTEREST RATE FUTURE POLICIES With the inflow expected to persist in the coming year the future monetary policies has to be formulated well enough to keep the economy stable. The appreciation in IDR is not expected. The IDR level has already recovered from the 2008 level, and the IDR REER currently is about only 12% just below the historical Asian Financial Crisis 1997-98. The exports of Indonesia basically comprises of commodity goods which are rather inelastic to the demand in the global market hence, a strong rupiah does not seem to damage the competitiveness of Indonesian exports. Rather the concern remains on the front that a strong rupiah boosts imports and erodes trade and current account balance, which may lead to the exposure of balance of payments to volatility of capital flows. The current account surplus has already registered a fall and the World Bank predicts a small deficit of USD 1.2bn next year. However, it is implicit that Indonesias outstanding amount of gross external debt is still 2.4 times of foreign reserves. The Bank of Indonesia could find it necessary to accumulate reserves in order to support current account balance. This would alleviate the destabilization effects stemming from a reversal in capital movement one day in future. In response to the expansion of domestic money supply, plans for tightening the liquidity will be reinforced although the Bank of Indonesia has shown itself to be reluctant enough to increase the interest rates. The benchmark rate level of 6.5% in Indonesia is among the highest in the region. Rate hikes will understandably become unavoidable with the surge in inflation. Rate hikes could also affect the lower down investors expectation as they with

respect to economic growth and asset price returns. Bank of Indonesia is expected to hike the rate to a neutral 8% from 6.5%. FISCAL POLICY Indonesia has reduced taxes to moderate levels as part of broader fiscal reform. The top individual income tax rate is 30 percent. The top corporate tax rate has been reduced from 28 percent to 25 percent. Other taxes include a value-added tax (VAT) and a property tax. In the most recent year, overall tax revenue as a percentage of GDP was 13.3 percent. During the global downturn the Indonesian government followed an expansionary monetary policy to sustain their domestic demand. With the improvement in the countrys macroeconomic fundamentals and political stability are attracting foreign investors to the countrys debt market. Tax revenues picked up in 2010 on more intense collection efforts. These sources proved to be adequate enough to finance the fiscal deficit, but Indonesia made substantial reforms in their subsidy structure and efficiency of commodity revenues with their focus on attaining medium-term fiscal sustainability.

DOING BUSINESS

The Doing Business section of the report enlightens us on the prospect of business in the country. It basically deals with the ease or difficulty of an entrepreneur to run a small size to medium size business in Indonesia. This section engages with the changes in the regulation affecting 10 areas in the life cycle of the business: starting of business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency.

indicator Business environment Index EIU-global outlook report control of corruption indicator world bank group regulatory quality world bank group country credity rating institutional investor index of economic freedom the heritage foundation and the wall street journal political risk rating (ICRG) PRS group doing business ranking

2011

Rank 2010 2009

2008 60 82 138 202 110 202 78 174

2007 scale 60 82 145 201 112 200 76 0-100 174 -5

2011

2010

2009

score 2008 2007 5.5 5.5

2006 5.4

2005 5.4

2004 5.5

2003 5.2

144 203 114 203 61 178 60 178 73 178

-0.7

-0.6

-0.7

-0.8

-0.9

-0.9

-1

-0.3

-0.3

-0.3

-0.3

-0.5

-0.6

-0.7

56.4

56.2

50.1

48.2

47

41.8

37.7

33.4

25

114 178 96 140 129 89 140 126

131 179 96 140

122 157 89 140

125 0-100 157 99 0-100 140 1-183 59

55.5

53.4

53.2

53.2

51.9

52.9

52.1

55.8

61

60.5

62

60.5

58

52

51.5

49

DOING BUSINESS: COUNTRY RANKINGS Ease of DB2012 DB2011 Change in Rank

Doing Business (Overall Ranking) Starting a Business Dealing with Construction Permits Registering Property Getting Credit Protecting Investors Paying Taxes Trading Across Borders Enforcing Contracts Resolving Insolvency

129 155 71 99 126 46 131 39 156 146

126 156 71 96 116 44 134 38 154 149

-3 +1 0 -3 -10 -2 +3 -1 -2 +3

For the entrepreneurs to start up their venture in a particular country they must first need to understand where the country stands in the different aspects of doing business.

According to the Doing Business survey, for business to start in Indonesia it requires 8 procedures, takes 45 days, and costs 17.9% income per capita along with paid-in minimum capital of 46.6% of income per capita.

Indonesia ranks at 155 of 183 economies on the ease of starting a business. Over the years the country has proved itself more conducive to start a business.

The report reflect that for a business to start in the year 2004 it required to go through 12 procedures, which has reduced to just 9 procedures in 2011 and it is projected that by 2012 it will be further reduced to just 8 procedures.

Time required for starting a business in the year 2011 has also reduced from 168 days in the year 2004 to just 45 days in the coming year 2012.

The cost as percentage of income per capita has decreased from 136.7 in the year 2004 to just 53.1 in the present year 2011.

In the year 2009 the business start up was made easier but the minimum capital required for that sake had doubled, over the years Indonesia made the business start up easier by reducing the company name clearance , reservation and the time required to reserve the company name. For the upcoming years Indonesia plans to make business easier by introducing a simplified application process which would entail the entrepreneurs to obtain both general trading license and a business registration certificate.

SUBNATIONAL DOING BUSINESS REPORT Doing Business in Indonesia compared business regulations across 14 Indonesian cities. Te report emphasizes on the collaboration of the national and local regulations across these 14 cities that affects 3 basic stages in the life of small to medium size firms in the domestic market viz. starting a business, dealing with construction permits and registering property. This was for the first time that Doing Business has gone beyond Jakarta to ponder on the opportunities available for collaboration between the national as well as the local government, which eventually leads to better business prospects within the cities surveyed. Main Findings: Yogyakarta was among the top 10 cities globally on the number of procedures for dealing with construction permits. This was due to the affect of the collaboration of the zoning and buildings authorities.

In the city of Manado transferring a property title took the same amount of time as it would take in the United Sates and hence was put into the 24th position worldwide.

Entrepreneurs in Manado had to wait for less than 2 weeks for transferring their property title, whereas in Surakarta they had to wait for almost 2 months.

Both Yogyakarta and Bandung led the overall ranking on the 3 indicators measured among the fourteen cities surveyed.

Business registration was found to be faster and easier in cities where business licenses administered by the local government were consolidated at one-stop shops.

BUSINESS OPPORTUNITY Indonesia is asseverating itself as a premiere destination for international business and investment. Over the past few years Indonesia's natural resources, large population (including its rapidly growing middle class), macroeconomic stability, generally open investment regime, and low asset prices have become major attractions for prospective businesses. The central government has formulated Master Plan for the Acceleration and Expansion of Indonesian Economic Development (MP3EI) for the period 2011-2025. This plan has been devised to alleviate widespread investments of all sizes across the archipelago. Rp 4,000 trillion has been appropriated to achieve desired developments in Indonesia's six designated economic corridors within the MP3EI. A major chunk of these are expected to come from the private sector and state-owned enterprises, and a big chunk will go to infrastructure projects to ease connectivity within the archipelago. Conclusion. Indonesian economic performance is predicted to continue improving. In 2012, economic growth is expected to increase, the balance of payments surplus will remain large, the bank intermediation function will improve and inflation will remain within its target. In the medium term, the domestic economy is projected to continue expanding and accompanied by further decrease in inflation. Bank Indonesia will remain directing its policies towards macroeconomic and financial system stability to support sustainable economic growth. Monetary policy will continue aiming to achieve the inflation target, while banking policy is

directed to enhance bank resilience in order to boost bank performance and competitiveness as well as to withstand crisis shocks. Payment system policy is directed to create a more efficient, reliable, simple and secure payment system.

BIBLIOGRAPHY www.centralrepublicbankofindonesia www.doingbusiness.org www.indonesiacountryreport.com www.imf2010.com

www.cia.gov. www.state.gov.

www.investmentindonesia.com
www.worldbank.com