PESTLE Analysis Indonesia

PESTLE Analysis
PESTLE ANALYSIS
Summary
The election of Joko Widodo in 2014 presidential elections is a strong testament to Indonesia's democratic values as it
marked the first time when a twice-elected president handed over power to a successor directly elected by the people.
However, the passage of a bill, which will scrap direct elections for regional heads in favor of indirect elections held by
regional assemblies, could prove to be a regressive democratic step. Although the previous President Susilo Bambang
Yudhoyono signed a presidential decree to repeal the bill, it will need approval from the newly elected parliament, which
is unlikely due to continued dominance of the Red-White coalition (opposition) in the legislative assembly. This
dominance could also hinder passage of institutional reforms proposed by the newly elected President Joko Widodo
(who belongs to rival coalition led by Widodo's PDI-P).
Another problem faced by Indonesia is that of corruption with a number of politicians, bureaucrats, policemen and
members of the judiciary tainted with corruption scandals. The country faces terrorism threats from both domestic and
international militant groups. On international front, Indonesia is improving its relations with other Association of SouthEast Asian Nations (ASEAN) countries as the 10-member regional group aims to establish an EU-style single market by
2020.
On economic front, the Indonesian economy has recorded annual growth of above 5.0% in all years except one (2009
during 2004-13. In 2013, GDP growth came in at 5.8%, which is expected to fall to 5.5% in 2014 partly due to the macro
stabilizing monetary and exchange rate policy measures taken during June-November 2013 to arrest further depreciation
of Indonesian rupiah and control further widening of its high current account deficit. The country's banking sector remains
strong, government finances remain sustainable and foreign companies such as General Motors and Cargill have
continued to invest in the country with an ambition to tap into its large consumer market.
Major challenges affecting economic growth continue to be underinvestment in infrastructure and over-reliance on
commodity exports; the latter being a major reason for widening of Indonesia's current account deficit during 2012-13.
Another major hindrance to economic growth is the underdeveloped nature of Indonesian financial markets, which create
funding problems for firms, especially startups and deters the economy's ability to withstand global financial shocks.
On social front, Indonesia has implemented cash transfer programs for poor households to mitigate the impact of fuel
subsidy reduction, and to provide them with healthcare and education facilities, effectively raising their standard of living.
The government is also playing its part by aiming to provide social insurance to the entire population by 2029. However,
the country has witnessed many instances of human trafficking since 1991, which is a cause for concern. Rising ethnic
violence and religious intolerance could pose a risk to social harmony in Indonesia.
Indonesia has recorded marked improvement in technological and innovation parameters; albeit from a low base. The
country placed 34th out of 148 economies in the Global Competitiveness Index 2014-15, 21 places up from its 2008-09
rank of 55th. However, low R&D expenditure has taken a toll on the number of patents granted. Indonesia's proportion of
high technology exports in manufactured exports is also way below peers such as Philippines, Malaysia, China and
Thailand. In addition, the country has one of the worst records in the world in terms of software piracy, and while the
government has initiated measures to reduce the problem, there is still much work to be done.
The country has an effective competition law; besides, the total tax rate is lower than regional average. However, the
country's legal environment remains affected by an inefficient bureaucracy, rigid labor laws and a weak judicial system,
which can easily be influenced and manipulated by the political and business elite. Further, foreign companies face risks
from the arbitrary intervention of the Indonesian government, which has often created problems for foreign entities by
PESTLE Country Analysis Report: Indonesia
MarketLine. This report is a licensed product and is not to be photocopied
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PESTLE Analysis
either not honoring deals or imposing new conditions after an agreement has been signed.
Indonesia's biodiversity is one of its greatest assets. The country is among the top five in the world in terms of plant
diversity, with an estimated 38,000 higher plant species. Indonesia leads the world in terms of palm diversity. However,
large tracts of Sumatra's forest have been destroyed to make way for palm oil plantations, with companies clearing trees
and burning the stumps that remain. A 2008 Greenpeace report suggested that around 1.4 million hectares of virgin
forest in Riau have already been converted to plantations to provide cooking oil and a further 3 million hectares are set to
be used for the production of biofuels. Further, the government's heavy energy subsidies have been contrary to its
environmental initiatives.

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PESTLE Analysis
Political analysis
Overview
The election of Joko Widodo in 2014 presidential elections is a strong testament to Indonesia's democratic values as it
However, the passage of a bill, which will scrap direct elections for regional heads in favor of indirect elections held by
regional assemblies, is a regressive step. Although the previous President Susilo Bambang Yudhoyono signed a
presidential decree to repeal the bill, it will need approval from the newly elected parliament, which is unlikely due to
continued dominance of the Red-White coalition (opposition) in the legislative assembly. This dominance could also
hinder passage of institutional reforms proposed by the newly elected President Joko Widodo (who belongs to rival
coalition led by Widodo's PDI-P).
Another problem faced by Indonesia is that of corruption with a number of politicians, bureaucrats, policemen and
members of the judiciary all tainted with corruption scandals. Restoration of indirect elections for regional heads could
aggravate this problem as it is believed to have fuelled corruption and nepotism during 1999-2004.The country faces
terrorism threats from both domestic and international militant groups. The latter could be a consequence of reawakening
of dormant networks as more than 100 Indonesians are suspected of fighting for the radical Sunni cause of the Islamic
State of Iraq and al-Sham (ISIS) in Iraq and Syria. To tackle terrorism, Indonesia has improved its security ties with the
likes of the US, Russia, China and South Korea.
On international front, Indonesia is improving its relations with other Association of South-East Asian Nations (ASEAN)
countries as the 10-member regional group aims to establish an EU-style single market by 2020.
Table 3:
Analysis of Indonesia's political landscape
Current strengths
Current challenges
Transition to democracy
Corruption
Strong defense cooperation policy
Dominance of opposition coalition in the parliament
Future prospects
Future risks
Deeper integration with ASEAN allies
Terrorism threats
Scrapping of direct regional elections
Source: MarketLine
MARKETLINE
Current strengths
Transition to democracy
Indonesia made a successful transition from authoritarian rule to democracy in 2004 after it held its first-ever direct
presidential elections. Indonesia has since built an institutional framework capable of forming the basis of a successful
and eventually thriving democracy. Since its transition to democracy, most Indonesians have enjoyed freedom of
expression. A system of checks and balances has been brought between the executive and the legislative branches of
government and the armed forces have been depoliticized.
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PESTLE Analysis
In the years following the fall of President Suharto, Indonesia has had five presidents: B.J. Habibie, Abdurrahman Wahid,
Megawati Sukarnoputri, Susilo Bambang Yudhoyono and the incumbent Joko Widodo, all of whom assumed power by
democratic means. In fact, the election of Joko Widodo as the Indonesian president in 2014 presidential elections
Although administrative flaws characterized the most recent legislative and presidential elections, which were held in
2014, they were assessed to be transparent and broadly fair.
Strong defense cooperation policy
In order to strengthen its military prowess, Indonesia has improved its security ties with the likes of the US, Russia, China
and South Korea. During late 2009, the US Pacific Command (USPACOM) was installed in Indonesia. In 2011, the US
also agreed to deliver 24 used F-16 C/D Block 25 fighter jets to Indonesia, free of cost. In addition to the US, the country
also has strong military ties with Russia, from which it has received 16 Sukhoi fighters since 2003. Military ties with China
are largely focused on obtaining the technology that the C-802 missile is based on. The two countries are also
negotiating a technology transfer mechanism for C-705 missiles to be used by the Indonesian navy. Indonesia is also
engaged in a technology transfer agreement with South Korea to build its first indigenously-built Chang Bogo-class
diesel-electric submarine (SSK) by 2018. In addition, it is expected to receive Chang Bogo-class SSKs from South Korea
by 2017. In addition to these countries, Indonesia also has cooperation agreements with the UK, India, Saudi Arabia and
the Netherlands.
Current challenges
Corruption
Like other countries with authoritarian history, Indonesia continues to have problems with high level of corruption. The
country secured a poor rank of 114th out of 177 countries in Corruption Perception Index 2013 as it witnessed various
instances of corruption involving politicians, bureaucrats, policemen and members of the judiciary. In the political arena,
the Democratic Party (PD) remained tainted with corruption issues in 2013-14 with a number of its high profile members
such as Anas Urbaningrum, Andi Mallarangeng, Angelina Sondakh and Jero Wacik either convicted or arrested for
involvement in bribery scandals. Corruption in police and judiciary also remain points of concern for the newly elected
President Joko Widodo, who won the 2014 elections on an anti-corruption platform. Previously, in 2013, a senior
policeman was jailed for money-laundering in a case involving the procurement of driving simulators for the police, while
the chief justice of the constitutional court was detained for bribery. The country needs to adopt stronger anti-corruption
legislation to weed out graft from the administrative and political machinerythis will also enhance its business
environment.
Dominance of opposition coalition in the parliament
The Red-White coalition (led by Golkar Party and Gerindra Party), which controls around 56% of the seats in the
legislative assembly, could hinder passage of institutional reforms proposed by the newly elected President Joko
Widodo. A prime example of potential instability that could affect lawmaking came to the fore on the first day of the new
parliament's five-year term in office on October 2, 2014, when members of the five parties that comprise the opposition
coalition grabbed five most important positions (one Speaker and four Deputy Speakers) in the People's Representative
Council (DPR). The coalition followed it up by managing to gain full control of the People's Consultative Assembly (MPR),
which has the power to amend the constitution and impeach the president, in the following week. The opposition
coalition, which was formed to support Prabowo Subianto's presidential bid in 2014, could thus render lawmaking
ineffective and affect political stability.
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PESTLE Analysis
Future prospects
Deeper integration with ASEAN allies
The coming years will see Indonesia improve its ties with other Association of South-East Asian Nations (ASEAN)
countries as the 10-member regional group aims to establish an EU-style single market and production base with a free
flow of goods, services, investments and skilled labor by 2020. In the near-term, the South-East Asian group aims to
establish ASEAN Economic Community (AEC) by end-2015, which will almost entirely eliminate tariff barriers on goods,
liberalize trade in services, integrate customs procedures and allow freer movement of capital in the region.
As the largest economy in the region, Indonesia has much to gain from this integration as its large population lends it
demographic advantage in terms of both sale and manufacture of goods and services. While the former will improve
consumption demand in a country, where the number of people belonging to the middle-class is expected to almost
double by 2020 (from 74 million in 2014); the latter will help generate manufacturing jobs and help the government revive
the struggling small- and medium- enterprise sector. The alliance could also help the country address its infrastructure
bottlenecks as it would make it easier for foreign companies to bid for contracts and reduce logistics cost.
Future risks
Terrorism threats
Although terrorist attacks in Indonesia have largely subsided since the country witnessed major attacks against the JW
Marriot and Ritz-Carlton hotels in Jakarta in 2009, the country still faces risks of renewed terrorism threats. Domestic
threat mainly stems from the release of more than 100 convicted terrorists from Indonesian prisons in 2014, most of them
were associated with 2002 Bali bombings. On the international front, Indonesia faces threats from reawakening of
dormant networks as more than 100 Indonesians are suspected of fighting for the radical Sunni cause of the Islamic
State of Iraq and al-Sham (ISIS) in Iraq and Syria. Such a phenomenon was previously seen in the 1980s and 1990s,
when returning jihadists from Afghanistan brought back new terrorist associations, improved funding and ammunition
expertise. The country's counter-terrorism unit must counter both international and local threats to maintain the long-term
stability and prospects of the country.
Scrapping of direct regional elections
The passage of a bill, which will scrap direct elections for regional heads such as governors, district chiefs and mayors in
favor of indirect elections held by regional assemblies, could pose a setback for Indonesia's democracy. The bill restores
the system followed during 1999-2004 and is believed to have fuelled corruption and nepotism during the five-year
period. Although the previous President Susilo Bambang Yudhoyono signed a presidential decree to repeal the bill, it will
need approval from the newly elected parliament and this is unlikely due to continued dominance of the Red-White
coalition.
The Red-White coalition considers the elections very costly and argues that scrapping the elections will save the country
around $3.5 billion. On the flipside, since direct elections were introduced in 2004, the accountability of the government
has increased and many political figures outside the political elite have come into limelight in Indonesian politics,
including the current President Joko Widodo (who is a carpenter's son and used to run his family's furniture business
before joining politics). Overall, the abolition of the elections could bring political influence in appointment of local leaders,
which could be a setback to Indonesian democratic values.

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PESTLE Analysis
Economic analysis
Overview
Since 2004, the Indonesian economy has recorded annual growth of above 5.0% in all years except 2009. In 2013, GDP
growth came in at 5.8%, which is expected to fall to 5.5% in 2014 partly due to the macro stabilizing monetary and
exchange rate policy measures taken during June-November 2013 to arrest further depreciation of Indonesian rupiah
and control further widening of its high current account deficit. The country's banking sector remains strong, government
finances remain sustainable and foreign companies such as General Motors and Cargill have continued to invest in the
country with an ambition to tap into its large consumer market.
Major challenges affecting economic growth continue to be underinvestment in infrastructure and over-reliance on
commodity exports; the latter being a major reason for widening of Indonesia's current account deficit during 2012-13.
Another major hindrance to economic growth is the underdeveloped nature of Indonesian financial markets, which create
funding problems for firms, especially startups and deters the economy's ability to withstand global financial shocks.
Table 4:
Analysis of Indonesia's economy
Current strengths
Current challenges
Healthy banking sector
Shallow financial sector
Sustainable public debt
Underinvestment in infrastructure
Future prospects
Future risks
Rising investments from American companies
High current account deficit
Demographic dividends of a vast labor pool
Source: MarketLine
MARKETLINE
Current strengths
Healthy banking sector
Despite a slowdown in economic activity, the Indonesian banking sector remains sound with strong capital adequacy and
profitability indicators in 2014. Although the NPL ratio of the sector increased from 1.90% in January 2014 to 2.30% in
August 2014, commercial banks have been able to maintain a system wide capital adequacy ratio of around 20.0%,
almost double the statutory requirement of 10.5% required under Basel III norms, according to data from Bank Indonesia.
The quality of capital maintained by the banks is good as around 92% of the capital is Tier-1, the most liquid form of
capital. Return on assets, a measure of banks' profitability, averaged 2.9% in the first seven months of 2014. Although
banks' profitability and non-performing loans (NPL) have taken a hit in 2014 due to risks stemming from higher interest
rates and the adverse effects of commodity prices, the Indonesian banking sector continues to remain among the most
profitable in Asia and capable of absorbing shocks from slowdown in economic activity.

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PESTLE Analysis
Figure 2:
Indonesia banking indicators, May 2013 - August 2014

NPL Ratio
2.2
20.0
2.1
% of total loans
19.0
18.0
17.0
2.0
1.9
1.8
1.7
Source: Bank Indonesia
Apr-14
May-14
Jun-14
Jul-14
Aug-14
May-14
Jun-14
Jul-14
Aug-14
Mar-14
Jan-14
Dec-13
Feb-14
Feb-14
Jan-14
Dec-13
Nov-13
Oct-13
Sep-13
Aug-13
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Dec-13
0.0
Nov-13
1.0
2.6
Oct-13
2.0
2.7
Jul-13
3.0
2.8
Sep-13
Oct-13
4.0
Jun-13
2.9
May-13
3.0
Aug-13
Apr-14
5.0
Jul-13
Mar-14
3.1
Percentage
6.0
Jun-13
Nov-13
Net Interest Margin
3.2
May-13
% of total assets
Return on Assets
Sep-13
Jul-13
Aug-13
May-13
Jul-14
Aug-14
Jun-14
Apr-14
May-14
Mar-14
Jan-14
Feb-14
Dec-13
Oct-13
Nov-13
Sep-13
Jul-13
Aug-13
Jun-13
1.6
May-13
16.0
Jun-13
% of risk-weighted assets
Capital Adequacy Ratio

21.0
MARKETLINE
Sustainable public debt

Prudent macroeconomic policies coupled with high economic growth have helped the Indonesian government in
maintaining debt sustainability since the turn of the millennium. According to MarketLine, Indonesia's public debt reduced
to 24.2% of GDP by the end of 2012 from levels as high as 96.8% of GDP in 2000. Moreover, during the 12-year period
to 2012, the country's fiscal performance outperformed its peersThailand and Malaysia. While Thailand's public debt,
as a percentage of GDP, reduced from 57.3% in 2000 to 44.5% in 2012, Malaysia's public debt, as a percentage of GDP,
increased from 34.3% in 2000 to 53.8% in 2012.
The International Monetary Fund (IMF) expects Indonesia's public debt to remain broadly stable in the medium-term and
has forecast a value of 23.2% of GDP in 2019. The debt level's sustainability is expected to boost the resilience of
sovereign bonds and would help lower yields, eventually making access to finance easier for Indonesian government and
corporates.

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PESTLE Analysis
Figure 3:
Comparison of public debt in East Asian economies
120.0
% of GDP
100.0
80.0
60.0
40.0
20.0
0.0
Malaysia
Philippines
2012
Thailand
Indonesia
China
2000
Source: Country Statistics, MarketLine
MARKETLINE
Current challenges
Shallow financial sector
Indonesia's financial sector remains shallow, which is reflected from the relatively small size of its banking sector and
financial markets when compared to regional peers. Indonesian firms, to a large extent, depend on retained earnings for
future investments than on bank credit, which could be a big negative for innovative firms short of cash on their balance
sheets. This is well reflected from a low credit-to-GDP ratio of 37.9% and money supply (M2) to GDP ratio of 41.0%
compared to numbers in excess of 100% for Malaysia, Thailand and Philippines for both these indicators. Enterprise
Surveys conducted by the International Finance Corporation and the World Bank cite the lack of access to credit as the
biggest impediment to do business in Indonesia.
The Indonesian stock and bond markets are also underpenetrated. As of September 2014, stock market capitalization of
listed companies on Indonesia stock exchange was equivalent to 50.5% of GDP, much lower than that of Thailand
(118.3%), Malaysia (159.6%), Singapore (263.1%) and even Philippines (91.3%). Outstanding debt securities issued
domestically amounted to 11.9% of GDP, less than half of Philippines (27.7%) and almost one-eighth of Malaysia
(99.2%). It is very important for Indonesia to deepen its banking services and financial markets as they form pillars of
funding necessary for future economic growth and social development.

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PESTLE Analysis
Figure 4:
Indonesian financial sector, key indicators

Domestic credit to private sector, 2013-end
180
140.0
160
120.0
140
100.0
% of GDP
% of GDP
Money Supply (M2), 2013-end

160.0
80.0
60.0
120
100
80
60
40.0
40
20.0
20
0.0
0
Malaysia
Thailand
Singapore
Philippines
Indonesia
Thailand
Market capitalization, September 2014
Singapore
Malaysia
Indonesia
Philippines
Outstanding debt securities issued domestically,

March 2014
300.0
120.0
250.0
% of GDP
% of GDP
100.0
200.0
150.0
100.0
50.0
80.0
60.0
40.0
20.0
0.0
0.0
Singapore
Malaysia
Thailand
Philippines
Indonesia
Malaysia
Thailand
Singapore
Philippines
Indonesia
Source: Bank for International Settlements, World Federation of

Exchanges, the World Bank and Country Statistics,
MarketLine
MARKETLINE
Underinvestment in infrastructure
Inadequate infrastructure spending has been one of the major impediments to economic growth in Indonesia. According
to the World Bank, Indonesia has lost more than 1% of additional GDP growth each year due to underinvestment in
infrastructure, mainly transportation. Indonesia has only invested roughly 3-4% of GDP on infrastructure since the Asian
crisis (investment in infrastructure averaged roughly 7% during 1995-97), which is much lesser than peers such as
Thailand and Vietnam, where infrastructure investments have consistently exceeded 7% of GDP. In China, infrastructure
investment averaged even higher at around 10% of GDP during 2001-11.
Road infrastructure, which accounts for most of the inter-urban passenger transport in the country, has not kept pace
with the vehicle and motorcycle fleet on the roads although the government spending on improving road infrastructure
has increased to pre-Asian crisis levels of 1.6% of GDP. Most of the dedicated amount has been spent on
reclassification of main roads, mainly through minor widening of strategically located roads.
Port infrastructure, despite being very important for an archipelago economy, also remains underdeveloped. The
country's largest port, Tanjung Priok, has a capacity of only about 6 million 20-foot equivalent units (TEUs) per annum. In
comparison, Thailand's Laen Chabang Port has a capacity of 10.5 million TEUs per annum, while Singapore has a port
capacity of 30 million TEUs per annum. Apart from port capacity, trade logistics measures such as container charges and
import lead times are also poor compared to other countries in the region.

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PESTLE Analysis
Cost and efficiency of Indonesian ports
2500
2000
Days
1500
3
1000
2
1
500
US$
Figure 5:
Median lead time for imports for ports/airports

Avg. charge (USD) for 40-foot container
Source: The World Bank
MARKETLINE
Indonesian businesses also suffer from low power generation capacity and high transmission losses. Indonesia has an
electrification ratio of 74%, much lower than peers such as Malaysia, Thailand and China (which have electrification
ratios of close to 100%). The World Bank estimates that Indonesia needs to generate an additional capacity of 66.8MW
to achieve an electrification ratio of 100%, which would require $200 billion worth of investment.
Overall, high transportation costs, low port capacity and below par power infrastructure undermine firms'
competitiveness, and make it difficult for producers to keep in line with final consumer demand.
Future prospects
Rising investments from American companies
American transnational giants such as General Motors, Cargill, Coca Cola, Chevron, General Electric, General Atlantic,
DuPont, American President Lines, Black & Veatch etc. have been exploring investment possibilities in diverse areas
such as heavy engineering, consumer goods, chemicals, logistics, farming and construction and infrastructure in
Indonesia. For instance, multinational conglomerate, General Electric, plans to spend $300m in a variety of sectors such
as energy, aviation, mining, health, transportation, and oil and gas during 2014-16. Coca Cola, the American
multinational beverage corporation, invested $500m in its American subsidiary to fund accelerated capital expenditure
and for market development in October 2014. Previously, in 2013, General Motors spent $150m to refurbish its
automotive plant outside Jakarta to benefit from the fast-growing automotive industry traditionally dominated by
Japanese and South Korean manufacturers.
The investment prospects of these multinational giants are also reflected in a 2013 study conducted by Ernst & Young
and research centers associated with two leading Indonesian universities. The study, which surveyed the 35 largest USbased investors in Indonesia, showed that these companies had plans to invest around $61 billion in the next 3-5 years
against a total of $61 billion invested by them during 2004-12. A host of future investments from multinational companies
bodes well for a resource rich country, which is likely to provide a new impetus to its growth.
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PESTLE Analysis
Demographic dividends of a vast labor pool
Indonesia, being the fourth most populous country in the world, enjoys a demographic advantage in terms of abundant
labor. The country's working age population (15-64) is expected to increase to more than 176 million in 2019 from 166
million in 2014. Moreover, a stable labor force participation rate (which will remain more or less at 70%) and a relatively
young population (median age of 30 years) will accentuate this advantage. A vast pool of labor is important to contain
wages and improve competitiveness in the international market; especially in light of rising wage costs in China.
Indonesia's demographic advantage, 2014-19
180.0
100.0
176.0
80.0
172.0
60.0
168.0
40.0
164.0
20.0
160.0
Percentgae
million
Figure 6:
0.0
2014
2015
2016
Working age population
2017
2018
2019
Labor force participation rate
MARKETLINE
Future risks
High current account deficit
After registering consecutive surpluses from 1998-2011, the Indonesian current account balance recorded a deficit for
the first time in fifteen years in 2012. The deficit, which amounted to 3.0% of GDP in 2012, was a marked deterioration
form a surplus of 0.2% of GDP in 2011. The deficit deteriorated further to 3.3% of GDP in 2013, and is expected to
remain in excess of 3.0% of GDP in 2014, leaving the country vulnerable to external shocks such as a slowdown in FDI
and portfolio outflows in 2015.
Softer commodity prices of major export items such as rubber, coal and palm oil coupled with strong import demand for
oil due to substantial government subsidies were the major reasons for this widening of current account deficit in 201213. Trade surplus has also suffered since the beginning of 2014 due to imposition of a ban on exports of unprocessed
mineral ores. Other major reason for the widening of current account deficit is slowing Chinese growth. According to the
IMF, a 1% slowdown in Chinese growth could reduce Indonesia's GDP by 0.3-0.5%.

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PESTLE Analysis
Indonesia's current account deficit, 1998-2013
15.0
6.0
10.0
5.0
5.0
4.0
0.0
3.0
-5.0
2.0
-10.0
1.0
-15.0
0.0
-20.0
-1.0
-25.0
-2.0
-30.0
-3.0
-35.0
% of GDP
$ billion
Figure 7:
-4.0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Current account deficit
CAD as % of GDP

MARKETLINE
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PESTLE Analysis
Social analysis
Overview
Indonesia has implemented cash transfer programs for poor households to mitigate the impact of effect of fuel subsidy
reduction, and to provide them with healthcare and education facilities, effectively raising their standard of living. The
government is also playing its part by aiming to provide social insurance to the entire population by 2029. However, the
country has witnessed many instances of human trafficking since 1991, which is a cause for concern. Rising ethnic
violence and religious intolerance could pose a risk to social harmony of the Indonesian society.
Table 5:
Analysis of Indonesia's social system
Current strengths
Current challenges
Cash transfer programs
Human trafficking
Future prospects
Future risks
Universal social security system
Religious intolerance
Source: MarketLine
MARKETLINE
Current strengths
Cash transfer programs
Indonesia has implemented both conditional and unconditional cash transfer programs to raise the income of levels of
poor households, consequently reducing the poverty levels in the country. The government runs a conditional cash
transfer scheme, Program Keluarga Harapan (PKH) and an unconditional cash transfer scheme, Bantuan Langsung
Tunai (BLT). The PKH was started as a pilot scheme in 2007 and provides cash transfers to more than 1.5 million very
poor households, mainly covering children and pregnant women (as of 2013). The BLT, started in 2005, mitigates the
effect of fuel subsidy reduction for over 19 million households in poverty. These programs have helped Indonesia in
improving education and healthcare access for the bottom 30% of the Indonesian population. This is well-reflected from
the fact that the proportion of the population living in poverty halved during 1999-2012 (24% to 12%).
Current challenges
Poor social development indicators
Indonesia's performance in terms of social parameters has been poor. Indonesia ranked 108th out of 187 countries in
2014 Human Development Index published by the United Nations, which is lower than many of its neighbors, including
Singapore (ranked 9th), Malaysia (62nd) and Thailand (89th). This indicates that the government has much to do in order
to improve the social landscape.
Human trafficking
The country has reported many instances of human smuggling and trafficking since 1991. There are instances where
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PESTLE Analysis
security personnel have been found guilty of smuggling asylum seekers to Australia, although some of the guilty have
been convicted in the recent past. The issue of smuggling has been lingering although many steps to patrol coastal
areas have been undertaken by both Australian and Indonesian authorities. By August 2012, more than 7500 people
were smuggled, up from around 200 in 1991, and most of them seek jobs and asylum in Australia, according to the
Australian department of immigration and citizenship (DIAC). In many cases, boats have sunk, leading to hundreds of
deaths over the past few years. The government has taken steps to counter the smuggling of people by jointly signing an
agreement with Australia and Taiwan; however, the measures have not been that effective as incidents of smuggling and
trafficking have been on the rise.
Future prospects
Universal social security system
In 2004, a new Social Security Law provided for pensions, national health insurance, work injury insurance, death
benefits, and severance payments for laid-off workers. The new system, the implementation of which began in 2014,
intends to cover all Indonesian residents under a universal healthcare system by 2019 and a common employment
benefits system by 2029. Two new non-profit public agencies, which were created in 2011, namely BPJS Health Care
(BPJS Kesehatan) and BPJS Employment (BPJS Ketenagakarjaan) will be responsible for the administration of this
system. While the former will administer health care benefits, the latter will be responsible for employment benefits,
which include old age, pension, workplace injury and death benefits.
The government aims to follow a staircase approach to finance the new schemes. While it will fully pay for the social
protection of the poor, it will employ contributory schemes for the workers in the informal sector, who will pay a fixed
monthly contribution. Workers in the formal sector will pay a statutory contribution of 5% of their wage, which will be
divided between employee and the employer. A strong social protection system will provide the country with immense
social support, contributing towards the development of the nation.
Future risks
Religious intolerance
Although the country's population is moderate, and for the most part avoids combining politics with religion, there is a
radicalized fringe that seems to be endangering the pluralism in the country, which is a dangerous state of affairs for
minorities in the country. In recent years, the Ahmadiya Muslims (Muslims who do not comply with conservative
teachings), Christian congregations and the Shiites have all been targets of hardline Islamist groups who consider most
non-Muslims as "infidels," and Muslims who do not adhere to Sunni orthodoxy as "blasphemers." According to Setara
Institute for Democracy and Peace, an Indonesia-based religious freedom group, Indonesia witnessed 220 cases of
documented violent attacks on religious minorities in 2013, a marked increase from 91 in 2007.
One of the most notable instances of violence on minority groups was witnessed in February 2011, when three Ahmadis
were beaten to death by 1,500 militants, who stormed the Ahmadiya community in Cikeusik village. It is not only the
Ahmadiya Muslims, who have suffered from religious intolerance. Attacks against Christians and Shia Muslim community
also seem to be on the rise; examples include the suicide bombing of a church in Surakata in September 2011 and
attacks by Sunni militants against Indonesia's Sampang regency on Madura Island. According to Communion of
Churches in Indonesia, at least 430 churches have been attacked, closed down or burned during 2000-10.
Successive Indonesian governments, despite highlighting "religious harmony" as a major objective, were unable to
contain these threats, as it required support from Islamist parties to maintain political stability. Not only this, the
government issued decrees and fatwas (religious rulings) against members of religious minorities, effectively violating
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PESTLE Analysis
their rights and freedoms. For instance, the government passed a nationwide anti-Ahmadiya decree in 2008, which
banned Ahmadiyas from preaching their faith. Moreover, a 2006 decree requiring religious groups to obtain permission
from a significant number of community members before constructing house of worships was used for closure of around
30 Ahmadiya mosques, more than 500 Christian churches and several Buddhist temples.

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PESTLE Analysis
Technological analysis
Overview
rank of 55th. However, low R&D expenditure has taken a toll on the number of patents granted. Indonesia's proportion of
high technology exports in manufactured exports is also way below peers such as Philippines, Malaysia, China and
Thailand. In addition, the country has high levels of software piracy, and while the government has initiated measures to
reduce the problem, there is still much work to be done.
Table 6:
Analysis of Indonesia's technology landscape
Current strengths
Current challenges
Improving technological landscape
Declining export share of high-technology products

Poor R&D spending
Future prospects
Future risks
Fast growing aerospace industry
Increasing software piracy
Source: MarketLine
MARKETLINE
Current strengths
Improving technological landscape
rank of 55th. The proportion of population using Internet has doubled from 7.9% in 2008 to 16.1% in 2013, while
broadband penetration has almost tripled from 0.4% in 2008 to 1.3% in 2013. Publication performance has improved
four-fold in a decade, growing from 1,000 in 2000 to 4,000 in 2010 with science and technology, engineering and
medicine being the most important disciplines.
In order to improve innovation output, the government has also increased the amount it spends on higher education;
consequently, spending on higher education has increased from 0.14% of GDP in 1990 to 0.27% in 2007. Although
Indonesia lags other ASEAN nations in terms of technological infrastructure, the government is making efforts to improve
innovation performance.
Current challenges
Declining export share of high-technology products
According to the World Bank, Indonesia's high technology exports (as a percentage of manufactured exports) stood at a
dismal 7.3%, way below peers such as Philippines (48.9%), Malaysia (43.7%), China (26.3%) and Thailand (20.5%).
High technology exports are products with high R&D intensity, such as aerospace, computers, pharmaceuticals, scientific
instruments, and electrical machinery. High-end technological innovation would make Indonesia's exports less vulnerable
ML00002-041/Published 10/2014
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PESTLE Analysis
to price competition. Moreover, the country's exports are witnessing a declining trend, which could mainly be associated
with windfall gains the country made through its focus on commodity exports until 2011. With the commodity supercycle
ending, the country needs to focus on increasing its share of high-tech exports as low and medium technology exports
are likely to suffer from high competition and price pressures from other emerging markets.
Figure 8:
Intensity of high technology exports
Proportion of high-tech exports in

manufactured exports in East Asia,
2012
High-tech exports as a percentage of

manufactured exports, 2005-12
18.0
60.0
15.0
50.0
12.0
40.0
9.0
30.0
20.0
6.0
10.0
3.0
0.0
0.0
Philippines Malaysia
China
Thailand Indonesia
2005 2006 2007 2008 2009 2010 2011 2012
MARKETLINE
Poor R&D spending

Indonesia spends less than half a percentage point of its GDP on R&D; low R&D spending is expected to impede
innovation in the country. Low R&D expenditure indicates that the government has to do a lot more in terms of fostering
innovation. Poor funding of R&D has weighed upon the patents count for the country. According to the USPTO,
Indonesia managed to get only 15 patents in 2013a very poor performance compared to Malaysia (214) and Thailand
(77).
Table 7:
Patents granted by USPTO, 2008-13
Year
Indonesia
Thailand
Malaysia
Philippines
China
2008
22
152
16
1,225
2009
23
158
23
1,655
2010
46
202
37
2,657
2011
53
161
27
3,174
2012
36
210
40
4,637
2013
15
77
214
27
Source: USPTO

5,928
MARKETLINE
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PESTLE Analysis
Future prospects
Fast growing aerospace industry
The Indonesian aviation industry is expected to grow at a robust rate in the coming years. After making parts for civilian
planes like Airbus A380 and military ones like Airbus C295 transporter for almost a decade, the state-owned aerospace
manufacturer, PT Dirgantara Indonesia (PTDI), has won contracts from Airbus to assemble whole planes on a
commercial basis. Airbus has shifted complete production of the Airbus C295 transporter to Bandung in Indonesia from a
factory in Spain. The company has also won contracts from the Philippines Air Force of supplying two smaller military
transporters based on Airbus's C212.
Future risks
Increasing software piracy
Indonesia has high levels of software piracy. According to the 2011 BSA Global Software Piracy Study, piracy was
estimated to be around 86% in 2011, up from 84% in 2007. The study claims that losses due to piracy were around
$1.46 billion in 2011. Although the Information and Communications Technologies Council was established, it is difficult
to predict whether it can crack down on piracy in an effective way. High piracy will deter foreign investment and dampen
investment in innovation.

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PESTLE Analysis
Legal analysis
Overview
The country has an effective competition law; besides, the total tax rate is lower than regional average. However, the
country's legal environment remains affected by an inefficient bureaucracy, rigid labor laws and a weak judicial system,
which can easily be influenced and manipulated by the political and business elite. Further, foreign companies face risks
from the arbitrary intervention of the Indonesian government, which has often created problems for foreign entities by
either not honoring deals or imposing new conditions after an agreement has been signed.
Table 8:
Analysis of Indonesia's legal landscape
Current strengths
Current challenges
Effective competition law
Rigid labor law
Low total tax rate
Weak judicial system
Future prospects
Future risks
Better business environment
Economic nationalism
Source: MarketLine
MARKETLINE
Current strengths
Effective competition law
An effective competition law is a vital tool for attaining and maintaining sound economic performance in any country, and
Indonesia is no exception. The country's first competition law, Concerning Prohibition of Monopolistic Practices and
Unfair Business Competition, was enacted on March 5, 1999, and came into being a year later. The law, which has been
in effect since February 2000, prohibits any single domestic company from controlling more than 50% of the market. The
Commission for the Supervision of Business Competition (Komisi Pengawas Persaingan Usaha [KPPU]) was established
immediately after the passage of the law. Although it has been criticized on various occasions, the KPPU has been
credited with countering a large number of cartels.
Low total tax rate
According to the World Bank's 2015 Doing Business Report , Indonesia's total tax rate (includes profits taxes, labor taxes
and other taxes) of 31.4% is lower than the East Asia & Pacific average of 34.4%. Further, it is lower than that of its
neighbors, Philippines (42.5%) and Malaysia (39.2%). A low total tax rate bodes well for an emerging economy to attract
investments.

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PESTLE Analysis
Figure 9:
Tax burden comparison for corporates in East Asia, 2014
Thailand
Indonesia
Malaysia
Philippines
China
0%
10%
Prof it tax
20%
30%
40%
Labor tax and contributions
50%
60%
70%
Other taxes
MARKETLINE
Current challenges
Rigid labor law
Indonesia's rigid labor law, which restricts hiring and firing, has been a prominent issue for foreign investors. According to
the World Bank, severance costs in Indonesia are as high as 58 weeks of salary. Wage setting has also been a
problematic matter for foreign investors due to significant increases in the past few years. For instance, Jakarta
witnessed an extraordinary 44% increase in minimum wage in 2012. Although labor contracts are relatively
straightforward to negotiate, they are subject to renegotiation despite the existence of written agreements. Even local
courts side with Indonesian citizens mostly in labor disputes, contracts notwithstanding.
Weak judicial system
The Indonesian judicial system is weak and is considered to be easily influenced and manipulated by the political and
business elite. Occasionally, the system is perceived to be discriminating against foreign interests. Since 2011, a number
of judges, prosecutors, lawyers and even public notaries have been implicated in corruption cases, notable the
Constitutional Court Chief Justice, Akil Mochtar and District court judge Syarifuddin Umar. According to the Human
Rights Report 2013, NGOs implicated 84 court judges for engaging in corruption in both civil and criminal cases in 2012.
All this has resulted in a perception among Indonesian citizens that the country's judicial system is the second most
corrupt public institution in the country after the parliament, according to Transparency International's Global Corruption
Barometer 2013.
Another key issue hurting the effectiveness of the Indonesian judicial system is the low qualification criteria required to
become a judge in Indonesia, which is just four years of post-grade school legal education and two years of training in
the Supreme Court judicial candidate program.

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PESTLE Analysis
Future prospects
Better business environment
The newly elected Indonesian president has prioritized corruption, inefficient government bureaucracy and inadequate
infrastructure as his main objectives, all of which are considered problematic issues for conducting business in
Indonesia, according to the Global Competitiveness Index 2014-15. The new administration hopes to set up a "one-stop
service for investment" and reduce the time taken to get a business license to a maximum of 15 days from 52.5 days
(according to the World Bank). In 2014, the former Yudhoyono administration made tax payments less expensive for
companies by reducing employers' health insurance contribution rate, which bodes well for job creation in the country.
The previous government also revised its Negative Investment List in April 2014, which loosened restrictions on foreign
ownership in public-private partnership projects in large power plants, electricity transmission and distribution, and
seaport projects. These steps are expected to support Jokowi's vision of improving Indonesia's infrastructure and
improve the country's business environment.
Future risks
Legal uncertainty and economic nationalism
Foreign companies face significant risks due to the arbitrary intervention of the Indonesian government, which has often
created problems by either not honoring deals or imposing new conditions after an agreement has been signed. A few
instances of regulatory hurdles and the government's protectionist policies faced by foreign companies are mentioned
below:
Mexican cement company Cemex bought shares in state-owned cement company PT Semen Gresik in 1998.
The company went on to sue the Indonesian government as the latter failed to honor the deal, under which
Cemex was to become a majority stakeholder. The deal could not go through due to opposition from legislators,
non-governmental organizations, local cement companies, residents, religious groups, and unions. Cemex went
for international arbitration but later settled the issue with the Indonesian government in July 2006. Cemex
subsequently sold all its shares and withdrew from Indonesia.
In 2000, ExxonMobil bought rights to the Cepu oilfield and immediately discovered large reserves that
Pertamina had failed to locate in 30 years of exploration. Indonesia then insisted ExxonMobil share its find with
Pertamina in exchange for a 20-year extension of its contract over the area. The two companies signed a joint
operating deal under government pressure for the field in 2006, which showed the Indonesian government in a
poor light.
Pertamina signed a $130m contract to acquire two new tankers in 2003; however, a management reshuffle in
October 2003 led to a decision to sell them. Goldman Sachs ran into problems when the KPPU began
investigating Pertamina over the sale of the two large crude carriers, with authorities claiming that the tender
may have violated anti-monopoly laws. The KPPU criticized Goldman Sachs for not holding an open auction
and accused it of influencing the results of the tender and charging an unusually high fee. The Indonesian
Supreme Court agreed with the KPPU's criticism, and imposed a hefty fine against Goldman Sachs.
French company Carrefour was ordered to sell its shares in local retailer Alfa Retailindo in late 2009. Carrefour
was accused of monopolistic trading practices by the KPPU.
In 2010, the government revoked four coal mining licenses held by a local subsidiary of Churchill Mining, an
American company. The company filed a $1.3 billion lawsuit against the government in the International Centre
for the Settlement of Investment Disputes in Washington.

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PESTLE Analysis
In March 2012, the government brought in regulations in which 51% of foreign operation should be passed to
local companies after a period of 10 years, up from 20% after five years.
In November 2012, the court dissolved the state energy regulator BP Migas on the grounds that it did not have
the power to oversee Indonesian resource reserves and sign exploration and production sharing contracts with
foreign oil companies. In addition, the court stated that some parts of the 2001 oil-and-gas law are not valid.
Further, the court also stated that the Indonesian operations of all foreign petroleum companies should be
passed on to state run oil company Pertamina after their contracts expire.
In July 2013, an Indonesian court sentenced three Indonesian employees of Chevron to two years in prison.
The sentence escalated uncertainties across the already troubled Indonesian oil and gas sector. The
criminalization of civil disputes has made foreign investors wary of investing in the energy sector. This does not
look good for Indonesia, as the energy sector needs foreign capital and technology to boost production, which
has fallen over the last decade.
In 2014, Indonesia imposed a moratorium on exports of all metal ores, mainly to boost domestic smelting and
other mineral processing. Although the parliament saw that there was not enough capacity to process all
minerals, it turned down a government proposal to allow exceptions for mining companies that had already
invested in building smelters.
The country's arbitrary policy reversals along with its protectionist policies are surely going to hurt investor
sentiment.

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PESTLE Analysis
Environmental analysis
Overview
Indonesia's biodiversity is one of its greatest assets. The country is among the top five in the world in terms of plant
diversity, with an estimated 38,000 higher plant species. Indonesia leads the world in terms of palm diversity. However,
large tracts of Sumatra's forest have been destroyed to make way for palm oil plantations, with companies clearing trees
and burning the stumps that remain. A 2008 Greenpeace report suggested that around 1.4 million hectares of virgin
forest in Riau have already been converted to plantations to provide cooking oil and a further 3 million hectares are set to
be used for the production of biofuels. Further, the government's heavy energy subsidies have been contrary to its
environmental initiatives.
Table 9:
Analysis of Indonesia's environmental landscape
Current strengths
Current challenges
Rich biodiversity
Increasing forest loss
Future prospects
Future risks
Conservation of wildlife
Distorted pricing
Source: MarketLine
MARKETLINE
Current strengths
Rich biodiversity
Indonesia has 515 species of mammals (second on the world mammal list behind Brazil), 39% of which are endemic;
511 species of reptiles (which places Indonesia fourth in terms of diversity), 150 of which are endemic; 1,531 species of
birds (fifth), 397 of which are endemic; 270 amphibian species (sixth), 100 of which are endemic; 75 species of psittacine
birds (first), 38 of which are endemic; and 35 species of primates (fourth).
The country is also in the top five on plant diversity, with an estimated 38,000 higher plant species; it leads the world list
in palm diversity with 477 species, 225 of which are endemic; and has over half of the 350 species of dipterocarp trees,
with 155 endemic in Kalimantan. Indonesia ranks behind only Brazil and possibly Columbia in freshwater fish diversity,
with around 1,400 species. This makes Indonesia richly endowed in terms of biodiversity.
Current challenges
Increasing forest loss
The rate of forest loss in Indonesia is increasing. On average, around 1 million hectares per year were cleared in the
1980s, increasing to around 1.7 million hectares per year in the first part of the 1990s. Furthermore, since 1996,
deforestation appears to have increased to an average of 2 million hectares per year. Indonesia's lowland tropical
forests, the richest in timber resources and biodiversity, are most at risk. They have been almost entirely cleared in
Sulawesi and Sumatra, while those on Kalimantan could also be cleared in the next few years. One of the main reasons
for deforestation in Indonesia is the corrupt political and economic system, which regards natural resourcesespecially
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PESTLE Analysis
forestsas a source of revenue to be exploited for political and personal gain. The rising demand for palm oil has
motivated further deforestation.
The drive to increase palm oil cultivation is taking a major toll on the environment, driving forest clearing, polluting rivers,
and introducing more pests. Around 2.1 million hectares of land in Sumatra was taken up by oil palm plantations until
August 2008, compared with only around 400,000 hectares in 1998. Farmers across the region have switched from food
crops to palm oil, as the price of palm oil has increased due to the rise in demand for biofuels. A Greenpeace report in
2008 suggested that around 1.4 million hectares of virgin forest in Riau has already been converted to plantations to
provide cooking oil, and a further 3 million hectares are set to be used for the production of biofuels. Large tracts of
Sumatra's forest have been destroyed to make way for palm oil plantations, with companies clearing the trees and
burning the stumps that remain. In December 2012, the government of Indonesia approved Reducing Emissions from
Deforestation and forest Degradation (REDD), for which Indonesia would get $1 billion from Norway for not cutting down
trees to make way for palm plantations. This should reduce deforestation to some extent.
Future prospects
Conservation of wildlife
Indonesia has initiated a new 10-year action plan to conserve orangutans, which will have important benefits in terms of
reducing climate change. It has been estimated that around 50,000 orangutans died during 1992-2007, as their habitat
shrunk. The orangutan plays a significant role in the fight against climate change and forest regeneration, as it disperses
seeds that help regenerate fruit trees, which in turn help keep the forest healthy and able to reduce greenhouse gases
such as CO2.
However, deforestation for timber, pulp, and palm oil plantations mean that Indonesia is a major carbon emitter; such
actions have also increased the threat to orangutans. Therefore, the Indonesian Ministry of Forestry finalized its plan for
orangutan conservation. As part of this plan, developed in conjunction with non-governmental organizations, Indonesia
will aim to stabilize the orangutan population and habitat and return orangutans housed in rehabilitation centers to the
wild by 2015.
Future risks
Distorted pricing
Energy prices are highly distorted in Indonesia. Subsidies on fossil fuels have resulted in increased utilization, which
ultimately contributes to pollution. The price of scarce energy resources should take into account the environmental and
social costs, and putting a tax on it is an effective way to curb their reckless use. Moreover, the distortive pricing
mechanism is also inhibiting the development of green technology. The government should ensure the market prices for
a resource rather than arbitrarily fixing them. The lack of a market-driven pricing mechanism could become an obstacle
to emission reduction.

ML00002-041/Published 10/2014
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PESTLE Country Analysis Report: Indonesia

Analysis of Indonesia's political landscape

Strong defense cooperation policy

Dominance of opposition coalition in the parliament

Deeper integration with ASEAN allies

PESTLE Country Analysis Report: Indonesia

Analysis of Indonesia's economy

Healthy banking sector

Shallow financial sector

Sustainable public debt

Rising investments from American companies

High current account deficit

Demographic dividends of a vast labor pool

PESTLE Country Analysis Report: Indonesia

Indonesia banking indicators, May 2013 - August 2014

Source: Bank Indonesia

Net Interest Margin

Capital Adequacy Ratio

Sustainable public debt

PESTLE Country Analysis Report: Indonesia

Comparison of public debt in East Asian economies

Source: Country Statistics, MarketLine

PESTLE Country Analysis Report: Indonesia

Indonesian financial sector, key indicators

Money Supply (M2), 2013-end

Market capitalization, September 2014

Outstanding debt securities issued domestically,

Source: Bank for International Settlements, World Federation of

PESTLE Country Analysis Report: Indonesia

Cost and efficiency of Indonesian ports

Median lead time for imports for ports/airports

Indonesia's demographic advantage, 2014-19

Working age population

Labor force participation rate

Source: Country Statistics, MarketLine

PESTLE Country Analysis Report: Indonesia

Indonesia's current account deficit, 1998-2013

Source: Country Statistics, MarketLine

PESTLE Country Analysis Report: Indonesia

Analysis of Indonesia's social system

Cash transfer programs

Universal social security system

PESTLE Country Analysis Report: Indonesia

Analysis of Indonesia's technology landscape

Improving technological landscape

Declining export share of high-technology products

Fast growing aerospace industry

Increasing software piracy

Intensity of high technology exports

Proportion of high-tech exports in

High-tech exports as a percentage of

2005 2006 2007 2008 2009 2010 2011 2012

Source: The World Bank

Poor R&D spending

Patents granted by USPTO, 2008-13

PESTLE Country Analysis Report: Indonesia

PESTLE Country Analysis Report: Indonesia

Analysis of Indonesia's legal landscape

Effective competition law

Rigid labor law

Low total tax rate

Weak judicial system

Better business environment