2014_indonesia

THE
REPORTIndonesia
2014
ECONOMY ENERGY INDUSTRY
BANKING TOURISM CAPITAL MARKETS
REAL ESTATE CONSTRUCTION TRANSPORT
INSURANCE TELECOMS & IT INTERVIEWS
9781910068038

CONTENTS INDONESIA 2014
In it for the long
term
Page 32
A significant actor in international trade and a
member of the G20, Indonesia has a strong
record of attracting foreign investment. The
authorities have developed new markets for
exports while encouraging investment in
import-substitution industries, and their key
priorities remain speeding up infrastructure
development and improving labour flexibility.
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SNAPSHOT
Indonesia in figures
COUNTRY PROFILE
Islands of diversity: A melting pot of cultures
Viewpoint: President Susilo Bambang
Yudhoyono
A crucial time: Elections are set for 2014
Interview: Xi Jinping, President of China
Interview: Yasuo Fukuda, Former Prime Minister
of Japan
Coming together: Looking forward to the AEC
TRADE & INVESTMENT
In it for the long term: Investors are committing
Easing access: Reducing bottlenecks in finance
Interview: Muhammad Lutfi, Minister of Trade
Consumer strength: A rise in spending power
Interview: Le Luong Minh, Secretary-General,
ASEAN
Viewpoint: Sri Mulyani Indrawati, Managing
Director, World Bank
Striking deals: New agreements to boost trade
Interview: Paul Wolfowitz, Former US
Ambassador to Indonesia
Interview: Wishnu Wardhana, Chair, ABAC, and
President Director and Group CEO, Indika Energy
Diversifying sources: Attracting investors
ECONOMY
Tighten up: Enacting structural reforms
Interview: Dipo Alam, Cabinet Secretary
Interview: Jokowi, Governor of Jakarta
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142
Shared responsibility: Private investment
Interview: Suryo Sulisto, Chairman, Indonesian
Chamber of Commerce and Industry
Interview: Jusuf Wanandi, Vice-Chairman, Centre
for Strategic and International Studies
Just the job: Sustaining employment gains
An active role: Keeping the long term in mind
Balancing growth: Macroeconomic challenges
Interview: Edward Soeryadjaya, Chairman and
Founder, Ortus Holdings
Interview: Prijono Sugiarto, President Director,
Astra International
Impetus for reform: Opening new sectors to FDI
Eastern promise: Investing in East Java
Linking up: Connectivity plans for East Java
Interview: Tri Rismaharini, Mayor of Surabaya
BANKING
Strong fundamentals: Sustained growth
Providing support: Improving access for SMEs
Viewpoint: Agus D W Martowardojo, Governor,
Bank Indonesia
Interview: Alan Richards, CEO, HSBC Indonesia
Alternate channel growth: Mobile payment
systems promise to expand the sector’s reach
CAPITAL MARKETS
Eye on the long term: Supporting real growth
Interview: Muliaman D Hadad, Chairman,
Otoritas Jasa Keuangan
Interview: Eko Yuliantoro, CEO, Bahana Securities
A growing appetite: Drawing in investors
Hedging your bets: Regulatory changes are set to
support the growth of trading
Commodities exchange: A new ban on
unprocessed ore exports
Stocks & Bonds: Share analysis & data provided
by Bahana Securities
Austindo Nusantara Jaya: Agriculture
BJBR: Banking
Garuda Indonesia: Transport
Malindo Feedmill: Poultry
Sri Rejeki Isman: Textiles
Total Bangun Persada: Construction
INSURANCE
Growth mode: Demand and sector expansion
Dialogue: David Beynon, President Director, Tokio
Marine Life Insurance Indonesia; and William
Kuan, President Director, Prudential Indonesia
Interview: Elvyn G Masassya, President Director,
Social Security Agency
Frontier for takaful: Making space for growth
Interview: Tim Shields, President Director, ACE
Jaya Proteksi
Broadening health coverage: Expanding benefits
Weathering the storm: Creating the tools to
handle natural disasters
Letter of the law: Legal framework is catching up
with sector growth
ISBN 978-1-910068-03-8
Editor-in-Chief: Andrew Jeffreys
Editorial Advisor: Peter Grimsditch
Regional Editor: Paulius Kuncinas
Editorial Manager: Eric Sterite
Editorial Associate: Tigran Karapetyan
Managing Editor: Alistair Taylor
Deputy Chief Sub-editors: Barbara
Isenberg, Martin Stegman
Sub-editors: Sam Inglis, Sean Cox,
Danya Chudacoff, Krystell Jimenez,
Oliver Ayyildiz, Abraham Armstrong,
Usman Ahmedani, Ivan Gladstone
Contributing Sub-editor: Miia
Bogdanoff
Analysts: Jon Gorvett, Alex Gordy, Amit
Jain, Joe Wilcox, Richard Meyer, Jenna
Oelschlegel
Senior Editorial Researcher: Susan
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Editorial Researchers: Souhir Mzali,
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Indonesia Investment
Coordinating Board

CONTENTS INDONESIA 2014
www.oxfordbusinessgroup.com/country/Indonesia
4
Diversification
under way
Page 147
The energy sector remains a key contributor
to state revenues, accounting for 58% of the
totalin2012.Oiloutputfrommaturingfields
is steadily declining, although this is offset
to a degree by enhanced oil recovery efforts
as well as a rise in natural gas production.
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ENERGY
Diversification under way: Broadening the mix
Fuelling growth: Keeping up with demand
From the core: Geothermal potential is high
Interview: Karen Agustiawan, President Director,
Pertamina
Interview: Nur Pamudji, President Director,
Perusahaan Listrik Negara
Colouring between the lines: Regulatory hurdles
The price is right: Subsidies for petrol
Roundtable: Andhika Anindyaguna, CEO, Sugih
Energy; Jon M Gibbs, President, ExxonMobil
Indonesia; Lukman Mahfoedz, President, Medco
Energi; Roberto Lorato, President Director,
Premier Oil Indonesia; and Hardy Pramono,
President, Total E&P Indonesie
A balancing act: Rising domestic demand for fuel
No stone unturned: Exploring new resources
Trade winds: Hydrocarbons receipts growing
Hydro potential: Diversifying energy sources
MINING
Moving into gear: Key legal changes
Golden promise: More transparency
Divesting interest: New framework for licences
Interview: Martiono Hadianto, President Director,
Newmont Nusa Tenggara
Interview: Arsjad Rasjid, Vice-President Director
and Group CFO, Indika Energy
INDUSTRY & RETAIL
Back on track: Leveraging strengths
Building up metals processing: New policies
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Interview: Irvan K Hakim, President Director and
CEO, Krakatau Steel
Interview: Klaus Lesker, Member of the Executive
Board, Ferrostaal
Revving up a sector: Greater market share
Pharmaceutical boom: New opportunities
Interview: Hiroyuki Fukui, President, Toyota Motor
Manufacturing Indonesia
Middle class reconsidered: New highs and lows
The e-commerce question: Paving the way
Interview: VP Sharma, CEO, Mitra Adiperkasa
Steady development: Transforming retail make-up
Tempering retail: A moratorium on new malls
CONSTRUCTION
Still growing: Demand drives the sector forward
In high demand: Building materials are seeing
investment and capacity expansion
A vital role: The equipment market is growing
Ready or not: ASEAN integration will challenge
the domestic construction sector
REAL ESTATE
A favourable environment: Strong fundamentals
A new asset class: REITs have plenty of potential
Room to grow: Demand for industrial land
Interview: Michael Widjaja, Group CEO, Sinar Mas
Land
Go east: Opportunities are expanding on the
island of Bali and beyond
Interview: Santoso Gunara, President Director,
Danayasa Arthatama
Interview: Eddy Sindoro, Chairman, Paramount
Enterprise
INFRASTRUCTURE
A change in focus: Expanding access to utilities
Interview: Djoko Kirmanto, Minister for Public
Works
Opportunities abound: Encouraging private
sector investment in the sector
Interview: Stuart Dean, CEO, General Electric
ASEAN
Interview: Bobby Umar, Chairman, Indonesian
Engineers Association
Filling the gap: Improving institutional capacity
and inter-ministry coordination
TRANSPORT
By land or by sea: Private sector involvement
could help integrate the transport network
Interview: Emirsyah Satar, CEO, Garuda Indonesia
Interview: Sukmawati Syukur, President Director,
Monorail
The promised land: Challenges in acquiring land
Prioritising ports: The modernisation of ports is a
prerequisite for economic expansion
Seizing momentum: Shortcomings in
infrastructure supply are being addressed
Interview: Djarwo Surjanto, President Director,
Pelindo III
Chairman: Michael Benson-Colpi
Director of Field Operations: Elizabeth
Boissevain
Regional Director: Laura Herrero
Country Director: Elizabeth Denworth
Project Directors: Leticia Costa,
Oumnia Boualam
Field Operations Executive: Meltem
Okur
Field Operations Assistant: Arda Özgen
Project Coordinators: Riris Adianti,
Mumtazus Sundus
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CONTENTS INDONESIA 2014 5
THEREPORT Indonesia 2014
Moving into gear
Page 177
Recoveringfromacommoditypriceslump
in 2012, the mining sector comprised
11.24% of GDP in 2013, building on its
strong record in mineral production. The
government is revamping the framework
regulating mining contracts to secure a
largerproportionofrevenuesforthestate,
including the limitation of metallic miner-
al exploration areas to 5000-100,000 ha.
Consolidate to accumulate
Page 280
Long-awaited consolidation in the tele-
coms sector is set to boost profitability,
paving the way for greater investment in
network infrastructure. Demand for spec-
trum continues to grow while the mobile
data services market remains underdevel-
oped. In addition, the country’s internet-
savvypopulationisencouragingthegrowth
of e-commerce and cloud services.
A favourable environment
Page 229
With GDP growth hovering around 6%
and middle-class wealth expanding rap-
idly, demand for real estate, especially in
Jakarta and Bali, has surged. Luxury real
estate prices have been rising so fast
that, to curb the risk of a property bub-
ble,thegovernmenthasintroducednew
loan-to-valuerulesandprohibitedbanks
from lending to unfinished projects.
Subjects of change
Page 326
The educational system is large and
relativelywellfunded,althoughlinger-
ingstructuralissuesandcapacitycon-
straints remain a challenge. While the
countryworkstoovercomehurdlesto
universal health care and a shortage
of medical staff, the private sector is
focusing on building up capacity.
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TELECOMS & IT
Consolidate to accumulate: A reduction in the
number of players could help shore up ARPU
Interview: Arief Yahya, President Director,
Telekomunikasi Indonesia
Interview: Hasnul Suhaimi, CEO, XL Axiata
Horse before the cart: Paving the way for data
Towers of strength: Capital intensive segment
could be set to pay off in the coming years
All down the line: An internet-literate populace
Network news: International connectivity
Thorny issue: The rise of smartphones
TOURISM
A day in the sun: Changes to the tourism offering
Getting their hands dirty: Tourism villages and
ecotourism expansion
Interview: Anthony Akili, CEO, Smailing Tours
The main events: A key high-value niche
Natural wonders: Komodo National Park set to
drive tourism growth in the region
Moving up the ranks: More international tourists
Needing a boost: Supporting creative industries
AGRICULTURE
Keeping the ball rolling: Boosting sustainability
A full plate: Maintaining reliable supplies of rice
Interview: Franky Oesman Widjaja, President
Commissioner, Sinar Mas Agribusiness and Food
Interview: Franciscus Welirang, Director, Indofood
EDUCATION & HEALTH
Subjects of change: The government’s top-down
initiatives are proving a challenge
Hairpin turns: The road to educational reform
All change: Plans to provide universal care
Growing interest: The private sector is set to
become more involved in the industry
Interview: Nafsiah Mboi, Minister of Health
Interview: Hasbullah Thabrany, President,
SEAPHEIN
TAX
PwC
Evolving environment: Changes to the tax system
and regulations for potential investors
Viewpoint: Ay-Tjhing Phan, Tax Leader, PwC
Indonesia
LEGAL FRAMEWORK
Lubis, Santosa & Maramis
Potential risks: Anti-corruption measures
Fighting corruption: Strengthening the system
Viewpoint: Todung Mulya Lubis, Senior Partner,
Lubis Santosa & Maramis
THE GUIDE
Here be dragons: Komodo National Park
Hotels: Someplace special
Listing: Helpful numbers
Facts for visitors: Useful information for visitors

SNAPSHOT6
Indonesia in figures
0
20
40
60
80
100
120
Users (m)
2017*2016*2015*2014*201320122011
0
9
18
27
36
45
54
% of total
Smartphone users, 2011-17
SOURCE:eMarketer*Forecast
SOURCE:BI
Retail sales index growth (y-o-y), 2013-14 (%)
0
6
12
18
24
30
Jan-14DecNovOctSepAugJulJunMayAprMarFebJan-13
SOURCE: BKPM BPJT: Indonesia Toll Road Authority; MoT: Ministry of Transportation
Project Agency Value ($ m)
Pandaan Malang toll road BPJT 418
Cisumdawu toll road BPJT 779
Manado-Bitung toll road BPJT 353
Pekanbaru-Kandis-Dumai toll road BPJT 1690
Maloy International Port MoT 287
Makassar New Port MoT 360
Cilamaya New Port MoT 3450
Soekarno-Hatta International Airport Rail MoT 2083
PPP projects, 2013-14
SOURCE: SKK Migas *(000 boe/day)
Oil Gas Condensates Total
2006 883.25 1367.86 122.74 2373.85
2007 836.01 1300.49 118.39 2254.89
2008 852.63 1332.13 124.15 2308.91
2009 826.63 1421.77 122.33 2370.73
2010 824.45 1581.59 120.45 2526.49
2011 794.30 1502.66 107.8 1610.46
2012 762.82 1455.27 97.09 2315.18
Production of oil, gas & condensates, 2006-12*
SOURCE:WorldBank
Electricity consumption, 2000-11 (KWh per capita)
0
160
320
480
640
800
111009080706050403020100

7
SNAPSHOT 7
SOURCE: AUUI
2011 2012 % change
Gross premiums 34.48 39.41 14.3%
Gross claims 12.96 17.80 37.4%
Net premiums 16.90 19.61 16.0%
Net claims 8.92 10.71 20.0%
Reinsured premiums 15.52 17.33 11.7%
Reinsured claims 5.21 8.80 68.9%
Total costs 5.0 5.58 11.7%
Operational result 1.03 1.80 75.3%
Investment income 39.21 47.10 20.1%
Non-investment income 30.69 33.95 10.6%
Assets 69.95 81.16 16.0%
Profit before tax 4.55 5.54 21.8%
Profit after tax 3.94 4.80 21.9%
Non-life insurance indicators, 2011-12 (Rp trn)
Travel & tourism spending by type, 2007-14($ bn)
SOURCE:WTTC
0
10
20
30
40
50
Business spendLeisure spendDomestic spend
2014F2013201220112010200920082007
Coal activity, 2006-12 (m tonnes)
SOURCE:MinistryofEnergy&MineralResources
0
80
160
240
320
400
ConsumptionExportProduction
2012201120102009200820072006
SOURCE:UNCTAD
FDI inflows & outflows, 2007-12 ($ bn)
0
5
10
15
20
25
OutflowsInflows
201220112010200920082007
SOURCE:WorldBank
Non-performing loans to total gross loans, 2003-13 H1 (%)
0
2
4
6
8
10
2013 H12012201120102009200820072006200520042003
Production index growth of manufacturing, 2010-13*
SOURCE:StatisticsIndonesia*(2010=100)
-5
-2
1
4
7
10
Q4 AvgQ3 AvgQ2 AvgQ1 Avg
2013201220112010
SOURCE: World Bank *Projected
2011 2012 2013* 2014*
Real GDP (annual % change) 6.5 6.2 5.6 5.3
Consumer price index (annual % change) 5.4 4.3 7.3 6.7
Current account deficit (% of GDP) 0.2 -2.8 -3.4 -2.6
Budget balance (% of GDP) -1.1 -1.9 -2.5 -2.3
Major trading partner GDP (annual % change) 3.6 3.4 3.4 3.9
Projections for key indicators, 2011-14
SOURCE: Indonesian Stock Exchange
Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013
Volume of share trading (bn) 271.72 215.89 310.59 375.97 383.62
Value of share trading (Rp trn) 287.69 252.99 297.03 376.05 482.35
Value of government bond trading (Rp trn) 398.04 550.40 472.38 389.89 545.67
Value of corporate bond trading (Rp trn) 43.46 32.72 43.63 42.19 57.60
Jakarta Composite Index high 4224.0 4262.6 4375.2 4940.9 5214.9
Jakarta Composite Index low 3654.6 3984.1 4236.3 4305.9 4418.9
No. of listed companies 445 454 459 464 472
No. of listed government bonds 90 91 92 92 93
Value of government bonds (Rp trn) 791.18 812.80 820.27 853.87 888.51
No. of listed corporate bonds 96 97 99 91 94
Value of corporate bonds (Rp trn) 167.47 171.32 187.46 196.44 205.37
No. of asset-backed securities issuers 4 4 5 5 5
Value of asset-backed securities (Rp trn) 1.25 1.15 1.98 1.89 1.70
IDX trading statistics, 2012-13

9
Country Profile
Encouraging development of value-added industries
Taking on a growing role within the region
Parliamentary and presidential elections due in 2014
Moving towards the introduction of AEC at end 2015

COUNTRY PROFILE AT A GLANCE
With a population of 247m, Indonesia is the third-largest democracy
While the Republic of Indonesia is less than seven
decades old in its current form, the South-east Asian
nation of more than 17,500 islands has had a much
longer history under other names. In fact, the name
“Indonesia” was first used in 1850 by British anthro-
pologist James Richardson Logan as he referred to
the extensive group of islands widely known as the
Indian or Malayan Archipelago.
HISTORY: Archaeological evidence indicates that
the ancestors of modern humans were present on
the archipelago as early as 1.9m years ago, while evi-
dence of modern humans goes back around 40,000
years. By 2000 BCE, the islands were inhabited by a
diversegroupofpeoplesknownastheAustronesians.
These peoples exhibited impressive maritime skill
and took full advantage of the archipelago’s loca-
tion, engaging in extensive inter-island trading. Such
burgeoning trade prompted the speedy develop-
ment of agricultural techniques and rice cultivation
methods that facilitated pockets of growth in the
form of villages, towns and cities. Islam first entered
the region around the 8th century CE, although
meaningful conversions did not occur until the 14th
century beginning in Samudera Pasai (North Suma-
tra) and continuing in Makassar and central Java in
the 17th century. By this time, Islam had become the
archipelago’s principal religion.
IDENTITY: Pancasila constitutes the original philo-
sophical foundation of Indonesia and consists of
two Sanskrit words, panca meaning five, and sila
meaning principle. These five inseparable and inter-
related principles, which were first articulated in
speech delivered by Indonesian Nationalist leader
Sukarno, include the following: nationalism, human-
itarianism, representative democracy, social welfare
and monotheism. These five principles became a
relative blueprint for the growth and progression
of the Indonesian nation and their significance
in society remains even today, despite variations in
their interpretation and order over the 20th century.
The flag of Indonesia is embodied by two equal
horizontal bands of red (at the top) and white (at
the bottom). The colours are derived from the ban-
ner of the Majapahit Empire of the 13th-15th cen-
turies; red symbolises courage and white, purity.
INDEPENDENCE&THEPATHTODEMOCRACY:The
Dutch colonisation was well established in Java by
the mid-18th century, and the Dutch continued to
consolidate their power over the following two cen-
turies. However, the first 30 years of the 20th cen-
tury saw a rise in the popularity of the notion of inde-
pendence and nationalism amongst the region’s
incumbent population.
The Second World War brought with it the Japan-
ese invasion and ensuing occupation, which sig-
nalled the end of Dutch rule and acted as a catalyst
for the previously suppressed Indonesian independ-
ence movements. As such, when the Japanese occu-
pation finally ended as the Japanese forces surren-
dered in the Pacific, it was only two days before the
country’s first President, Sukarno, declared Indone-
sianindependenceonAugust17,1945.Followingthis
declaration, it took six weeks for the allied Dutch and
British forces to arrive, by which time Indonesian
nationalist forces had established themselves. The
conflict which followed represented a final attempt
by the Dutch to re-establish their authority. Howev-
er, with the British withdrawing towards the end of
1946, and following four years of intermittent fight-
ing and consistently fierce criticism of the Dutch by
the UN, The Netherlands formally recognised the
sovereignty of a federated Republic of the United
StatesofIndonesiaonDecember27,1949.OnAugust
17, 1950, precisely five years after the proclamation
of independence, Sukarno proclaimed a single uni-
tary Republic of Indonesia.
While the first democratic elections were held in
1955, the years which followed were fraught with
political, economic and social volatility. In 1957
Sukarno declared and implemented a system of
11
Islands of diversity
A melting pot of cultures and ethnic groups, the nation holds a
significant regional role

“Guided Democracy”, declaring himself president
for life in September of 1963. He presided over a
raging political sea within which the civilian nation-
alist leadership, the Islamic leadership, the Indone-
sian Communist Party (PKI) and the army were all
opposed to each other.
However, the situation reached a breaking point
on September 30, 1965 through an attempted PKI
coup against Sukarno’s government. Following the
impromptu formulation of a “New Order” coalition,
comprised of students, Muslim communities and
army factions, the PKI coup was swiftly and brutal-
ly defeated in the months which followed. By this
point, however, Sukarno was in failing health and he
was replaced by an army officer largely responsible
for halting the coup, Major General Suharto.
Assuming full power in March 1967, Suharto’s
reign endured seven consecutive five-year terms in
office, within which time a system of highly cen-
tralised governance appeared, including transmigra-
tion policies and coerced resettling of many Javanese
people – a legacy of which remains today in the form
of ethnic tensions. During this time, the annexation
of both West Papua and East Timor sparked inter-
national condemnation, while the population start-
ed to express its frustration towards the widespread
corruption and Suharto’s brand of authoritarianism.
When the Asian financial crisis of 1997-98 prompt-
ed the currency to plummet and inflation to soar,
students took to the streets to voice their griev-
ances, supported by the greater population.
Eventually, under widespread pressure to resign,
Suharto left office on May 21, 1998. His position was
filled by his vice-president, Bucharuddin Jusuf Habi-
bie. Habibie restored order by regaining IMF support
for economic stabilisation programmes and begin-
ning a period of considerable governmental change
under the banner of “Reformasi”.
POLITICAL LANDSCAPE: In 1999 Indonesia’s first
freely contested parliamentary elections since 1955
were held with Abdurrahman Wahid, a well-known
intellectual and leader of Indonesia’s largest Mus-
lim organisation (Nahdlatul Ulama, NU), sweeping
to victory. His leadership style, however, was less
popular and unrelenting questions concerning his
competency and health meant he was dismissed in
July 2001 in favour of his vice-president, Megawati
Sukarnoputri. Though head of the Indonesian Dem-
ocratic Party of Struggle (PDI-P) and Sukarno’s eld-
est daughter, Megawati’s reign was also short-lived
and she was defeated in the September 2004 elec-
tion by retired army general and Democratic Party
candidate, Susilo Bambang Yudhoyono. Widely
referredtoasSBY,Yudhoyonoservedasthefirstdem-
ocratically elected president in Indonesia’s history
and was re-elected for a second five-year term in
2009. While SBY’s popularity has remained stable,
the same cannot be said of the Democratic Party,
which has failed to secure a significant portion of
the vote in Parliament.
Fresh presidential elections will take place in July
2014 and since he will have served the maximum of
two terms permitted, SBY’s presidential career ends
here, although it has been confirmed that he will
remain as his party’s chairman. While the July 2014
elections are wide open, there are a number of
diverse candidates making 2014 an increasingly sig-
nificant year for Indonesia.
In terms of Indonesia’s greater regional involve-
ment, after chairing the Association of South-east
Asian Nations (ASEAN) in 2011, the country has con-
tinuedasanincreasinglyinfluentialmember.Inrecent
years Indonesia has continued strengthening its
diplomatic relations with neighbouring countries
including Malaysia, Singapore and the Philippines,
while it has also boosted long-term cooperation with
Japan. Indonesia has also occupied an integral role
in assisting the resolution of territorial disputes
between Thailand and Cambodia.
The next stepping stone for ASEAN is the ASEAN
Economic Community (AEC), which is likely to cre-
ate numerous opportunities for investors in the
region with a combined GDP of around $2.3trn. The
AEC is designed to allow the free movement of goods,
services, investment, skilled labour and capital in
the region (see analysis).
HUMAN CAPITAL & FOREIGN INVESTMENT:
Indonesia’s young and growing population is one of
the country’s strongest assets. The country’s mid-
dle classes also continue to expand.
The government has continued its focus on the
promotion of creative industries, areas which have
seen considerable success in neighbouring coun-
tries such as Thailand. At present more than 8m peo-
ple work within these industries which contribute
approximately 8% to Indonesia’s GDP.
Local and foreign corporations are increasingly
investing in Indonesia, realising the potential of the
country. The country is targeting the provision of
improved vocational training opportunities for grad-
uates. Such a focus coalesces well with Indonesia’s
12
The current president is the first democratically elected president in Indonesia’s history

continual support and encouragement of the devel-
opment of value-added industries. Through inviting
targeted investment and adapting existing regula-
tory frameworks the government has taken signifi-
cant steps to facilitate foreign investment and the
development of value-added industries.
Investment currently accounts for roughly 32% of
the nation’s GDP. While the country’s natural
resources are still plentiful, by channelling foreign
direct investment into the right areas the govern-
ment is ensuring that true potential, in terms of val-
ue and manufacturing, is achieved.
NATURAL RESOURCES: Indonesia is a country
renowned for its abundance of natural resources,
which include oil, gas, coal, nickel, tin, copper, gold
and silver. While slightly down on the year before,
the country’s total oil production for 2012 stood at
861,000barrelsperday(bpd),accountingforapprox-
imately 1.2% of the world’s oil production. Indone-
sia had proven oil reserves of 3.7bn barrels as of the
end of 2012, according to BP’s “Statistical Review
of World Energy 2013”, while it imported around
480,000 bpd during the year in light of consistent-
ly increasing domestic demand for fuel.
Indonesia remains the world’s largest exporter of
thermal coal, exporting a total of 304m tonnes in
2012 to countries such as Japan, South Korea, Chi-
na and India. The country’s coal resources total 60bn
tonnes and are estimated to last 83 years at current
production rates, with the three largest deposits
located in Kalimantan. Around 60% of Indonesian
coal is lower-quality or sub-bituminous coal. Despite
price volatility towards the end of 2012, production
continued at the rate of 370m tonnes at the end of
that year. Other minerals produced in Indonesia
include tin, nickel, gold and silver.
Production continued to increase in 2012, reach-
ing 26.5m tonnes on the year, up from 23.5m tonnes
in 2011 and 21.8m tonnes in 2010, according to the
Indonesian Palm Oil Association (GAPKI). The major-
ity of this was exported, with 18.22m tonnes shipped
in 2012. Through the first seven months of 2013
exportswereonpacetooutperform2012withatotal
of 12.21m tonnes shipped, and the US Department
of Agriculture projected total 2013 output of around
31m tonnes (28m tonnes by GAPKI). The total area
of oil palm cultivation in Indonesia was estimated at
8.2m ha – an increase of more than 100,000 ha over
2011. The plantations are concentrated in Sumatra,
Kalimantan and Sulawesi.
While there has been talk of a reduction in export
taxes, this has yet to materialise, and lower tax lev-
els in Malaysia continue to give it an advantage.
Higher taxes have also been applied to CPO as
opposed to downstream products made from CPO
as part of a government-initiated shift to promote
the development of downstream industries.
Concerns over deforestation of rainforests remain
a major issue, although there are efforts to address
the situation, and many Indonesian companies have
joined the Roundtable for Sustainable Palm Oil, an
organisation established in 2004 with the objective
of promoting the growth and use of certified sus-
tainable palm oil.
ENERGY: Around 86% of Indonesia’s energy comes
from conventional thermal sources, with hydroelec-
tric power accounting for 9%, and geothermal and
other alternative energy sources for 5%. The govern-
ment recently set an ambitious target of reaching
90% national electricity coverage by 2020. The coun-
tryiskeentodevelopnuclearpowerandinearly2014
the government announced a nuclear power plant
with a capacity of 30 MW would be built in the west-
ernpartofJava.Intermsofalternativeenergysources,
Indonesia is focusing on solar power, with the gov-
ernment planning to build 36 new solar power plants
especially in isolated and border areas. Due to the
rapidly increasing demand for power, a 10,000-MW
“fast track” plan has been under way since 2004 in
a major bid to boost output, predominantly through
the construction of coal-fired thermal power plants.
15
Indonesia’s crude palm oil output reached 26.5m tonnes in 2012, up from 23.5m tonnes in 2011
The country’s demand for power is increasing rapidly

While the completion date has been pushed to 2014,
it is being followed by a second Power Transmission
Development Project. This development project aims
to further stabilise the power system in Java and
Bali,whilealsoexpandingthesupplyofpowertoeast-
ern and western areas. Perusahaan Listrik Negara,
the state-owned energy distribution firm, is in charge
of the development projects and accounts for
approximately 85% of generated power. A 2009 Elec-
tricity Law aims to reduce the state-owned firm’s
monopoly on distribution and encourage the par-
ticipation of private firms in the power sector.
POPULATION: With a population of approximately
247m made up of more than 300 different ethnic
groups, Indonesia is the third-largest democracy in
the world while also being the world’s most popu-
lous Muslim nation. Indonesia is currently the world’s
16th-largest economy, while Jakarta is the country’s
most populated city, with more than 10.18m inhab-
itants living within an area of 740 sq km. Other major
cities include Surabaya, Bandung, Medan and
Semerang. Java is the most populated island in the
world with 141m people spread over 128,298 sq
km, which is equal to just 7% of Indonesia’s total
land mass. The population has more than doubled
since 1971, when it was 119.2m, while it continues
to grow at a rate of 1% per year. It is estimated that
by 2050, the country’s population will exceed 420m.
Indonesia is home to more than 300 different eth-
nic groups. The largest groups, according to the
2009 census, are the Javanese (41.7%), Sundanese
(15.4%) and Malay (4.1%), closely followed by
Madurese (3.3%), Batak (3%), Bugis (2.9%), Minangk-
abau (2.7%) and Betawi (2.5%).
GEOGRAPHY: Indonesia has a total land mass of
1.90m sq km, spread over an archipelago of around
17,508 islands, some 6000 of which are inhabited.
With a coastline of 54,716 km, Indonesia has 1107
km of land boundaries with its neighbour Malaysia,
820 km with Papua New Guinea and 288 km with
East Timor. The archipelago acts a meeting place
between the Pacific and the Indian oceans, while also
bridging the Asian and Australian continents. This
unique position has had an influence, affecting the
country’s cultural, social and political make-up.
LANGUAGE:Indonesian is an Austronesian language
which stems from the country’s various cultural and
linguistic groupings, the majority of which are eth-
nically Malay. As part of the country’s independence
movement during the 1930s, the language – a stan-
dardised form of Malay – became titled as Bahasa
Indonesia and has since become the dominant lan-
guage in terms of government and media commu-
nication, education and business.
Local dialects and languages such as Balinese,
Javanese and Sudanese are still used in certain areas
of the archipelago. The popularity of the English lan-
guage has continued to increase. This has likely also
stemmed from the middle and upper classes send-
ing their children to schools where English is the main
language of instruction.
RELIGION: The Indonesian Constitution guarantees
freedom of religion with the government currently
recognisingsixreligions,namelyIslam(86.1%),Protes-
tantism (5.7%), Catholicism (3%), Hinduism (1.8%),
Buddhism (around 1%), and Confucianism (less than
1%). On the island of Bali, unlike the rest of the coun-
try, more than 93% of the population practices Bali-
nese Hinduism, while in certain rural areas, animism
is still practised.
CLIMATE:Duetoitsproximitytotheequator,Indone-
sia’s tropical climate is accompanied by average tem-
peratures of between 28 C and 34 C in coastal areas,
and 23 C in the mountain areas. Temperatures remain
similar year round with little variation from season
to season. The dry season lasts from June to Octo-
ber, while the rainy season runs from December to
March. The country’s relative humidity stays between
70% and 90%. Located over the Ring of Fire, the
meeting place of tectonic plates, Indonesia can
be subject to earthquakes and volcanic eruptions.
16
The country has a total coastline of more than 54,000 km and is home to over 17,000 islands
Indonesia has a multitude of different religions and ethnic groups

COUNTRY PROFILE VIEWPOINT
President Susilo Bambang Yudhoyono
Therapidexpansionofbusinesshaschangedour21st-
century economic landscape for the better. Govern-
ments will remain important in formulating economic
policies but, without the help of the private sector, we
mightnotbeabletoprovidemorejobsforourcitizens.
We know that whatever country one comes from, the
top national and local agenda is going to be jobs.
Already, global growth in 2013 is showing different
dynamics.Advancedeconomiesareexperiencingrecov-
ery and showing positive growth, while emerging
economies – including the so-called BRICS countries
(Brazil, Russia, India, China and South Africa) – are fac-
ingaslowdown.Theyarealsosufferingfromlargetrade
deficits,capitalflightanddepreciatingcurrencies.This
is also true for the APEC region.
In some APEC advanced economies, growth is gain-
ing strength. Meanwhile, APEC emerging economies
need further momentum for growth. Not withstand-
ingthis,APECeconomiesremainacrucialsourceofglob-
al growth. According to the IMF, as a group, APEC is
expected to grow by 6.3% in 2013 and by 6.6% in 2014
– which is more than twice the world average.
Atpresent,APECeconomiesaccountfor54%ofglob-
alGDPand44%ofglobaltrade.Withintheregion,trade
hasgrownnearlyseven-foldsince1989,reachingover
$11trn in 2011. In the past 25 years, average tariffs in
APEC have declined by close to 70%. The total cost of
conducting business across borders decreased by two
successive rounds of 5% tariff reductions: resulting in
nearly $59bn of savings for businesses. All this shows
that with its combined potential, APEC is in the ideal
position to help the recovery of the global economy.
Therefore,APECmembers–throughindividualandcol-
lective measures – must put extra efforts to promote
growth. Let me highlight some possible measures.
Firstandforemost,weallneedtodoourpartinhelp-
ingpreventprotectionistpolicies,andcontinueonour
path of trade liberalisation in ways that uplift the well-
being of all our citizens. We must also ensure that our
trade relations are not only strong but also balanced.
Second, we need to intensify efforts to stimulate
investment within our region so as to maintain growth
and create jobs. There is major opportunity for this as
weareexperiencingarapidgrowthofthemiddleclass.
Third, we need to develop more and better infra-
structure as an essential element for our connectivity.
This will of course help not only to facilitate trade and
investment,butalsoboostjobcreation.APECneedsto
tackleinefficiencyinthesupplychain.Wehavetomake
it easier, cheaper and faster to conduct trade in goods
and services across borders. In this regard, it is crucial
that we promote connectivity as a priority.
Fourth, to ensure growth with equity, we must
embrace the SMEs that form the backbone of all our
economies.Fifth,wemustworktogethertoensurethe
financialstability,whichisanabsoluterequisiteforsus-
tainableeconomicactivities,includingtradeandinvest-
ment. APEC members can help to stabilise the global
financial market through bilateral as well as regional
initiatives.Theseincluderegionalfinancingagreements
and the Financial Stability Board. The Chiang Mai Ini-
tiativeMultilateralisationisagoodexampleoftheclose
collaboration among some APEC members.
Sixth,toensuredevelopmentforall,wemustnotfor-
gettoprovideasocialsafetynetforthepoorandfinan-
cial inclusion for shared prosperity. Finally, APEC
economies can only achieve all this if we intensify our
policy consultation and coordination.
Indonesiaenvisionsthefutureofthisregionaspros-
perous,stable,dynamic,inclusiveandforward-looking.
Our objective is to make the APEC region the epicen-
tre for the world’s economic advancement. I believe
throughclosecollaborationwiththebusinesscommu-
nity, APEC can achieve the following priorities:
Attaining the Bogor Goals: APEC economies have
achieved tremendous progress toward achieving the
Bogor Goals. But while APEC has reduced average tar-
iffsfrom16.9%in1989to5.7%in2011,restrictivenon-
tariffmeasures,lengthyCustomsproceduresandpoor
transport infrastructure still pose challenges to trade.
18
Realising potential
President Susilo Bambang Yudhoyono on promoting economic growth

Therefore, as we continue to work for trade and
investment liberalisation, as well as deeper regional
economic integration, we must ensure we have the
capacitytotacklethosechallenges.Wehavetobeable
to address growing trade barriers, financial instability
and fluctuating commodity prices.
Achieving sustainable growth with equity: Today,
APEC economies are confronted by new challenges
thatcouldcausedisruptionandstuntedgrowth.Impor-
tant among these is population growth.
Theglobalpopulationhasgrownrapidlyfromjustover
5.5bn people in 1994 to more than 7bn people today.
By 2045 there will be 9bn people worldwide. Much of
thispopulationincreasewillcomefromtheAsia-Pacif-
icregion,placingagreatburdenonthesupplyofener-
gy, food and water for our people. We cannot achieve
APEC’s goals without ensuring the principles of inclu-
sion in our economic development. Therefore, main-
taining a growth path that is sustainable and inclusive
is of great importance. Our efforts should focus on
economic empowerment, engagement of stakehold-
ers, enhancement of small and medium-sized enter-
prises’globalcompetitivenessthroughinnovation,and
tappingwomen’sproductivityintheeconomy.Itisalso
critical to ensure financial inclusion, strengthen food
security and improve access to health services.
Promoting connectivity: Unlike in 1994, the advent
of new technologies has opened new ways for people
to do business with each other, across countries, and
across continents. Improving connectivity, therefore,
becomes a critical development priority.
I believe that focused and improved physical, insti-
tutional and people-to-people connectivity will help
integrate our region. It will also facilitate the flow of
goods, services, capital and people of the Asia-Pacific
region. Thus, we must work together to strengthen
connectivity through infrastructure development and
the promotion of infrastructure investment.
Indonesia will work with both APEC leaders and all
other stakeholders to help advance progress on these
three priorities. After all, the success of our country is
strongly tied to the success of other nations.
Like other emerging markets, Indonesia is facing
some head-winds resulting from financial market tur-
bulence. Yet, this situation is manageable and the
Indonesiangovernmentisrespondingtoitwithapack-
age of focused policy measures, including substantive
structural reform. As a result, in recent times Indone-
sia’s financial market has stabilised.
We believe this is only a short-term challenge, and
we remain confident that the long-term prospects to
investandgrowareenormous,asIndonesiawillremain
a land of opportunity and growth.
Indonesiahasbecomeatrillion-dollareconomywith
a large middle class. Our democracy is strongly rooted,
andthismakesIndonesiawell-placedforforeigninvest-
ment. Global consultancy McKinsey & Company pre-
dictedthatIndonesia’sbusinessopportunitywillincrease
upto$1.8trnin2030.Thisopportunityrangesfromcon-
sumer services, agriculture and fishery, and natural
resources to education, industry and infrastructure.
Wecontinuetocreateabetterbusinessandinvestment
climate, addressing many of the challenges. We have
made steady progress, including major bureaucratic
reforms to strengthen government institutions.
To accelerate economic growth, in May 2011, we
launched the Master Plan for the Acceleration and
ExpansionofIndonesia’sEconomicDevelopment2011-
25(MP3EI).Inthenext14years,weareaimingtoreach
over$460bnworthofinvestmentsin22maineconom-
ic activities, integrated in eight programmes. These
include agriculture, mining, energy, industry, marine,
tourism and telecommunications.
Therefore,theMP3EIoffersagreatnumberofoppor-
tunitiesforinternationalinvestors.Letusbuildastrong
partnershiptogetherandforgearesilientAPEC.Letus
also ensure that APEC continues to bring prosperity to
all the people in the APEC region.
The above is an excerpt from the speech at the APEC
CEO Summit 2013, Bali, Indonesia on October 6, 2013.
19

COUNTRY PROFILE OVERVIEW
Indonesia declared its independence in 1945
With the year ahead set to see the much-anticipat-
ed election of a new president and new national
and regional legislatures, 2014 will likely be a time
of great political activity in Indonesia. Some 15 par-
ties(threejustlocaltoAceh)willcontestforthevotes
of approximately 175m potential voters, 67m of
whom will be casting a ballot for the first time. The
elections may also give rise to a new impetus for
reform, as the country debates a range of issues –
from how to tackle corruption to the role of religion
in politics. Underscoring many of these debates is
also the question of how best to manage rapid eco-
nomic growth and the social changes it engenders,
as Indonesia becomes increasingly globalised and
urbanised, with a surging population and greater
standing and responsibility both within the region
and the world at large. In facing these challenging
issues though, the country can draw on a growing,
modern tradition of democracy – as well as on an
ancient history of compromise and consensus.
THAT WAS THEN: Forming part of an active vol-
canic arc, the country is known both for its richly fer-
tile soils – and for its periodic natural disasters. In
more recent times too, it has become known as
South-east Asia’s largest nation and one of the
region’s most vibrant economies.
Indonesia consists of some 17,508 islands, inhab-
ited by around 247m people, according to figures
from the World Bank. More than half of the popu-
lation lives on one of the archipelago’s smaller islands
– Java – with the capital, Jakarta, accounting for
approximately 10m of those citizens.
The archipelago’s early history saw the spread of
the Dongson culture, which originated in Vietnam
and southern China around 1000 BCE, to Indonesia.
The culture brought with it irrigated rice-growing
techniques and animal husbandry skills.
During the 7th century CE the Hindu-Buddhist
empire of Sriwijaya rose on the island of Sumatra and
became a major trade power, controlling most of the
trade in South-east Asia at the time due to its loca-
tion on the Strait of Melaka, while the Buddhist
Sailendra dynasty and the Hindu Mataram dynasty
thrived in central Java between the 8th and 10th cen-
turies. In the following centuries, a series of king-
doms rose and fell on the archipelago.
DECLARING INDEPENDENCE: Yet while the islands
of this country are dotted with the remains of ancient
civilisations, Indonesia itself only came into being less
than 70 years ago. Symbolically, that was when, on
August 17, 1945, a group of Indonesian nationalists
on the island of Java declared independence from
the Netherlands.
TheDutch,Indonesia’sformercolonialmasters,had
first arrived in 1602, expanding their empire over
the centuries that followed. It was not until the
1930s that Aceh finally came under Dutch tutelage
and the current borders were established.
The Second World War changed the balance of
power in Asia, however, first via the conquering
Japanese, who took control of what was the Dutch
East Indies in a rapid campaign, vanquishing myths
of European superiority. This gave impetus to a wave
of nationalism throughout South-east Asia.
On August 17, 1945 then, with the Japanese still
in occupation and before the Dutch had returned,
several of Indonesia’s nationalists gathered in Jakar-
ta to declare independence. They included Sukarno
and Mohammed Hatta, who became Indonesia’s first
president and vice-president, respectively.
The new state was given five basic principles for
its foundation – known as Pancasila. These are still
the ruling state philosophy today, and include belief
in the unity of God; in a just and civilised humanity;
in a united Indonesia; in democracy guided by the
inner wisdom of unanimity arising from representa-
tive deliberation; and social justice.
The precepts, rights and freedoms of Pancasila
are embodied in the constitutional and legal sys-
tem, and derive from the traditions and customs of
A total of 15 parties are
expected to contest the
2014 elections, vying for
the votes of around 175m
potential voters, 67m of
whom will be voting for the
first time.
21
The five principles of
Pancasila, which are
embodied in the
constitution, include belief
in the unity of God; in a just
and civilised humanity; in a
united Indonesia; in
democracy guided by the
inner wisdom of unanimity
arising from representative
deliberation; and social
justice.
A crucial time
Parliamentary and presidential elections are set for 2014

the Indonesian people. The 1945 Constitution of the
country is based upon Pancasila.
TheDutchwouldnotgiveupeasily,however.Armed
conflict spread across Indonesia between national-
ists and returning Dutch forces, with more killed in
the country during that conflict than during the
fighting there in the Second World War.
Finally, on December 27, 1949, under UN and US
pressure, the Dutch transferred sovereignty of the
archipelago to the new, Republic of the United States
of Indonesia (RUSI) – although the Netherlands
retained West Papua (then Dutch New Guinea) until
1963. In August 1950 though, Sukarno declared RUSI
would be replaced by a unitary, Republic of Indone-
sia (RI), with a new constitution. The first parliamen-
tary elections were held in 1955, when Sukarno’s
Indonesian National Party (PNI) came first, though
without a majority. Also making a strong showing was
the Indonesian Communist Party (PKI), while Islamist
parties had widespread support as well.
Islam had first come to Indonesia in the 8th cen-
tury CE, spreading to become the dominant religion
in Java and Sumatra by the end of the 16th century
and in all the other islands except Bali by the end of
the 18th. Bali remains a majority Hindu island, while
animism and Christianity are strong forces in certain
areas,suchasKalimantan,Maluku,PapuaandSulawe-
si. Currently, approximately 86% of the Indonesian
population is Muslim, 10% Christian and the rest
either follow Hinduism or other faiths.
Two major Islamic organisations exist – the Sun-
ni, modernist Muhammadiyya and larger, tradition-
alist National Union (NU). Both organisations engage
in social and educational activities, although Muham-
madiyya did make a foray into backing the Islamist
National Mandate Party (PAN) in the 2000s, a move
it has recently backed away from.
In a Cold War world, Sukarno’s Indonesia was one
in which the president attempted to pull the coun-
try’s nationalist, communist and Islamist strands
together – a daunting and ultimately unsuccessful
ambition. This led, however, to his proclamation of
“Guided Democracy” in 1957, with seats in the Cab-
inet for the PNI, PKI and other parties. In 1959,
Sukarno followed this, however, by abrogating the
1950 constitution, replacing the elected parliament
with one appointed by the president and with a sin-
gle, National Front party established.
Behind this now authoritarian state was a delicate
balancing act between the army, the PKI and the
Islamic groups. This eventually unravelled in 1965
though, when a series of coups and counter-coups
led to a takeover by the military, led by Major Gen-
eral Suharto, and a nationwide massacre of the PKI
and its suspected sympathisers.
UnderSuharto,anewera,knowasthe“NewOrder”,
began.Indonesiaexperiencedrapideconomicgrowth
under the rule of Suharto’s Golkar Party, up until the
Asianfinancialcrisisof1997-98.Thecountryexpand-
ed territorially with the invasion of East Timor in
1975. In addition, Suharto implemented a transmi-
gration programme, resettling mainly Muslim citi-
zens from the islands of Java and Sumatra to less pop-
ulated islands – later sometimes leading to violent
ethnic and religious-based clashes.
By 1996, support for Suharto had begun to erode,
with the financial crash that followed leading to riot-
ing and calls for his resignation. Suharto finally
resigned in May 1998, and was replaced by the vice-
president, Jusuf Habibie.
This saw the beginning of the Reformasi period
and the return to democracy. Elections were held in
1999, with the largest party becoming the Indone-
sian Democratic Party-Struggle (PDI-P), led by
Sukarno’s daughter, Megawati Sukarnoputri. With
the PDI-P unable to form a majority, however, the new
parliament elected Abdurrahman Wahid, known as
Gus Dur, president, with Sukarnoputri as vice-pres-
ident. He was ousted in 2001 following major
protests, with Sukarnoputri then taking over as pres-
ident until 2004. Elections in that year saw Susilo
Bambang Yudhoyono (known as SBY) assumed the
office of president. SBY then won the 2009 election,
completing his maximum allowed two terms. Now,
in 2014, the electoral field is once more open.
CONSTITUTION&ELECTORALCHANGE:Under the
current constitution, the head of state, command-
er-in-chief of the armed forces and chief executive
authority is the president. Since 2004, the office
has been directly elected every five years with a
maximum of two terms allowed per incumbent. The
winner of the presidential election is the candidate
achieving 50% of the votes, plus one. If no candidate
passes this mark, a second round of voting is then
held. One other rule is that to become a candidate
for president (candidacies are dual tickets, for pres-
ident and vice-president), the candidate’s party must
have won at least 25% of the vote for the lower
house of the legislature, the People’s Representa-
tive Council (DPR), or hold a minimum of 20% of the
seats there. This essentially rules out independent
22
The current president won elections in both 2004 and 2009
Following Indonesia’s
declaration of
independence in 1945,
armed conflict spread
across the country
between nationalists and
returning Dutch forces.
Finally, under UN and US
pressure, the Netherlands
recognised Indonesia’s
independence at the end
of 1949.
Under the current
constitution, the president
is the head of state,
commander-in-chief of the
armed forces and chief
executive authority. The
office is directly elected,
and presidents can serve a
maximum of two five-year
terms.

candidates and those without a significant, nation-
wide party base. It also tends to mean the president
and vice-president come from different parties, in
order that the candidacy can receive the necessary
support in the DPR, where individual parties seldom
cross the 25% threshold.
The president appoints a Cabinet, again usually
consisting of ministers drawn from a variety of par-
ties, given the need for coalitions within the DPR.
The president can propose bills to the DPR, issue reg-
ulations in emergencies, can appoint the chief jus-
tice, conduct foreign policy (although ultimately, the
DPR’s approval must be sought for treaties and
appointments) and grant pardons, after consulta-
tion with the Supreme Court.
The bicameral legislature consists of the lower,
DPR and the upper Regional Representatives Coun-
cil (DPD). Most political power resides in the DPR,
whose 560 members are elected for five-year terms
via an open-list proportional representation system,
allowing voters to vote for individuals put forward
by the different parties in electoral districts of
between three and 10 seats each.
An electoral threshold is also in force, of 3.5% of
the national vote. This tends to exclude regional and
locally based parties at the national level, and was
also imposed in order to reduce the number of par-
ties overall. In 2004 there were 17 parties represent-
ed in the DPR; after the 2009 elections, there were
just nine; and some are suggesting fewer still are like-
ly to be represented following the 2014 elections.
In 2009, 38 parties contested the elections, with
perhaps a dozen likely to do so in 2014. The DPR
debates proposed laws sent by the president, while
it can also propose legislation of its own. It may
question the president and government officials,
and is also responsible for passing the budget.
As of year-end 2013, the nine parties in the DPR
were divided between six on the government bench-
es and three in opposition. The six ruling parties
were led by SBY’s own Democratic Party (DP), with
148 seats, followed by Golkar, with 106; the Pros-
perous Justice Party (PKS) with 57; PAN, with 46
seats; the United Development Party (PPP) with 38
seats; and the National Awakening Party (PKB) with
28. The PKS, PAN, PPP and PKB are all Islamist-based.
The opposition, meanwhile, consists of the PDI-P,
with 94 seats; the Great Indonesia Movement Party
(Gerindra), with 26 seats; and the People’s Con-
science Party (Hanura), with 17 seats.
Parties must have offices in 75% of the provinces
and 50% of the districts to register, meaning that a
major investment in infrastructure is required before
a party can run in the national elections.
The upper house, meanwhile, contains 132 seats,
with each province electing four members for sin-
gle, five-year terms. In addition, the DPD must be
involved in any legislation affecting the regions,
while it may also propose bills to the DPR.
DECENTRALISATION: Since the Reformasi period
began, there has also been a drive towards decen-
tralisationofauthority;inmanywaysthisisaresponse
to over-centralisation under Suharto and Sukarno,
while is also designed to address demands for local
autonomy and undermine separatist groups.
At year-end 2013, Indonesia consisted of 34
provinces, with Aceh, Jakarta, Yogjakarta, Papua and
West Papua enjoying different levels of autonomy
from the rest. In 2009, for example, Aceh introduced
sharia law, tightening this in 2013, while Yogjakar-
ta is the only province still headed by a monarch.
In 2014 elections will also be held for 33 provin-
cial assemblies (the DPRD I), and for their 508 sub-
divisions, the regencies or districts (DPRD II).
Some 2112 seats are being contested at the DPRD
I level and 16,895 at the DPRD II. Jakarta and the
newest province, North Kalimantan, will not have
district-level balloting.
JUDICIAL MATTERS: Indonesia’s legal code is based
on civil law, with influences from Dutch, Roman and
customary systems. Islamic law also plays a major role
in Aceh. The highest court is the Supreme Court,
which presides over everything except constitution-
al cases, which go to the Constitutional Court. The
Supreme Court is headed by the chief justice, who
since February 2012 has been MA Hatta Ali.
Beneath this court, the high courts consist of gen-
eral, military, administrative and religious types, with
some 250 district courts then coming under these.
The Supreme Court is the final court of appeal and
can also order the reopening of closed cases.
Meanwhile, a body often in the headlines these
days is the Corruption Eradication Commission (KPK),
a government agency that has had a controversial
record. Nonetheless, the KPK has also accumulated
a growing number of successful prosecutions and
is generally widely respected.
ASEAN: Indonesia was among the founding mem-
bers of ASEAN in 1967, along with Malaysia, the
Philippines, Singapore and Thailand. Since then, the
bloc has gained in stature, as well as in population
25
The country is divided into 34 provinces, several of which enjoy different levels of autonomy
In 2004 there were 17
parties in the People’s
Representative Council,
whereas after the 2009
elections there were just
nine. Some suggest that
fewer are likely to be
represented post-2014.
The bicameral legislature
consists of the lower
People’s Representative
Council and the upper
Regional Representatives
Council. Most political
power resides in the
former.

and economic importance. Brunei joined the organ-
isation in 1984, followed by Vietnam in 1995, Laos
and Myanmar in 1997, and Cambodia in 1999. The
bloc now has a combined GDP of around $2.3trn. In
the past few decades, the region’s impressive growth
rates have helped millions out of poverty and trans-
formed what were once largely agrarian economies,
such as Malaysia and Thailand, into centres for man-
ufacturing and industry. The richer nations are now
looking to develop more sophisticated service indus-
tries and move up the value chain, while the bloc’s
poorer members have taken their place in lower-lev-
el manufacturing.
All this is putting more money into the hands of
ordinary people and making more of them middle
class – with an annual income of at least $3000. In
Indonesia, ASEAN’s biggest economy and the source
of around one-third of the group’s GDP, some 163m
people are expected to be middle class by 2020,
equivalent to the combined population of Britain
and Germany. ASEAN is now moving towards closer
integration of its markets, and 2015 has been set as
the target date for the launch of the ASEAN Econom-
ic Community (AEC). Under the AEC, tariffs between
the bloc’s five founding members plus Brunei will be
almost entirely removed, while the later members will
aim to adopt the same tariff levels by 2018 (see
analysis). In addition to the AEC, ASEAN has also
signed free trade agreements with other countries
in the region, including Australia, New Zealand, South
Korea, Japan, India and China.
OTHER AFFILIATIONS: In addition to its member-
ship in ASEAN, the country is a member of the UN,
the World Trade Organisation, the Asia-Pacific Eco-
nomic Cooperation grouping as well as the Organi-
sation of Islamic Cooperation. Indonesia was also
one of the founding members of the Non-Aligned
Movement, which was established in Belgrade in
1961 as a group of nations not aligned with or
against the US or the Soviet Union in the Cold War.
OUTLOOK: With the presidential election due in
mid-July 2014 and DPR and DPD balloting on April
9, the year is likely to be dominated by electioneer-
ing and balloting – followed by political bargaining,
as the new president seeks to build a coalition in the
Cabinet and in the DPR. Who that new president will
be, however, has been the subject of considerable
debate countrywide since soon after the last elec-
tion in 2009. At the time of writing, the governor of
Jakarta, Jokowi, was the frontrunner in the polls.
Jokowi was the PDI-P candidate when he won Jakar-
ta’s top job in 2012, and in November 2013, it was
not clear whether the PDI-P’s leader, the veteran
politician Megawati Sukarnoputra, might not still
decide to run – perhaps for the last time – on the
PDI-P’s ticket. Jokowi had also only just begun to
tackle Jakarta’s formidable challenges.
A candidate who has long declared his candidacy
is Aburizal Bakrie, chairman of Golkar and member
of the powerful business and financial family. A fur-
ther candidate might come out of a coalition of par-
ties unlikely to beat the 20-25% threshold in the DPR
individually.This“centralaxis”groupmaybandtogeth-
er many of the Islamist parties with the DP, which
has lost much ground since 2009.
Onbalance,SBYleavesamixedlegacy.Hisfirstterm
won him considerable public support and good will,
as he tried to tackle a number of major issues. Yet
inhissecondterm,hewasoftenseenasfarlesseffec-
tive. In any case, SBY leaves his successor as presi-
dent with a series of challenges. Abroad, Indonesia
will have to be ready for the introduction of the
ASEAN Economic Community in 2015, with many
looking to Jakarta to take a more active role in region-
al and international politics. At home, economic
growth and the distribution of its benefits remain
thorny issues, as does solving the bottlenecks and
impediments thrown up by rapid expansion in a
developing economy. Regional disparities and oppor-
tunities are also still high on the agenda. A busy time
ahead, then, for whoever wins the elections in 2014.
26
ASEAN is working to improve integration, with the bloc set to introduce a common market in 2015
SBY’s party is currently the largest in parliament with 148 seats
With DPR and DPD
elections in April 2014 and
the presidential vote in
mid-July, the year is likely to
be dominated by
electioneering and
balloting – followed by
political bargaining, as the
new president seeks to
build a coalition in the
Cabinet and in the DPR.

Xi Jinping, President of China
TheChineseeconomyhasremainedconsistentlystrong
as we focus on reforms and liberalisation, and we are
confidentofmaintainingthismomentumgoingforward.
ChinaandtheAsia-Pacificshareasymbioticrelation-
ship. Both parties rely on one another for new job
prospectsandeconomicgrowth.Wehopetoestablish
more links with the Asia-Pacific in order to build a bet-
ter and more prosperous future.
The global economic recovery will be filled with dif-
ficultiesandsetbacks.IntheAsia-Pacificregionitisno
different, but let us not forget that we are on a good
streak,andIbelievethatwewillcontinuethistrendfor
the foreseeable future. Advanced and developing
economies alike are seeking new channels for growth,
which can only come from reform and innovation.
Growth rates have been steady across the board,
which gives me a lot of confidence in the future of the
Chinese economy. We are committed to structural
reforms in order to sustain, and even increase, growth
over the long term. We are not short-sighted insofar
that we might forego long-term benefits in exchange
for short-term satisfaction. If structural reforms are
necessary for long-term growth, then we will commit
tothese.Anycauseweundertakewillrequiredueatten-
tion to both short- and long-range targets, taking into
accountbothimmediateandlong-terminterests.Killing
the goose that lays the golden eggs and only consid-
ering immediate interests and long-term effects is not
a formula for sustainable development.
IamalsoconfidentbecauseChinahasstrongendoge-
nouspower.Thisincludesongoingurbanisation,agrow-
ing generation of modern and professional talent, and
better implementation of innovation-driven develop-
ment. In addition, continuous expansion of domestic
needs and the consumer market, adherence to the
principle of putting people first, and enabling more
people in other regions to share the benefits of devel-
opment, are also strong factors going forward.
ThedevelopmentprospectsfortheAsia-Pacificregion
are very exciting. They are currently undergoing their
own technological industrial revolution. Economies in
the region have a strong capacity to fend off risks
because of their increasing competitiveness.
Weneedtostayalerttopotentialobstaclesandchal-
lenges.Chinaneedstocomprehensivelydeepenreform
and open its own economy to move forward.
The rainbow often only appears after the winds and
rain. There is a saying that there is no mountain high-
erthanman,andnoroadlongerthanourfeet.Nomat-
ter how high the mountain is, and how long the road
is,aslongaswemoveforwardwithperseverance,there
will be a day when the end is achieved.
China is a member of the Asia-Pacific family. Our
economic relationship is interdependent. China can-
not develop without the Asia-Pacific, and the Asia-
Pacific cannot prosper without China. The sustainable
andhealthydevelopmentoftheChineseeconomywill
bringgreateropportunitiestothedevelopmentofthe
wider region. China will firmly maintain regional peace
andstability,vigorouslypromoteregionaldevelopment
andprosperity,andbecommittedtobuildingaregion-
al cooperation framework that stretches across the
Pacific Ocean and benefits all parties.
Asia-Pacific is the space for our joint development,
and we are all the sailing ships moving forward in the
sea of the Asia-Pacific. China hopes to join hands with
ourregionalpartnerstocollaborateandbuildastronger
region that will help guide global economic recovery.
In terms of development, the region should seek
commongoals,insistonopenness,promoteinnovation,
as well as seek interaction.
The business community is an important force in
promotingeconomicdevelopmentandtrade,andwe
welcomeandencourageenterprisesofalleconomies
to invest in China. In 2014, China will host the Asia-
PacificEconomicCooperationSummitLeaders’Meet-
ing. We hope representatives from across the region-
al business community will come to Beijing to discuss
things together and collaborate to jointly witness
anotherimportantmomentintheregion’sdevelopment.
27
Over the rainbow
Xi Jinping, President of China, on the Asia-Pacific’s ties with China

COUNTRY PROFILE INTERVIEW
Yasuo Fukuda, Yasuo Fukuda, Former Prime Minister of Japan
WhatareyourprojectionsforJapaneseinvestments
in Indonesia over the next 18 months, and how
long can the bullish investment rate be sustained?
FUKUDA: In cumulative terms, since 1990 Japan has
been the largest investor in Indonesia after Singapore,
with a particularly dynamic shift in 2011. In that year,
foreigndirectinvestmentfromJapantoIndonesiadou-
bled from 2010, reaching $1.52bn and going on to
reach $2.46bn in 2012. The 2013 figure had already
surpassed that by the end of the third quarter, at
$3.64bn. Though I cannot predict whether Japanese
companies can sustain such a bullish pace, I am confi-
dentthatsuchinboundinvestmentswillcontinuesolid-
ly in the coming years, since Japanese companies have
anextremelypositiveviewofIndonesia’smarketpoten-
tial and political stability in the medium and long term.
A testament to this sentiment is the 2013 report by
the Japan Bank for International Cooperation (JBIC) on
Japanesemanufacturers’overseasoperations,inwhich
Indonesia was evaluated as the most promising desti-
nationforinvestmentinthemediumterm(aboutthree
years) followed by India, Thailand and China.
At present, 70% of Japanese investment projects
areinmanufacturing.Howlikelyisashiftintoserv-
ices and where specifically would this take place?
FUKUDA: After the success of investments in cars,
motorcycles and electronic household devices, Japan-
esecompaniesarenowexpandingintoconsumergoods
suchascosmeticsandbeverages.Thistrendisadirect
reflection of the growth of Indonesia’s middle class,
whichaccordinglyrequiresmoreextensiveinvestment
in services. From a Japanese perspective, we see serv-
ice opportunities everywhere, but especially in retail,
where we are seeing significant new investments.
UNIQLO opened its largest shop in South-east Asia
inJakartainthespringof2013.AEONisopeningshop-
ping malls in the country. Japanese regional banks are
increasing their cooperation, and Japanese insurers
willcontinuetooperateintheIndonesianmarketplace.
TowhatextentareJapanandIndonesiacollaborat-
ing on infrastructure realisation and where else
must Indonesia seek to make improvements?
FUKUDA: Infrastructure is obviously essential for effi-
cient business activities, and its development facili-
tates economic growth. The Indonesian government’s
MasterplanforAccelerationandExpansionofIndone-
sia's Economic Development, announced in 2011, is a
very important step forward. To speed implementa-
tion, Indonesia and Japan, among others, are cooper-
ating extensively to strengthen the infrastructure of
JakartaanditsneighbouringJabodetabekareathrough
the Metropolitan Priority Areas project.
Under this plan, the two countries have identified
45 projects to be completed by 2020, at a total cost of
around Rp411.3trn ($41.13bn). The five flagship proj-
ects include the Jakarta mass rapid transit system, the
development of Cilamaya port, expansion of Soekara-
no-HattaInternationalairport,creationofnewacadem-
ic research clusters and the Jakarta sewerage project.
As for improvements in other areas, the JBIC reports
that Japanese companies are facing challenges in the
formofincreasedlabourcostsandlegaluncertainties.
What affects, direct or indirect, will Japan’s new
monetary policy have on Indonesia, and how will
this affect their relationship?
FUKUDA: Japan’s new economic policy, often referred
to as Abenomics, consists of three “arrows” and aims
to spur economic recovery by ending deflation and
promotingsustainablegrowth.Theeffects,moststrong-
ly brought on by the first arrow, are already showing
the policy’s merits. Confidence in Japan’s private sec-
torhasvisiblyincreased,andisfurtherreflectedineco-
nomicindicesandencouragingsignsattheTokyostock
exchange.TherecoveryofJapan’seconomywilldoubt-
less help stimulate the world economy, especially in
Asian. Indonesia, with long-standing ties to Japan, is
excellently placed to reap the rewards of its recovery,
whichwillseebothcountriesprosperinthelongterm.
28
Good neighbours
OBG talks to Yasuo Fukuda, Former Prime Minister of Japan

COUNTRY PROFILE ANALYSIS
ASEAN has set itself targets and deadlines in a binding “blueprint”
Indonesia continues to be the dominant nation in
South-east Asia both politically and economically. Its
participation within ASEAN will likely determine the
shape of regional integration, with the introduction
of the ASEAN Economic Community (AEC) at the end
of 2015 looming as the next major milestone.
The AECisexpectedtocreatenewopportunitiesfor
investors in a region that boasts not only some of the
world’s fastest-growing economies, but also a rapid-
ly expanding middle class. “ASEAN and South-east
Asiaareoneofthefewreallybrightspotsintheworld
economy,”saidTeohKokLin,founderofSingularAsset
Management in Kuala Lumpur. “We still have a young
populationsothedemographicsarepositive.Wealso
have a huge emerging middle class. It’s a sweet spot.”
A GROWING BLOC: Inthepastdecadetheeconomies
of emerging Asia have expanded by more than 7.5%
a year, according to the IMF. ASEAN’s combined GDP
is already valued at $2.3trn and is expected to reach
$10trn by 2030. The group, now home to an estimat-
ed 609m people, was formed in 1967. The original
members – Malaysia, Indonesia, Singapore, Thailand
and the Philippines – made economic growth a pri-
ority from the very start. Historically, members have
tended to compete in the same industries, focusing
onthepotentialoutsideASEANratherthanwithinthe
region. Even today, intra-ASEAN trade is just 25% of
the region’s total. The group’s 10 members compete
in areas such as food processing, telecoms, tourism
and business services, while those with better stan-
dards of English have tended to have an advantage
in the global economy.
The original five are now at the core of what has
grown into a highly diverse organisation. As well as
differing political systems, there are also vast dispar-
ities in economic management, culture and wealth.
Singapore is the richest but also the smallest. Its per
capita income might be 45 times that of Myanmar,
but it has less than 1% of ASEAN’s population. Myan-
mar, by contrast, is home to more than 60m people.
BACKGROUND: The AEC was launched in 2003 as
theregionemergedfromtheAsianfinancialcrisis.Five
years earlier, the collapse of the Thai baht ricocheted
across the region, triggering deep recessions and
bringing an end to the rule of Indonesia’s President
Suharto. In the aftermath, leaders sought a way to
rebuildtheireconomiesonamoresecurefoundation.
“Asians did not draw the wrong lesson from the
Asian crisis; they did not hunker down, pull up draw
bridgesorwithdrawfromtheworld,”ChristineLagarde,
the IMF’s managing director, said in a speech in Kuala
LumpurinNovember2012.“Asia’seconomicfounda-
tions became safer, sounder and more resilient, but
still open to the world and open for business.”
TheAECisdesignedtotransformASEAN’s10mem-
bers into a single production base, allowing for the
freemovementofgoods,services,investment,skilled
labour and capital. Initially set to take effect in 2020,
theAECisnowexpectedtocomeintoforceonDecem-
ber 31, 2015. ASEAN has also championed integra-
tion as a way to bridge some of the developmental
differences within and among members, deepen the
region’s economic ties with the rest of the world and
compete more effectively with China.
TARGETS: The group has set itself key targets and
deadlines in a binding “blueprint” that tracks each of
theAEC’sfourpillarsandwasagreedin2007.An“AEC
scorecard”keepstrackofeachcountry’scompliance.
Lim Hong Hin, the deputy secretary-general with
responsibility for the AEC, notes that as of August
2012, 72% of measures for 2008-11 had been imple-
mented. Still, other than peer pressure, there are no
penalties for those countries that miss their targets
and no way to ensure measures take effect.
WiththeAECbuiltontheexistingASEANFreeTrade
Agreement, it is perhaps not surprising that most
progress has been made in trade liberalisation. But
efforts to integrate Customs procedures to create a
“single window”, liberalise services, and harmonise
crucial regulations and standards have been slower.
In the past decade, the
economies of emerging
Asia have expanded by
more than 7.5% a year,
according to the IMF.
ASEAN’s combined GDP is
already valued at $2.3trn
and is expected to reach
$10trn by 2030.
29
The AEC is designed to
transform ASEAN’s 10
members into a single
production base, allowing
for the free movement of
goods, services,
investment, skilled labour
and capital. Initially set to
take effect in 2020, the
AEC is now expected to
come into force on
December 31, 2015.
Coming together
Looking ahead to the introduction of the ASEAN Economic Community
at the end of 2015

COUNTRY PROFILE ANALYSIS
Local corporations, fearful of competition in their
home markets and often politically well connected,
have made it difficult for governments to effect the
policychangesthattheAECdemands.Indeed,aGlob-
al Trade Alert report notes that in 2011 Indonesia
adopted more potentially restrictive trade measures
than any other country in South-east Asia, ranking it
among the top 10 protectionist nations.
TRACKING IMPLEMENTATION: Jayant Menon, the
Asian Development Bank’s lead economist for trade
andregionalcooperation,hasbeentrackingtheimple-
mentation of the AEC. He doubts the core countries
will meet their 2015 target for implementation –
though they will declare the AEC in existence anyway
– and admits that the poorer nations of Cambodia,
Laos,MyanmarandVietnamareevenfurtherbehind,
perhaps by as much as a decade. But he stresses that
the2015targetshouldbeseenmoreasa“milestone”
thanahardtarget.“Oneshouldnotexpectthatin2015
to see ASEAN suddenly transformed; its nature and
processes abruptly changed and its members inter-
ests substantially altered,” he said. “2015 should be
viewedmoreasamilestoneyear–ameasureofawork
in progress. The journey remains relevant even if the
destination takes longer to arrive at.” Menon esti-
mates the region’s core members will achieve AEC
implementation by 2020, their original target.
GLOBAL UNCERTAINTY: Officials are also mindful
of the region’s vulnerability to the uncertainty in the
rest of the world. “The intensification of global risks
puts into question the credibility of globalisation and
casts some doubts on the region’s ability to manage
its own integration,” Lim told delegates at a forum on
the AEC in September 2012. “Of particular concern
are the potential pullbacks in trade and capital flows
into the region as global conditions deteriorate, and
the possibility that some ASEAN countries may revert
to protectionist measures and inward-looking poli-
cies to protect their own domestic economies.”
The poorer nations, Cambodia, Laos, Vietnam and
Myanmar, have, officially, until 2018 to reach their
targets, but even richer countries have been able to
negotiate exclusions for what they deem to be “sen-
sitive”industries.IndonesiaandthePhilippinesareseen
asamongthemostrestrictive,concernedaboutopen-
ingtheirvastdomesticmarketseventoregionalrivals.
RISING TRADE: Still,whiledatasuggestspolicyimple-
mentation has been slower in some areas than it
should be, trade between ASEAN and the rest of Asia,
as well as within ASEAN itself, has risen sharply in the
past decade. The most recent data shows trade with-
in the 10-member bloc rose to $520bn in 2010, com-
pared with just $121m in 1998. There are signs too
that member states appreciate the benefits of con-
vergence and cooperation.
Increasingly,electronicsfactoriesinASEANaremak-
ing components that are then shipped to production
centresinChinaforassemblyandexporttothewider
world. Japanese carmakers have taken advantage of
the ASEAN Industrial Cooperation Scheme to set up
an integrated region-wide production system. More-
over, the importance of trade to the region is reflect-
edintheproliferationoffreetradeagreementseither
on a bilateral basis or between ASEAN and its major
trading partners, such as China, Japan and Korea.
Much then will depend on what happens in the
next two years, with many looking to Malaysia, which
will take the ASEAN chair in 2015, to convince its
neighbours to embrace the common market and
ensure that ASEAN’s disparate members achieve the
economic ambitions to which they have long aspired.
30
ASEAN-based electronics factories are exporting to the wider world
While data suggests policy
implementation has been
slower in some areas than
it should be, trade between
ASEAN and the rest of Asia,
as well as within ASEAN
itself, has risen sharply in
the past decade.

31
Trade & Investment
Rising trade volumes attest to the shift to value added
Commodities underpin exports, but manufacturing grows
Inflows of foreign direct investment expected to stay high
Partnerships near and far support continued expansion
Improvements to investment environment remain uneven

TRADE & INVESTMENT OVERVIEW
Streamlining of industries has helped reduce domestic bottlenecks
A significant actor in global trade and investment, and
a member of the G20 group of the world’s largest
economies, Indonesia has achieved a strong record of
attractingforeigndirectinvestment(FDI)andrebalanc-
ingitstradepatternstowardhigh-growthmarkets.The
authorities have developed new markets for exports
while encouraging investment in import-substitution
industries. Their key priorities heading into the 2014
elections remain speeding up infrastructure develop-
ment,improvinglabourflexibility,andbolsteringtrade
andinvestmentpolicies.Whilechallengesremaininthe
investment environment, efforts to streamline proce-
duresandeasebottleneckshaveattractedinvestment
inthenaturalresourcesandmanufacturingsectors.As
policymakers worked to contain a current account
deficit of imports of capital goods and intermediary
materialsin2013,long-termdirectinvestorsappeared
more bullish than short-term portfolio investors.
TRADE PATTERNS: Despite a 6.7% contraction in net
exports in 2012, the value of Indonesia’s trade has
expandedsignificantlyoverthepastdecade,withadou-
blingofexportsbetween2006and2011to$203.50bn.
Rising demand for Indonesia’s key commodity outputs
from Asian markets has spurred a redirection of trade.
Yet with most FDI flowing to sectors linked to con-
sumption,tradehasbeenasmallergrowthdriverthan
household spending. This comes despite ASEAN-wide
tradeliberalisationthathasencouragedconglomerates
to expand their supply chains to Indonesia (see analy-
sis). Japan was Indonesia’s top market in 2012, but its
share of total exports fell from 22.28% in 2003 to
15.86%, according to the Asian Development Bank
(ADB). China and Singapore, the next two markets,
grew from 6.23% and 8.84% of exports, respectively, in
2003,to11.4%and9.02%by2012.China’ssignificance
as a source of imports also grew, with its share of
Indonesian imports rising from 9.08% to 15.33% in
2003-12, though it was third behind Singapore and
Japanin2012imports,with13.6%and11.88%,respec-
tively. The US, Indonesia’s fifth-largest market in 2012,
sawitssharedeclinefrom12.09%to7.83%inthesame
span,whileexportstotheEUdroppedfromnearly18%
to 9.3%. The largest increases went to India, where
exports doubled from 2.85% to 6.58% in 2003-12, and
ASEANcountries–exportstoMalaysiarosefrom3.87%
to 5.94%, and to Thailand grew from 2.28% to 3.49%.
“We are seeing an intensification of trade and FDI
flows in ASEAN, particularly between Indonesia, Thai-
land and Vietnam in both directions,” Nick Gandolfo,
HSBC’s senior vice-president of leading international
business in Indonesia, told OBG.
ACCELERATED GROWTH: Trade with non-traditional
markets in Africa, the Middle East, Eastern Europe and
Latin America has grown even faster, albeit from a low
base. Growth in trade with Africa accelerated from
14.42%annuallyin2007-11to46.4%in2011-12,while
that with the Middle East rose from 7.7% to 43.23% in
the same span, according to data from the Ministry of
Trade (MoT). While traditional markets in Asia grew
40.64%annuallyin2007-11and63.13%in2011-12,mar-
kets in Europe and America contracted: annual trade
growth with Western Europe slowed from 13.99% to -
4.27% in this span, while that with North America
dropped from 10.69% to -14.83% (see analysis).
Bythefirsthalfof2013thetop10marketsaccount-
ed for 73.6% of Indonesian exports, according to the
MoT, while roughly 70% of exports stay in Asia, as per
figures from private equity firm KKR. Although exports
continued to contract into August 2013, with a 6.3%
year-on-year (y-o-y) drop, a reversal of the oil and gas
deficit to a small surplus helped to offset contracting
non-hydrocarbons exports to a degree.
A 2013 report on trade patterns published by glob-
al accountancy and professional services firm Ernst &
Young forecast export growth rates of roughly 15%
annually until 2020, driven by rebounding demand in
emerging Asian economies. Annual increases in trade
with China, Thailand and South Korea were over
13%,stimulatingdemandforlower-value-addedman-
ufacturing exports – clothing and shoes in particular.
Japan was Indonesia’s top
export market in 2012,
with 15.86% of exports.
China and Singapore, the
next two markets,
accounted for 11.4% and
9.02%, respectively, of total
exports that year.
By the first half of 2013
Indonesia’s 10 largest
export markets accounted
for 73.6% of its total
exports, roughly 70% of
which stay in Asia.
32
In it for the long term
Investors are committing to the country for the long haul

TERMS OF TRADE: As Indonesia is the world’s largest
exporter of crude palm oil (CPO) and tin, the second
source of cocoa and a major exporter of nickel (fifth),
gold (seventh) and copper (eighth), commodities are
a key earner, accounting for 62% of exports in the first
halfof2013,accordingtodatafromStatisticsIndone-
sia (BPS). Given its dependence on unprocessed com-
modities, Indonesia benefitted from major price
upswings during the commodities super-cycle – with
74%ofthe28.98%y-o-ygrowthinexportsin2011driv-
en by increases in price rather than volumes, accord-
ingtoKKR–butithasalsobeenaffectedbydepressed
prices since the first quarter of 2012. “The price index
of our goods exports declined by nearly 15% in 2012,
mainlyduetoslowergrowthinourmajortradingpart-
ners,includingIndiaandChina,”LukyAlfirman,headof
the Ministry of Finance’s (MoF) centre for macroeco-
nomicpolicy,toldOBG.WhileCPOsalesremainthesin-
gle-largestexportitemwith13%ofthetotalinthefirst
quarterof2013,accordingtoBPSdata,manufactured
goods have grown in importance, driven by exports of
machinery, electronics, ships and aircraft parts. Ship
exportsalesgrew29.42%y-o-yinthefirsthalfof2013,
while footwear and ready-to-wear garments were up
9.9% and 3.9%, respectively, in the first half of 2013
according to data from the MoT.
Although these increases are significant, depressed
prices for key commodity exports have dragged down
sales values. Rebalancing of growth in China toward
domesticconsumptionhasledtodeclinesinCPO,rub-
ber, and key industrial metals like tin and nickel, whose
prices declined 17% in the first half of 2013, and cop-
per, which fell 12% in six months, while higher thermal
coal exports from the US given the rise in its shale gas
productionhavepusheddowncoalprices.Newexport
tariffs of 20% on 65 unprocessed minerals (excluding
coal) introduced in 2012 have also squeezed export
volumes,althoughthemajorityweresuspendedamidst
the August 2013 policy package from the MoF.
RECORD FDI: Despite shocks to Indonesia’s commod-
ity export earnings, the economy has continued to
proveadrawforFDI.Investment,atroughly32%ofGDP,
is the second driver of growth after household con-
sumption. Inward FDI (excluding hydrocarbons and
non-bank financial institutions) rebounded from a low
of $4.88bn in 2009 to $16.21bn in 2010, the year
IndonesiaovertookThailandasthelargestrecipientof
FDI in ASEAN, and $24.56bn in 2012, when Indonesia
rankedastheworld’s20th-largestFDIrecipient,accord-
ingtodatafromtheUNConferenceonTradeandDevel-
opment (UNCTAD). Investment ratings upgrades by
Japan’s JCR in 2010, and by Fitch and Moody’s at the
startof2012,encouragedthehigherFDItrend.Despite
significantoutflowsinportfolioinvestmentin2013,FDI
flows continued to grow, reaching $7.05bn in the first
quarter of 2013 and $7.17bn in the second quarter –
with Indonesia on track to achieving $28bn in inward
FDIandRp390trn($39bn)intotalinvestment,accord-
ing to the Indonesia Investment Coordinating Board
(BKPM). While FDI growth slowed slightly to $6.98bn
in the third quarter of 2013, up 18.4% y-o-y, this was
largely compensated by surging domestic investment,
up 33% y-o-y to $1.92bn.
In the first half of 2013, FDI accounted for 68.57%
of total investment, while the total stock of inward FDI
balloonedtenfoldin12yearsfrom2000to$205.66bn,
accordingtoUNCTAD.Theserecordnumbersweredriv-
enbygreenfieldinvestment,whichaccountedfor57.5%
of all investment in the year to September 2013, while
expansion of existing facilities accounted for 42.5%,
according to BKPM. The four largest sources of FDI in
2012 remained Singapore, Japan, South Korea and the
US with $4.86bn (19.8% of the total), $2.46bn (10%),
$1.95bn(7.9%)and$1.24bn(5.1%),respectively,accord-
ing to BKPM. Some uncertainty over official figures
remains, however, given an October 2013 report pub-
lished by the American Chamber of Commerce in
Indonesia (AmCham) that noted the under-valuing of
US FDI: it found that total US investment in Indonesia
reached $65bn in the eight years to 2012, rather than
the official $7bn figure. This was due to the use of cor-
porateentitiesintaxhavenslikeMauritius(whichchan-
nelled $1.06bn in FDI to Indonesia in 2012), the British
33
SOURCE:UNCTAD
FDI inflows & outflows, 2007-12 ($ bn)
0
5
10
15
20
25
OutflowsInflows
201220112010200920082007
Investment is the second growth driver after household consumption
In the first half of 2013, FDI
accounted for 68.57% of
total investment, while the
total stock of inward FDI
grew tenfold from 2000 to
2012, reaching $205.66bn.

Virgin Islands ($855.9m) and Cayman Islands ($8.5m)
as well as Singapore and Hong Kong (see analysis).
Investor interest is expected to continue to grow.
“Indonesia’s lower GDP projection will not deter for-
eign investors,” Armand B Arief, president director of
UOB Bank, told OBG. “There is too much potential in
themedium-andlong-termforinvestorstoignorethe
opportunity in Indonesia. After the recent FDI forums
inIndonesia,therehasbeenalotoffollowupfromfor-
eign investors, however, the government is making it
difficult because they can’t formally act on these
inquiries until the central bank makes it official.”
BROADER FOCUS: Despite adverse terms of trade for
exports, a growing share of FDI has focused on manu-
facturing,domestic-orientedinparticular.Theshareof
FDI in Indonesia’s secondary sector grew from 20.58%
in 2010 to 47.9% in 2012 and 63.3% by the third quar-
terof2013,whilemanufacturingandservicescombined
accounted for 76% of all FDI in the first three quarters
of 2013, according to BKPM. “We did not expect a sig-
nificantdrop-offininwardFDIin2013,despiteadverse
portfolio investment flows during certain times in the
year, with a particular focus on consumer and retail,
infrastructure and services,” Gandolfo told OBG.
“Surabaya and Batam are probably the most active FDI
destinations outside Jakarta.” The secondary sector’s
reliance on imports of capital goods and intermediary
materials, which accounted for 20% and 73% of all
imports in 2012, means that higher FDI in manufac-
turing has driven import growth and widened Indone-
sia’s current account deficit (see analysis).
While disasters like the Fukushima tsunami and
nuclearshutdownandtheThaifloodsin2011prompt-
edautomotiveandelectronicsmanufacturerstoexpand
production chains within ASEAN, the strong pull of
Indonesia’s vast domestic market and government
measurestoincreaselocallyproducedcontentbothin
manufacturingandincommodityprocessinghavealso
provided impetus to growing investment. A full 15% of
all 2012 FDI went to transportation equipment and
machinery, according to KKR, a sign of value chains
beingestablishedinJava,outsourcedfromsouthernChi-
na. “We are seeing the shift of investment from natu-
ralresources-basedtovalue-addedsectors,”incoming
BKPM chief Mahendra Siregar said when the third-
quarter 2013 investment figures were released.
The October 2013 report by AmCham found that
while US investment in oil, gas and mining grew 11%
ineightyearsto2012,growthinmanufacturinginvest-
ment was nearly double that, at 21%. By 2012 52.2%
ofUSFDIwasinextractiveindustriesand46.1%inman-
ufacturing. Significantly, the nature of firms investing
includes small and medium-sized enterprises (SMEs),
particularlyfromJapan,SouthKoreaandTaiwan,accord-
ingtoBKPM–asignmultinationalsareexpandingsup-
ply chains to Indonesia.
“ThegrowthinFDIfromSMEsislargelybecausethey
are subcontractors to larger multinationals that are
34
US investment in oil, gas
and mining grew 11% in
the eight years to 2012,
while manufacturing saw a
rise of 21%. By 2012, 52.2%
of US FDI was in extractive
industries and 46.1% in
manufacturing.

trying to fulfil government requirements to integrate
more of their supply chains domestically,” Destry
Damayanti, Bank Mandiri’s chief economist, told OBG.
Thelargestdealsbyvalueinrecentyearshavefocused
on the manufacturing, automotive, electronics, phar-
maceuticalsandtelecommunicationssectors,accord-
ing to research from the University of Indonesia.
VALUE ADDED: Eager to transition to a higher-value-
addedproductionbase,Indonesianauthoritiesarestriv-
ing to streamline investment procedures and promote
investment to key sectors under the Masterplan for
Acceleration and Expansion of Indonesia’s Economic
Development (MP3EI) to 2025. Structured along six
growthcorridors,theplanaimstodevelopsorelyneed-
edinfrastructuretosupportexpansioninkeystrategic
industries and jumpstart the country’s industrialisa-
tion. Meanwhile, the MoT’s five-year strategic plan to
2014 aims to increase non-oil exports, strengthen the
domestic market and improve the availability of basic
products. Given Indonesia’s surging capital goods and
intermediate materials imports, driven by growing
investment in final manufacturing, the authorities are
conscious of the pressing need to develop intermedi-
ate industries. The Ministry of Industry’s industrialisa-
tion plan focuses on 35 priority industrial clusters in
basic manufacturing, agro-industry, electronics and IT,
transportationaswellascreativeandsupportiveindus-
tries. “The regional context is conducive for Indonesia
to develop its intermediate industries,” Ndiame Diop,
lead economist and economic advisor for Indonesia at
the World Bank, told OBG. “As China rebalances there
is quite a lot of investment flowing south, and Indone-
sia may be able to capture some of this.”
RAWMANAGEMENT:Thegovernmenthasadopteda
carrotandstickapproachtoimprovingvalue-addedout-
put. The WTO noted in its March 2013 trade policy
review that, “A number of measures... have recently
raisedconcernsaboutthedirectionoftradeandinvest-
ment policymaking.” The Heritage Foundation puts
Indonesia’s trade-weighted average tariff at 2.5%, but
trade is constrained by non-tariff barriers (see analy-
sis). The 2009 Mining Law allows only miners invest-
inginlocalsmelterstocontinueexportingunprocessed
minerals from 2012 and plans for a total ban on the
export of raw minerals from 2014, although investors
in downstream processing may be able to continue
suchexportsgiventhelooseningofexportrestrictions
in the government’s August 2013 policy package. The
state also introduced progressive taxes on the export
of mineral commodities, CPO and cocoa, and since
August 2013 requires the sale of tin through local
commodity exchanges (see Capital Markets chapter).
Indonesia also placed import restrictions and quo-
tasonhorticulturalandanimalproductsin2011,restrict-
ingimportlicensingtoahandfulofimportersandonly
four entry ports. While these were also relaxed in April
2013 due to rising food inflation, they elicited a num-
ber of WTO complaints from the US (see analysis).
Meanwhile,ontheinvestmentfront,newrulesonbank
ownershiplimitingsingle-owner(whetherlocalorfor-
eign) shares to 40% of a lender from 2012 were seen
asameansofhaltingDevelopmentBankofSingapore’s
attempted majority takeover of Bank Danamon, in the
absence of reciprocal access for Indonesian banks to
Singapore’s market. This is prohibitive given the capi-
tal charges applied to minority ownerships on banks
complying with Basel III rules (see Banking chapter).
New rules on mining ownership introduced in 2012
alsorequiredivestmenttoan80%stakewithinsixyears
of production (by 2018), and then 70%, 63%, 56% and
49% every year thereafter – with local initial public
offerings not qualifying as divestment (see Mining
chapter). In addition, as part of efforts to curb imports
of intermediate materials and capital goods, the cen-
tral bank has discouraged banks from lending to 10
import-dependent industries including telecoms and
automotivemanufacturing.“BankIndonesiahasencour-
aged banks to support investments that will reduce
imports, which in turn should have a positive effect on
the country's balance of payments,” Sheky Lemasoa,
HSBC’sheadofcorporateinIndonesia,toldOBG.“How-
ever, these encouragements need to be clarified in
terms of enforcement.”
Ontheincentivesfront,in2011Indonesiarolledout
taxholidaysof5-10years(followedby50%reductions
fortwoyearsthereafter)and5%cutsinincometaxfor
investmentoversixyearsforfirmsinvestingoverRp1trn
($100m) in one of the six MP3EI corridors in sectors
likebasemetalprocessing,oilrefining,petrochemicals,
renewables, telecoms equipment and machinery.
Labour-intensive businesses – those employing more
than 100 staff – are also eligible for these incentives
for investments over Rp50bn ($5m) in 129 sectors,
includingplantations,pharmaciesandproperty.Thegov-
ernmentplanstoexpandtheseincentivesinthefourth
quarter of 2013 to firms from countries with no tax
treaties with Indonesia and for those investing in
research and development locally. In the two years
since 2011 the government has only granted tax hol-
idays to two investors: Unilever’s $133m oleochemical
palm oil refinery and Chandra Asri Petrochemical’s
$145m butadiene factory. While the approval process
for tax holidays is complicated – with BKPM assessing
the technical aspects and a committee including MoF,
the Coordinating Ministry of Economic Affairs and the
Tax Office approving them – the two main criteria are
the amount of local content and jobs generated.
NEGATIVELISTREVISION:The 2007 Investment Law
introduced greater clarity regarding which sectors are
open to majority FDI. In practice, however, this has led
tothepublicationofa“negativelist”ofsectorsinwhich
FDI is capped – mainly high-value-added sectors such
as telecommunications towers, health care, pharma-
35
New rules on mining
ownership introduced in
2012 require divestment to
an 80% stake by 2018, and
further reductions to 70%,
63%, 56% and 49% every
year thereafter.
Labour-intensive
businesses – those
employing more than 100
staff – are eligible for
incentives on investments
over $5m in 129 sectors,
including plantations,
pharmacies and property.
SOURCE: BKPM *excluding oil, gas, banking, insurance
2010 2011 2012 Q1 2013 Q2 2013
Primary sector 3.03 4.88 5.93 1.69 1.65
Secondary sector 3.34 6.79 11.77 4.55 3.46
Tertiary sector 9.84 7.81 6.86 0.80 2.07
Total 16.21 19.48 24.56 7.05 7.17
Value of FDI by sector, 2010-Q2 13 ($ bn)*

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