Country Risk: Indonesia

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Official Name: Republic of Indonesia
Internet Domain: .id

International Dialing Code: + 62
Time Zone: UTC +7 (12 hours ahead of Washington, DC standard time)

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Location and Size

Indonesia is spread across a chain of thousands of islands between Asia and Australia. Its area is 2 million sq. km. (736,000 sq. mi.), about three times the size of Texas (USA).

Government

Indonesia is an independent republic consisting of 31 provinces, 1 autonomous province, 1 special region and 1 national capital district. The capital is Jakarta.

In 1945, Indonesia gained independence from the Netherlands and Japan, which had occupied the country from 1942. Indonesia’s constitution embodies five principles called Pancasila: monotheism, humanitarianism, national unity, representative democracy by consensus, and social justice. The constitution provides for separation of executive, legislative and judicial power.

Branches:

• Executive Branch: Chief of State and Head of Government: President Joko WIDODO (Since October 20, 2014); Vice President: Jusef KALLA; cabinet; Elections: president and vice president elected for five-year terms by direct vote of the citizenry
• Legislative Branch: People’s Consultative Assembly consisting of members of the DPR (Dewan Perwakilan Rakyat) and DPD (Dewan Perwakilan Daerah); 560 seats, members elected to serve five-year terms
• Judicial Branch: Supreme Court or Mahkamah Agung (51 judges divided into 8 chambers); Constitutional Court (consists of 9 judges); subordinate courts: High Courts of Appeal, district courts, religious courts

Legal System

Based on the Roman-Dutch model, Indonesia’s legal system is a civil law system and influenced by customary law.  Indonesia has not accepted compulsory International Court of Justice (ICJ) jurisdiction.

People

Indonesia is the world’s fifth-most populous nation. The people range from rural hunter-gatherers to modern urban elite.

• Population: 262,787,403
• Population growth rate: 0.83%
• Languages: Bahasa Indonesia (official, modified form of Malay), English, Dutch, local dialects (of which the most widely spoken is Javanese)
• Literacy: 95.4%
• Ethnic Make-up: Javanese 40.1%, Sundanese 15.5%, Malay 3.7%, Batak 3.6%, Madurese 3%, Betawi 2.9%, Minangkabau 2.7%, Buginese 2.7%, Bantenese 2%, Banjarese 1.7%,Balinese 1.7%, Acehnese 1.4%, Dayak 1.4%, Sasak 1.3%, Chinese 1.2%, other 15%.
• Religions: Muslim 87.2%, Protestant 7%, Roman Catholic 2.9%, Hindu 1.7%, other 0.9% (includes Buddhist and Confucian), unspecified 0.4% (2010 est.)

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Economy

The government plays a significant role in Indonesia’s market-based economy. There are more than 130 state-owned enterprises and the government administers prices on several basic goods including fuel, rice, and electricity. During the global financial crisis, Indonesia joined China and India as the only G20 members posting growth. Indonesia is the only Association of Southeast Asian Nations (ASEAN) member in the G20.

The country has been undergoing significant economic reforms under current President Joko Widodo. Indonesia has a debt-to-GDP ratio of less than 25% and historically low inflation rates. However, according to the CIA World Factbook, “Indonesia continues to struggle with poverty and unemployment, inadequate infrastructure, corruption, a complex regulatory environment, and unequal resource distribution among regions”.

Leading Markets (2019): China 13.6%, US 10.6%, Japan 10.5%, India 8.4%, Singapore 7.6%, Malaysia 5.1%, South Korea 4.8%

Leading Exports – Commodities: Mineral fuels, animal or vegetable fats (includes palm oil), electrical machinery, rubber, machinery and mechanical appliance parts

Leading Suppliers (2019): China 23.2%, Singapore 10.9%, Japan 10%, Thailand 6%, Malaysia 5.6%, South Korea 5.3%, US 5.2%

Leading Imports – Commodities: Mineral fuels, boilers, machinery, and mechanical parts, electric machinery, iron and steel, foodstuffs

Top Industries: Petroleum and natural gas, textiles, automotive, electrical appliances, apparel, footwear, mining, cement, medical instruments and appliances, handicrafts, chemical fertilizers, plywood, rubber, processed food, jewelry and tourism

Leading Agricultural Products: Rubber and similar products, palm oil, poultry, beef, forest products, shrimp, cocoa, coffee, medicinal herbs, essential oil, fish and its similar products, and spices

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Comparative Economic Indicators – 2019

* 2018 estimate
Economic Data from CIA World Factbook

Credit and Collections

Dispute Resolution

Dispute settlement mechanisms are not highly developed, although “Indonesia is a signatory to the Convention On The Settlement Of Investment Disputes Between States And Nationals Of Other States (ICSID)”. According to the 2019 Investment Climate Statement ” Indonesia, foreign arbitral awards are not always enforced in practice, but they are “legally recognized and enforceable in the Indonesian courts”.  Also, judges are not bound by previous rulings, and laws are open to different interpretation. The court system does not provide effective recourse for resolving commercial disputes.

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Risk Assessment

Coface Country Rating: A4 — The overall risk is a combination of business-specific factors and factors relating to the country in which the business operates. The analyses use a seven-level ranking. In ascending order of risk, these are: A1, A2, A3, A4, B, C and D.

Coface Business Climate Rating: A4 — Evaluating the business environment involves measuring the quality of a country’s private sector governance ” in other words businesses’ financial transparency and the effectiveness of the courts in settling debts. Evaluations use a seven-level ranking. In ascending order of risk these are: A1, A2, A3, A4, B, C and D.

Credendo Political Risk Rating: 2.5 — Fairly low
Credendo Commercial Risk Rating: B — Moderate

Credendo Risks on Export Transactions

• Political Risk – Short Term <2 years: 2 — Fairly low
• Political Risk – Medium-Long Term >2 years: 3 — Moderate risk
• Commercial Risk: B — Moderate

Business Climate

Indonesia is an attractive destination for Foreign Direct Investment (FDI) because of their growing middle class, strong domestic demand and stable political situation. However, “vague and conflicting regulations, poor existing infrastructure, rigid labor laws, and corruption” have been significant concerns for foreign investors, 2019 Investment Climate Statement ” Indonesia.

Indonesia is a member of WTO and ASEAN (Association of Southeast Asian Nations).

Transparency of Regulatory System: Even though progress is slow, Indonesia is continuing to bring its legal, regulatory, and accounting systems into compliance with international norms.  A recent example of positive implications for foreign investment came in July 2018. The following quote comes from Indonesia’s 2019 Investment Climate Statement:

“Indonesia launched the OSS system to streamline 488 licensing and permitting processes through the issuance of Government Regulation No.24/2018 on Electronic Integrated Business Licensing Services. As a new process, OSS implementation is a work in progress and would benefit from greater socialization, especially at the subnational level. Special expedited licensing services are available for investors meeting certain criteria, such as making investments in excess of approximately IDR100 billion (USD7.4 million) or employing 1,000 local workers.”

Conversion and Transfer Policies: The rupiah remains freely convertible. According to the Indonesia’s 2019 Investment Climate Statement, “banks must report all foreign exchange transactions and foreign obligations to the Bank of Indonesia (BI)”.

Economic Freedom: According to the 2019 Index of Economic Freedom, Indonesia’s economy is 65.8% free, which makes it the world’s 56th freest economy. Its overall score is 1.6 points higher than last year, due to improvements in business freedom, investment freedom, and financial freedom. Indonesia is ranked 11th out of 43 countries in the Asia”Pacific region, and its overall score is the same as the regional average, but below the world average.

Corruption: “Indonesia’s ranking in Transparency International’s 2019 Corruption Perceptions Index is 118 out of 183 countries”, according to Indonesia’s 2019 Investment Climate Statement. Despite laws to combat corruption, there hasn’t been an organized government effort to implement the laws. Companies haven’t been required to establish internal codes of conduct. 

Political Violence: A top priority for the Indonesian government is fighting terrorism. They have “effectively pursued counter-terrorism efforts through legislation and law enforcement” Indonesia’s 2019 Investment Climate Statement . There is potential for violence and unrest, and both can erupt without warning.

For more detailed information on these topics, visit the 2019 Investment Climate Statement ” Indonesia, of the U.S. Department of State.

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Business Protocol

• Generally, Indonesians place less emphasis on efficiency, punctuality, and deadlines than Western counterparts — hence the concept of ‘rubber time’, or jam karet that exists in Indonesia.
• Give/accept business cards using two hands or the right hand. Treat all business cards you receive with respect. Ensure that your card emphasizes your name and position and includes as much information as possible.
• Business attire is generally conservative. Women should be sensitive to Muslim beliefs and dress conservatively and modestly. Tight fitting clothes should be avoided, blouses should cover at least the upper arms, skirts should be knee length or longer.
• Titles are important in Indonesia as they signify status. You should address Indonesians by their title followed by their name. If unsure, it is best to ask the individual how they should be addressed.
• Indonesians are indirect communicators; they do not always say what they mean. Indonesians dislike confrontation due to the potential loss of face.
• To display your interest and sincerity in establishing a long-term business relationship, present your Indonesian counterparts with small gifts during the first meeting.  Present gifts with the right hand only. Gifts should be modest such as items that feature your company logo.
• Indonesians do not make hasty decisions; therefore, exercise patience. Do not be surprised if business is not even discussed during initial meetings.

More information on Business Protocol: Kwintessential

Sources for further information on doing business in Indonesia

American Chamber of Commerce in Indonesia

Doing Business in Indonesia, Living in Indonesia

Embassy of The Republic of Indonesia, Washington, DC

Embassy of the United States in Jakarta

Indonesia, U.S. Commercial Service

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This information is provided by ABC-Amega Inc. Providing international receivable management and debt collection services for exporters to more than 175 countries including Indonesia. For further information, contact [email protected].

This report represents a compilation of information from a wide variety of reputable sources.

Comparative Economic Indicators: CIA World Factbook

Exchange Rates: OANDA.com The Currency Site.