An Expert's View about Business Environment in Indonesia

Posted on: 28 Feb 2012

Latest Development
•Indonesia’s economy expanded by 6.2% in 2011.
•Inflationary pressures eased during 2011, dropping from 7.1% (YoY) in January 2011 to 3.8% (YoY) in December 2011.
•After the China-ASEAN Free Trade Area (CAFTA) completed its establishment in January 2010, trade between China and the ASEAN countries increased by 23.9% in 2011 to US$ 362.9 billion, while the bilateral trade between China and Indonesia increased by 42% to over US$ 60 billion.
•Indonesia was Hong Kong’s 21st largest export destination in 2011. Hong Kong's total exports to Indonesia grew 5.8% to US$2,973 million in the same year.

Current Economic Situation

Indonesia continued to show a strong economic performance in 2011 and posted a 6.5% GDP growth, the strongest pace after the Asian financial crisis in 1997-8. For 2010 as a whole, Indonesia’s GDP rose 6.1%.

Private consumption, accounting for more than half of Indonesia’s GDP, continued to be a key support to Indonesia’s economic growth. Retail sales grew by 22.2% (YoY) in December 2011 as indicated by Bank Indonesia, the country’s central bank. Buoyant domestic consumption is supported by a range of factors, including stronger purchasing power, low interest rates, an appreciating Rupiah, and stronger business and consumer confidence.

Monetary policy

Although the global economy is awash with liquidity with many developed economies having adopted accommodative monetary policies and quantity easing, inflation in Indonesia appears to be under control. Consumer price inflation in Indonesia, after rising 7.1% YoY in January 2011 to reach its highest level since May 2009, declined to less than 5% in the second half of 2011. In December 2011, consumer price inflation was reported at 3.8% over the year-earlier period.

With inflation under check, Bank Indonesia began to ease its monetary policy by cutting its policy rate by 0.25% to 6.5% in October 2011.  The central bank expects that the inflation rate in 2012 will be below 5%, which is within its inflation target of 4%-6%, pointing to further room for an easier monetary policy in 2012.

International trade

Both merchandise exports and imports of Indonesia showed strong growth in 2011. Indonesia’s merchandise exports increased by 29.1% to US$203.2 billion in 2011, boosted by the surging demand from emerging economies, particularly China and India. On the other hand, Indonesia’s merchandise imports increased by 30.7% to US$177.3 billion in 2011, mainly driven by the strong private consumption.

In recent years, the destinations of Indonesian imports and exports have shifted significantly from the West to the East. In 2011, China (US$21.6 billion, 13.3%) surpassed Japan and became the largest importer of Indonesia’s non-oil exports, recording a 55% growth. The US ranked third (US$ 15.7 billion, 9.7%), recording an 18% growth. The share of Indonesian goods exported to China increased from 8.5% in 2004 to 13.3% in 2011. For Indonesia’s non-oil imports, China was the top source. The share of imported goods from China increased from 11.6% in 2004 to 18.7% in 2011. CAFTA tariff elimination is seen as conducive to further expansion of trade between the two countries.

Trade Policy

Indonesia is a member of the World Trade Organisation (WTO) since 1 January 1995, and has since then been lowering tariffs and non-tariff trade barriers.

Currently, import tariffs are mostly imposed on an ad valorem basis in Indonesia. The import duty ranges between 0-20% for most items, except for certain food items, alcohol, perfume, cosmetic or toilet preparations, plastics, ceramic products and cars, which have duties ranging from 30% to 170%.

Most of the imports are subject value-added tax (VAT) in Indonesia. The standard rate of VAT is currently 10%. In addition, there is a luxury sales tax imposed on items, such as large-size televisions, sports equipment, carpets, jewellery and etc. The luxury goods sales tax rates range from 10% to 200%.

However, exports to Batam, Bintan and Karimun (free trade zones (FTZ) just south of Singapore) are free of import tariffs, VAT and luxury goods tax. These FTZ, particularly Batam, are popular as an offshore production bases for Singapore manufacturers.

Though the Indonesian government has striven to reduce the number of items subject to various import restrictions, some imported goods are still subject to certain restrictions, such as special licences and limited import volume. These goods include rice, sugar, alcohol, medicine, engines and pumps, motor vehicles and batteries.

Indonesia is a member of ASEAN, and thus it is committed to the ASEAN Common Effective Preferential Tariffs (CEPT) scheme, under which all industrial products traded within ASEAN are subject to import duties of 0%-5% only. ASEAN has signed individual free trade agreements (FTA) with China, Japan, Korea, India, Australia and New Zealand.

Under the China-ASEAN Free Trade Agreement (CAFTA), to which Indonesia is a signatory member, Chinese exports enjoy tariff-free access to the Indonesian market since July 2005, and tariffs on most goods were eliminated by 2010.

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Posted: 28 February 2012

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