ANALYSIS AS AN EMERGING MARKET

INDONESIA
Andrea Kick
FRN16Victor Espinoza
FRN16-509

DEMOGRAPHICS
Indonesia has a total
population that rounds the
255 million people, is the 4th
largest country regarding
population.1
The
annual
national
population growth has been
an average of 1.49% from
2000-2010 and 1.2% until
2015 according to data from
the World Bank.

The
urban-rural
population
ratio
has
changed
from
being
concentrated in rural areas
to conglomerate into big
cities, the biggest cities of
Indonesia are found on the
island of Java.2
The majority of
the
indonesia
population
practice
the muslim relition,
being these a 87% of
the total population.
The major segment
of population resides
within
the
economically active range of age (15-64 yrs).3
A survey made by BCGs Center of Consumer and Customer Insight found
that 91% of population felt financially secure being this higher when compared to
the BRI nations.4 Euromonitor estimates a disposible income of US$11,300 from
2014 and forward, coming from US$6,300 and also is expected that the middle

11 Indonesia Investments Population of Indonesia http://www.indonesiainvestments.com/culture/population/item67

2 United Nations on Indonesia http://un.or.id/en/

3 CIA World Factbook Indonesia https://www.cia.gov/library/publications/the-world-factbook/geos/id.html
4

BCG Perspectives-Indonesias Rising Middle-Class and Affluent Consumers

https://www.bcgperspectives.com/content/articles/center_consumer_customer_insight_consumer_products_indo
nesias_rising_middle_class_affluent_consumers/?chapter=2

class will expand to something

near 20 million household by
2030.5

Fiscal Conditions
The average annual growth has been 5.35% since the year 2000 until
2016 reaching an all-time high of 7.16% in the 2004 against an all-time low of
1.56% in the year 2001, as reported by the Indonesian Statistics. 6
Indonesia reported a
guvernment debt to the GDP
of 27% of it. From year 2000
until 2014 Indonesia has
averaged a level of 41.23%
with an all-time high of
87.43% in 2000 and an alltime low of 22.96% in year
2012 as reported by the
Ministry of Finance of the
Republic of Indonesia.7

The consumer prices rose a total of 3.31% as compared to last year

october. Core inflation rose 3.08%.

5 Blog Euromonitor-Top 5 Emerging Markets with the Best Middle Class Potential
http://blog.euromonitor.com/2015/09/top-5-emerging-markets-with-the-best-middle-class-potential.html

6 Trading economics-Indonesia GDP annual growth http://www.tradingeconomics.com/indonesia/gdp-growthannual

7 Trading Economics-Indonesia Government debt to GDP

http://www.tradingeconomics.com/indonesia/government-debt-to-gdp

Inflation Rate in Indonesia is

reported
by
the
Statistics
8
Indonesia.

The USDIDR increased

45.0000
or
0.34%
to
13,390.0000 on Thursday
November
17
from
13,345.0000 in the previous
trading session. The USDIDR
changed +1.94% during the
last week, +2.76% during
the last month and -3.13%
during
the
last
year.
Historically, the Indonesian Rupiah reached an all-time high of 16650 in June of
1998 and a record low of 888.11 in November of 2010. 9

Economic Conditions
Indonesia is the largest economy in
Southeast Asia. Its gross domestic product
(nominal) in the year 2015 is US$861.933
billion and the GDP per capita (PPP)
US$11,10010. After the year 2012 the GDP
has seen a slowdown as depicted in the
illustration.
The downtown can be explained with
the
loss
of
the
export
boom
of
11
commodities . As for the year 2016 the
GDP is said to be growing again to
US$936.955 billion12. Before the export of
commodities and services was the reason
for growth. Also because the price for
labour and therefore for services and
commodities were rising, the exports in this
8Trading Economics-Indonesia Inflation Rate
http://www.tradingeconomics.com/indonesia/inflation-cpi
9 Bloomberg-USD-IDR Exchange Rate
https://www.bloomberg.com/quote/USDIDR:CU
10World Bank Indonesia
http://wits.worldbank.org/CountryProfile/en/Country/IDN/StartYear/2011/EndYear/2015/Ind
icator/NY-GDP-MKTP-CD

field were decreasing. In this year the shift towards growth that is highly
motivated by innovation and internal demand can be seen. This phenomena can
also seen in China or Brazil 13. The GDP real growth rate in the last years was very
positive. In the last three years it was growing around 5% whereas in developed
countries it would be around zero or even negative. The Inflation rate in the last
10 years was stabilizing. In 2006 it was quite high with around 15% which meant
a weaker currency and lower return on investments. Since the last five years the
inflation was around 5 to 10 percent as can be seen in the figure. In the year
2014 Indonesia has Foreign Exchange Reserves of US$111.9 billion 14. Their
imports were 178.2 billion in 2014 which means Indonesia would be able to
finance its imports for more than half a year. In case of recession this is very
important and Indonesia has a good position. The Investment as a percentage of
GDP was 34.5% in the year 2015. This shows Indonesias efforts in terms of R&D
and its way of being internationally competitive 15. The debt-to-GDP ratio is 27
percent, which is compared to other emerging markets like Brazil with 70 percent
quite low16.

Indonesias positive growth in the past, the successful shift to growth not only
through exports but also internal consumption and the other benchmarks imply
that Indonesias growth is sustainable and longer lasting.

11CIA Factbook Indonesia https://www.cia.gov/library/publications/the-worldfactbook/geos/id.html

12IMFhttp://www.imf.org/external/pubs/ft/weo/2016/01/weodata/weorept.aspx?
pr.x=26&pr.y=7&sy=2010&ey=2016&scsm=1&ssd=1&sort=country&ds=.&br=1&c=53
6&s=NGDP_RPCH%2CNGDPD%2CNGDPDPC%2CPPPGDP%2CPPPPC
%2CPPPSH&grp=0&a=

13The emerging markets handbook

14 http://www.indonesia-investments.com/news/todays-headlines/foreign-exchangereserves-indonesia-grow-in-june-2016/item7000?

15 http://www.economywatch.com/economic-statistics/economicindicators/Investment_Percentage_of_GDP/

16http://www.indonesia-investments.com/news/todays-headlines/taking-a-look-intoindonesia-s-public-debt-to-gdp-ratio/item6669

Financial
Factors
Indonesian
banks
were
ranked the best
among
the
ASEAN
countries. They
have
the
strongest
balance sheets,
enough capital
to
support
business and in
terms
of
17
exogenous shocks help them to sustain . Indonesias non-performing loan ratio
in 2015 was 2.4% which is very positive. The Indonesian Rupiah was in 2015
Asias most-volatile currency. But Indonesia therefore had taken measures 18. The
rating agency Fitch rated Indonesia in the year 2011 to BBB- which means stable.
That meant, considered from an investment perspective, that investing in
Indonesia was changing from a speculative grade to an investment grade 19.
Trade
In a globalized world trade seems to be one of
the key drivers when regarding the growth of
emerging markets. The trade balance during the
last years was varying20. In the chart you can see
surpluses as well as deficits. In 2016 there
seems to be a surplus21. As there are neither
large surpluses nor large deficits for longer
periods there is no need to worry. When it comes
to trade barriers, Indonesia is part of the ASEAN
and therefore allows quite open trade. Apart
from that Indonesia also has Free Trading
Agreements with many countries. Nevertheless
there had been some measures that prohibited
foreign investments in infrastructure which has
been given up in 2016 and opened the economy
up22. in 2014 Indonesia was the 25th biggest

17https://www.oxfordbusinessgroup.com/overview/indonesia-working-towards-inclusive-and-efficient-financialservices

18http://www.bloomberg.com/news/articles/2015-06-04/bank-indonesia-relaxes-fx-rules-to-rein-in-mostvolatile-rupiah

19 http://www.reuters.com/article/indonesia-ratings-fitch-idUSL1E7NFBZ220111215
20 http://wits.worldbank.org/CountryProfile/en/Country/IDN/Year/2014/Summary

exporting country in the world23. Nevertheless there are also high imports and
Indonesia is shifting from a country that is dependent on their commodity
exports to a more independent and innovative country. This is necessary as by
now the country is still dependent on exports of (palm) oil, timber and other
primary goods and attract foreign investments.

Political stability and governance

21http://www.indonesia-investments.com/news/todays-headlines/trade-balance-indonesia-598-million-surplusin-july-2016/item7098?

22http://www.bloomberg.com/news/articles/2016-02-10/indonesia-in-big-push-to-openup-economy-to-more-investment

23 http://atlas.media.mit.edu/en/profile/country/idn/

The political stability and a good governance is crucial when determining

emerging markets. There is no chance of doing business where war and threat is
determining the daily life. On the other side an emerging market does not
necessarily be a democracy. China as an example of dictatorship was
economically doing very well and many other countries just passed a
dictatorship.
More
important is, that
there are property
rights
and
legal
rights existing24. The
economist
Intelligence
Unit
(EIU) political risk is
measured from 0 to
100 with 100 being a
very
high
risk.
Indonesia itself was
in the last years
improving that index
so that in the year
2012 the scale of 55
could be reached.
Indonesias Freedom from corruption index continuously rose and in the year
2016 reached the score of 34. This is a positive development, as 100 means
complete freedom of corruption25.The political stability index during the last
years improved from -1,87 in 2004 to -0,37 in the year 2014 (-2,5 being worst
and +2,5 being best). All the parameters show, that Indonesia is improving in
this area during the last ten years.

24 the emerging market handbook

25 http://www.theglobaleconomy.com/Indonesia/herit_corruption/

Business Conditions
According to the World Banks report about Doing Business Indonesia
was in 2010 ranked 126 out of 1 to 183 ranks and could improve up to the rank
109 in 201526. The ranking monitors the regulations that influence the ease of
doing business in a certain country. China for example is on rank 84 and the
Philippines on 10327. All in all the positive development needs to be highlighted.
It suggests, that the country is taking steps to simplify the way of doing business
in Indonesia.

Technology, innovation and infrastructure development

Internet penetration has largely grown from the year 2000 with only 0.93%
of Indonesians using the internet to 17.14% in 2014 28. The mobile phone
penetration is Indonesia in the year 2016 is nearly 40% of the population. It is
expected to grow even stronger and remarkably in 2016 Indonesia has already
become the third largest market for smartphones in the Asian-Pacific region,
following China and India29. One of the bottlenecks of Indonesias growth is its
infrastructure. Huge traffic jams, bad conditions of roads and even safety issues
hamper the country30. The government is aware of this and started huge
infrastructure projects which are going to take time until being established 31.

Human development
According to UNESCO Indonesia spent 3.37% of its GDP on education in
the year 2013. In the UK it was in comparison 5.72%. The figure shows the
percentage of GDP that is spent on education in Indonesia from 2007 to 2013 32.

26 http://www.tradingeconomics.com/indonesia/ease-of-doing-business
27http://www.indonesia-investments.com/id/news/todays-headlines/ease-of-doingbusiness-in-indonesia-world-bank-s-doing-business-2016-ranking/item6094

28 http://www.theglobaleconomy.com/Indonesia/Internet_users/
29http://www.indonesia-investments.com/news/todays-headlines/indonesia-is-the-3rdlargest-smartphone-market-in-the-asia-pacific/item6777

30 http://www.countryreports.org/travel/Indonesia/traffic.htm
31http://www.pwc.com/id/en/media-centre/press-release/2015/english/pwcreportforecasts-indonesian-infrastructure-investment.html

32 http://www.theglobaleconomy.com/rankings/Education_spending/

The health spending per capita in

2014 was US$99. India is below
with US$75, whereas developed
countries like France or Sweden
spend around 5 to 6 thousand
US$
per
capita.
The
life
expectancy of someone born in
2014 is 69 years old, and the
literacy rate in 2011 was about
92.81% which is very positive33.

Environment
Indonesia had a huge
growth in the last years
concerning
the
CO2
emissions. This is typical for
emerging markets. Developed
markets already passed this
step of high CO2 emissions
and are now trying to reduce
those
by
means
of
technological advantage and
awareness. In the chart you
can see the growth in
Indonesias CO2 emissions34:
The amount of renewable
energy output was going
down. In 2001 it was 17.4% of the total energy output whereas in 2012 it was
only 11.4%. The amount of electricity production from coal was increasing from
2001 37.2% to 51.2% in 201335. This can be explained with the huge growth of
economy and therefore higher demand for energy.

Capital Markets
It is important for an emerging market to attract foreign capital and
therefore market transparency is also very important. The foreign direct
investment (FDI) in India was rising extremely from the beginning of the 20th
century. After having FDI of US$25.3bn in 2014 it was going down in 2015 to
33 http://en.unesco.org/countries/indonesia
34 http://data.worldbank.org/indicator/EN.ATM.CO2E.KT?
end=2013&locations=ID&start=2000

35 http://data.worldbank.org/indicator/EG.ELC.COAL.ZS?locations=ID-CN

US$15.5bn36. In February 2016 Indonesia opened up 35 business sectors for

100% of foreign ownership, which definitely will attract more FDI.

Opportunities for Investment According to Sectors

Indonesia presented a fast growth in the late 1990s decade fostered by
the Suharto government, as result of that the macroeconomic indicators started
to gain momentum and came back on track in the mid 2000s, one of the
principal factor that influenced this growth was the increase of internal products,
which helped to boost the local economy. 37

The economy is mostly based on the next 3 sectors:

Agricultural
Industry
Services

In the past five decades three main sectors have dominated the
Indonesian GDP, Indonesia changed from a highly agricultural economy to a
more quite balanced one among these three sectors, thus depending much less
on their primary good exports but still being a big part of the total nowadays.
Despite the drop of the agricultural sector as a percentage of the GDP it
does not mean that the activity were reduced as it remains with similar levels of
production, the Industry and
service sector arose in an
abruptly way.38
Here a table with the
behaviour of these three
sectors through the past
decades:

Industry
The principal pillar of Indonesias long term economic expansion strategy which
explains its faster growth, more than any other sector, in recent years. Indonesia
is now poised to outpace Malaysia and Thailand as the major regional export and
36 http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD?locations=ID
37 Indonesia Investments-General Economic Outline of Indonesia
http://www.indonesia-investments.com/culture/economy/general-economicoutline/item251
38 Indonesia Investments-Composition of Indonesias Economy: The three main
sectors http://www.indonesia-investments.com/culture/economy/generaleconomic-outline/item251

manufacturing hub, attracting this way a large amount of potential investors that
are changing their options of outsourcing for Indonesia over China, Thailand or
Malaysia based on its recent growth and apparent stability as a whole, sizeable
low-cost labour and large domestic market.39
The major sub-sectors are:

Pharmaceuticals
Automotive Manufacturing
Textiles

Services
As one of the most important growing sectors in Indonesias economy right now
the subsectors that boost this area are mainly:
Trade
Restaurants & Hotels
Government Services
Transport, Storage & Communications
Finance, Insurance
Real Estate
Business Services
The growing role of the services sector in the Indonesian economy is not
the result of its ingenuity, nor does it mean that the Indonesian economy is
entering a stage of advanced economy.40 At the same time this service sector is
highly complemented by the other major sectors as for deliver the level of
services required, Air transportation and insurance has grown very quickly in
order to satisfy the demand produced by the manufacturing sector. 41

Agriculture
With its vast variety of products Indonesia is still a major key producer in the
world being this sector still a considerable big part of Indonesias GDP, being also
the main provider of income to the majority of Indonesian households. By 2012
this sector only employed a little bit more than 49 million individuals, which was
back then the 41% of the total labour force. 42
The most important agricultural products are:

Palm Oil

39 Oxford Business Group-The Report: Indonesia-Industry

https://www.oxfordbusinessgroup.com/indonesia-2015/industry
40 The Jakarta Post-Service Sector: An alternative route to high growth?
http://www.thejakartapost.com/news/2010/04/12/services-sector-an-alternativeroute-high-growth.html
41 Countries Quest-Indonesia-Economy, Services
http://www.countriesquest.com/asia/indonesia/economy/services.htm

Rubber
Cocoa
Coffee
Tea
Cassava
Rice
Tropical Spices

The Indonesian government has placed self-sufficiency in certain

agricultural products high on the agenda. In particular this applies to rice which
by far is the main staple food for the majority of the population; Indonesia has
the highest per capita rice consumption in the world (approximately 139 kilo per
capita per year). However, the country is still dependent on imports from
Vietnam and Thailand to secure the domestic rice supply. 42

42 Indonesia Investments-Agricultural Sector of Indonesia http://www.indonesiainvestments.com/culture/economy/general-economicoutline/agriculture/item378?