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Investment Environment

Developments in Indonesia during the Asian economic crisis of 1997–98 impacted heavily on the exports imports in particular. Steady growth in economic freedom over the past 5 years has tapered off more recently. However, since 2011, economic freedom in Indonesia has advanced by over 2.0 points, reflecting a more sustained commitment to opening up the financial sectors and improving the investment regime. Other changes have led to score advances in 6 of the 10 economic freedoms, reflecting relatively broad-based policy improvements.

Nonetheless, economic freedom remains weakly entrenched in Indonesia. The judiciary has demonstrated some independence, but corruption is present. Overregulation of the business and labor markets leads to inefficiencies in labor supply and business formation. Despite its presence in a dynamic East Asian trading network, Indonesia remains relatively closed off from the global marketplace.


2.1 Potential Indonesia’s Economic

Indonesia is a large country with the largest economic in South East Asia, that grow fast. Indonesia has an abundant potential natural resources and human resources, that can be used as an opportunity to advance Indonesia’s economic. Recently, a new set of emerging economies has gained public attention. Members of this set are countries that contain promising markets with diverse economies, reasonably sophisticated financial systems and fast growing populations.

Indonesia’s strong points that explain increasing foreign investments and the recent macro economic growth :
• Abundant and diverse natural resources
• Young, large and burgeoning population
• Political stability (relatively)
• Prudent fiscal management since the late 1990s
• Strategic location in relation to the giant economies of China and India
• Low labour costs

Indonesia is a market economy in which the state owned enterprises and play a significant role, thus shows a number of highly positive features at the beginning of what can become a period of substantial economic development.


2.1.1 Growth of Indonesia’s economic

The fall of economic conditions in Indonesia is not a problem to the growth of Indonesia’s economic. The goverment strive to encourage the economic development that can give a positive impact to the growth of Indonesia’s economic, with a minim infrasturcture in Indonesia, that makes the world’s investors interested to invest here in Indonesia. Indonesia’s economic has an enormous promise because Indonesia has a young population and grow fast, that powering economic growth.

There are several ways to realize the potential of the growth of Indonesia’s Economic :
• A modern development infrastructure and efficient. The lack of sufficient infrastructure makes another sector does not efficient.
• Improve the investment climate that conducive to the absorbtion of new technologi, and the capacity to compete on producing a large amount of goods and services.
• All of that have to done with the international trade policy that support the process of Indonesia’s economy integration with the world.
• Become a manufacturing exporter, in terms of export Indonesia is still dependent on (raw) commodity exports. To overcome this vulnerable position Indonesia needs to diversify its export products, particularly boosting downstream industries for the manufacturing of value-added products. Improving the domestic supply side is also important as the Indonesian population (which is characterized by a rapidly expanding middle class which numbers about 75 million now) is demanding more and more products.
• Lower the benchmark interest rate. Indonesia’s economic slowdown (which started in 2011) is partly self-inflicted as Bank Indonesia raised its key interest rate (BI rate) in a move to combat high inflation (that emerged as a consequence of Indonesian subsidized fuel price hikes, curb the country’s wide current account deficit, support the rupiah exchange rate, and to avert future capital outflows ahead of an expected US interest rate hike later this year.
• Foster political stability. Investors prefer to invest in Indonesia when the political situasion is stable.
Indonesia have to take the advantage of economy resources, not just from human resources and natural resources, and utilize every oportunity from every aspects.


2.1.2 GDP and Rate of Indonesia’s economic Grow

Gross Domestic Product (GDP) is the monetary value of all the finished goods and sevices produced within a country’s borders in specific time period. Though GDP is usually calculated on an annual basis, it can be calculated on a quarterly basis as well.
GDP is one of the primary indicators used to gauge the health of a country’s economy. It represents the total dollar value of all goods and services produced over a specific time period; you can think of it as the size of the economy. As one can imagine, economic production and growth, what GDP represent, has large impact on nearly everyone within that economy.
According to www.tradingeconomics.com The Gross Domestic Product (GDP) in Indonesia was worth 888.54 billion US dollars in 2014. The GDP value of Indonesia represents 1.43 percent of the world economy. GDP in Indonesia averaged 214.72 USD Billion from 1967 until 2014, reaching an all time high of 917.87 USD Billion in 2012 and a record low of 5.98 USD Billion in 1967. GDP in Indonesia is reported by the World Bank Group
Indonesia’s economy is struggling against a backdrop of weaker external demand for commodities, delayed infrastructure spending and tight monetary policy. The government has introduced several stimulus packages, but real GDP expansion is still expected to remain sedate in 2016, at 5.2%, compared with forecast growth of 4.9% this year.


2.1.3 Potential of huge market

Indonesia is a developing country that have a big potential of huge market, because its society growth rapidly, and “Asia’s next big opportunity,” according to a new report from Boston Consulting Group, which cites its fast-growing economy (up 6.2% last year, forecast to grow 6.8% in 2013) and favorable demographics. . Indonesia is a populous country that makes business people interested to emerge in this potential market. We can see this potential market through the growth of middle class and affluent consumers.
The Indonesian archipelago has a very young working population (average age 28), more than 30% of whom belong to one of the world’s fastest growing middle classes. Overall purchasing power is increasing and major international brands in all sectors are falling over themselves to Indonesian consumers. The capital Jakarta boasts around 100 shopping centres where all the big chains have stores.
Domestic consumption is high. In the last three years, economic growth in the archipelago has been among the highest in the world in 2013, largely because of the Indonesian government’s policies to encourage foreign investment.


2.1.4 Stable economic situation

Despite slowing down in recent years, Indonesia’s growth trajectory remains impressive. The country’s gross national income per capita (Atlas method) has steadily risen. Today, Indonesia is the world’s fourth most populous nation, the world’s 10th largest economy in terms of purchasing power parity. It has made enormous gains in poverty reduction, more than halving the poverty rate since 1999 until 2014. The World Bank Group remains the largest provider of development finance and advice for Indonesia, and continues to positively impact development in many sectors. Inflation

Inflation has long been another problem in Indonesia. Because of political turmoil, the country had once suffered hyperinflation, with 1,000% annual inflation between 1964 and 1967, and this had been enough to create severe poverty and hunger. Even though the economy recovered very quickly during the first decade of New Order administration (1970–1981), never once was the inflation less than 10% annually. The inflation slowed during the mid 1980s, however, the economy was also languid due to the decrease of oil price that reduced its export revenue dramatically. The economy was again experiencing rapid growth between 1989-1997 due to the improving export oriented manufacturing sector, still the inflation rate was higher than economic growth, and this caused widening gap among several Indonesians. The inflation peaked in 1998 during the Asian financial crisis, with over 58%, causing the raise in poverty level as bad as the 1960s crisis. During the economic recovery and growth in recent years, the government has been trying to decline the inflation rate. However, it seems that Indonesian inflation has been affected by the global fluctuation and domestic market competition. As of 2010, the inflation rate was approximately 7%, when its economic growth was 6%. Inflation is affecting Indonesian lower middle class, especially those who can’t afford food after price hikes.

Historically, the level and volatility of Indonesia’s inflation rate have been higher than in peer emerging nations. Whereas these other emerging markets shared inflationary rates of between 3 and 5 percent during the period 2005 to 2014, Indonesia contained an average annual inflation rate of around 8.5 percent over the same period. There are 2 annual peaks of inflation in Indonesia. First, the December – January period always bring higher prices due to Christmas and New Year celebration, besides the traditional floods in January (a peak of the rainy season) cause a disrupted distribution channels in several cities, that cause a higher logistics costs. Second, the June – July period, where Inflationary pressures in these two months emerge as a result of the holiday period, and the start of the new school year. A marked increase is detectable in spending on food and other consumables (such as clothes, bags and shoes), accompanied by retailers adjusting prices upwards. Indonesia’s finance

The Indonesian financial market have recovery from the Asian Crisis in the late 1990s. Prudent fiscal management and strong economic fundamental have succedeed in realising robust growth in recent years. Indonesia’s financial situation in 2015 is different with the financial situation in 1997 – 1998. The financial situation in 2015 is much better fundamentally.
IMF assess Indonesia and other developing countries currently financial situation, affected by global crisis fluctuation. Indonesia believed can survive the turbulence, because of the experience encounter the crisis on 1997 – 1998.


2.2 Aiming at change of Indonesia’s economic

The Indonesian economy grew less dependent on oil and agriculture during the Soeharto New Order. The severe contraction of Indonesia’s economy at the time of the 1997 Asian financial crisis, however, highlighted the shortcomings of the New Order economic model (increasingly wasteful use of foreign investment, declining international competitiveness). Economic growth has gradually increased in 2001 (led by the export sector) until 2007; the figure for 2008 is estimated to be about 6.1%. Services, manufacturing (28%), agriculture (15%) and mining (9%) account for most of the origins of Indonesia’s GDP.
The Indonesian Government initiated a wide-ranging economic reform programme in 1998, with strong IMF advisory and financial support, to address the impact on Indonesia of the 1997 Asian financial crisis and to lay the foundations for long-term sustainable growth. On 1 January 2004 Indonesia graduated from the IMF’s lending programme, and in early 2007 took the decision to disband the Consultative Group on Indonesia. The World Bank welcomed this step as a further sign of Indonesia’s renewed economic confidence.


2.2.1 from import of resource to High added value trade

In 2013 Indonesia is the largest imported in the world. During the last 5 years, the imports of Indonesia have increased at an annualized rate.
The fear about Indonesia’s import escalation and export decline is quite obvious. Some trade policies have been implemented to tighten imports, such as introducing non-automatic licenses for imported products. These restrictive import policies add to many other regulations and policies that have been introduced to control Indonesia’s export of raw materials and intermediate inputs. These policies are in line with common perception that Indonesian industries should produce goods with higher added value. Such obsession with increasing domestic added value is not limited to raw material production, but also involves manufacturing products. The fact that almost 70 percent of industrial goods imported are parts and components has raised concern about the country’s dependence on imports. Import-phobia and the value-added obsession are not new to Indonesia. In fact, import substitution strategies such as local content requirements were implemented in the past without much success.


2.2.2 Trade of Indonesia

Indonesia posted a USD $ 709.4 million trade surplus in January 2015, according to the latest data from Statistics Indonesia (BPS) released on Monday 16th February. The economy of Indonesia expanded 5.02 percent in 2014, the slowest growth pace in five years. This economic slowdown is mainly caused by weak exports and slowing investment growth. Amid a sluggish global economy, demand for commodities has weakened hence resulting in low commodity prices. Indonesia, an important (mainly raw) commodity exporter, immediately feels the impact of lower commodity prices. Meanwhile, exports of unprocessed minerals have been banned by the Indonesian government since January 2014. Moreover, growth of investment realization in Indonesia has slowed in 2014 due to the political year (Indonesia organized legislative and presidential elections in 2014).


2.2.3 Situation of Export and Import each countries

Indoneisa’s export and import performance in 2015 is expected to improve as it is believed that the economic situation will not face any obstacles next year.


2.2.4 Situation of Export and Import each items

August 2014, Indonesia export 126,935 Completelety Build Up (CBU) vehicle units and 71,000 Completely Knock Down (CKD) vehicle units, while the total production is 878,000 vehicle units, so the export is 22.5 percent of total production. Automotive export is more than double of its import. Prediction, by 2020 the automotive export will be the third after CPO export and shoes export.
While year to date August 2015, Indonesia export 123,790 motorcycles. The dominant manufactures, export 83,641 motorcycles and announced to make Indonesia as a base of exporting country of its products


2.3 Change of industry’s structure

2.3.1 Agriculture

The agricultural sector of Indonesia comprises large plantations (both state-owned and private) and smallholder production modes. The large plantations tend to focus on commodities which are important export products (palm oil and rubber), while the smallhold farmers focus on rice, soybeans, corn, fruits and vegetables.
The most important agricultural products of Indonesia are:

• Palm Oil
• Rubber
• Cocoa
• Coffee
• Tea
• Cassava
• Rice
• Tropical spices

About 45% of Indonesian workers are engaged in agriculture. Because the population is rapidly increasing, the government seeks to achieve food self-sufficiency through expansion of arable acreage, improved farm techniques (especially the use of fertilizers and improved seeds), extension of irrigation facilities, and expanded training for farmers. Production of rice, the staple food, has been gradually increasing, and production comes close to meeting domestic requirements. This increase has resulted less from extension of cultivated area through the government’s resettlement policy than from expanded use of irrigation, fertilizers, and pesticides and cultivation of high-yielding hybrid rice, especially insect-resistant hybrids. It also reflects the success of the government’s “mass guidance” program, which provides technical assistance, easy credit terms, and marketing support through a system of village cooperatives. Additional support was provided by the National Logistics Board, which is responsible for price regulation and the national rice-rationing programs. Due to the rapid growth of the industrial sector, the agricultural contribution to GDP is expected to decline to 11.8% by 2003.


2.3.2 Food

Food and baverages industry in Indonesia has a significant increase in these past few years, both local and foreign brands. Nowadays local brands has increase production with a very good quality that help the growth Indonesia’s economic.

Indonesia’s economy is largely driven by rising household consumption, and one industry that thrives on this like no other is that of food and beverages. Sales growth is fuelled by rising personal incomes and increased spending on food and drink, especially from the growing number of middle class consumers. Consequently, this is also an industry where local companies have been particularly ambitious – and several of them have evolved into successful global exporters. At the same time, the internationalisation of local cuisine represents a prime opportunity for foreign companies to sell their products to Indonesian consumers, who are more and more open to new foods and flavours.


2.3.3 Vehicle

Vehicles sales are an important indicator to measure an economic conditions of a country.
The general picture in Indonesia is one of an automotive sector that has experienced positive growth, a trend that was clearly demonstrated in the period between 2005 and 2012. Over the same time span, domestic vehicle sales increased by a compound annual growth rate (CAGR) and this was mainly driven by the sales of commercial vehicles and passenger cars. Vehicle production also increased by a CAGR between 2005 and 2012. Indonesia has a relatively low vehicle ownership rate, but its high population means the overall market volume is significant. Low interest rates have helped to boost consumption and economic growth over the past few years. As a result, vehicle sales increase in sales.


2.3.4 Oil and Natural Gas

The landscape of the oil and gas industry in Indonesia, has experienced dramatic changes in recent years. The industry that have a very interested potency and profitability. The prospect of oil and gas Industry in Indonesia is very high related to the market of oil and gas in Indonesia and the big resource of oil and potency. This is because of oil and gas is the existing fuel and not yet owned by the substitution product which significant. Oil and gas Industry is the biggest contributor in devisa income and predominated by the government regulation with the monopolistic system.
Indonesia’s oil production declined over the last decade due to the natural maturation of producing oil fields combined with a slower reserve replacement rate and decerased investment. Most oil and gas production is carried out by foreign contractors under production sharing contracts arrangements.
The potency of oil and gas industry in Indonesia is big enough to be developed, especially in east side of Indonesia that have not been explored. The source of oil and gas with a low level difficulty exploration currently consumed up because of the exploitation and leaves a high level of difficulty.


2.3.5 Non Metallic

2.4 Issue of Indonesia’s Economic