Indonesia

Indonesia’s economy to continue demonstrate resilience

As was the case in 2023, Indonesia is again set to post resilient economic growth in 2024. Indonesia’s goods exports (22% of GDP) are set to remain damped by a still sluggish global demand, notably from China and the US – the country’s top two export markets accounting together for around a third of the total. In addition, although some commodities exports such as palm oil, liquified natural gas or copper could see prices on an upward trend, raw material exports may be subject to further export restrictions. As for nickel ore (2020) and bauxite (2023), exports of copper concentrates are expected to be banned to boost local processing after the two producers’ export permit expires at mid-2024. Exports of services should, however, benefit from the continued recovery in international tourism. In 2023, the sector welcomed almost twice as many travellers from overseas as in the preceding year, which represents 73% of the number recorded in 2019. On the domestic side, private consumption (53% of GDP) will remain robust, helped by rising wages (increased regional minimum wages and an 8% increment in wages for civil servants), higher pension payments (+12%), and extended social assistance programs – namely El Niño cash handouts and rice aid. In addition, households will continue to benefit from moderate inflation, which would ease from the previous year. Although Bank Indonesia (BI) reduced its inflation range target from 2-4% in 2023 to 1.5-3.5% in 2024, it should remain within the new corridor. Investment – both private and public – would keep expanding. The building of the new capital city on Borneo Island should contribute to the expansion. Foreign investment in the electric vehicle supply chain, notably in its nickel industry, would remain dynamic amid the global development of the market and tax incentives. That said, the election as President of Prabowo Subianto – a former army general accused of kidnapping and committing atrocities against pro-democracy activists in the 1980s – may stifle foreign investment inflows on back of fears of rising authoritarianism and social tensions. Meanwhile, a decline in interest rates in the second part of 2024 would support domestic investment. Reasonable inflation, as well as an expected monetary easing in the US that would support the Indonesian rupiah, are arguments for a change – albeit timorous – in Indonesia’s monetary policy.

Limited twin deficits

Despite uncertainty associated with Prabowo taking office in October 2024, the budget deficit should remain virtually unchanged this year, in line with the incumbent Jokowi government’s target of a public deficit below 3% of GDP. The 2024 budget, which went a 6.5% increase compared to the previous year’s, will focus on growth and social protection as well as food and energy security. Moreover, defence and national security are key points of the budget amid a complex geopolitical environment, leading to a 20% increase in the defence budget. Public debt, increasingly domestic (72% of the total), would therefore remain moderate.

The limited current account deficit could slightly widen in 2024. The trade surplus may narrow due to subdued export prospects and higher import bills linked to energy and food prices. Oil in particular (the leading import item) and sugar may see their costs increase. In addition, the building of the new capital city would result in rising construction materials imports. Meanwhile, tourism receipts will help to lower the services deficit. The primary income balance, dragged down by debt interest payments and profit repatriation, will remain the main driver of the current account deficit. However, it would be covered by investment, especially in the form of FDI. Foreign exchange reserves would therefore remain adequate, standing at 6.7 months of imports in December 2023. The obligation for commodity exporters to retain a part of their foreign exchange earnings onshore for three months, introduced in 2023, may further support reserves.

Uncertainty looms ahead of Prabowo’s Presidential inauguration in October 2024

The country went to the polls in February 2024 to elect the next President, Vice President, members of the People's Consultative Assembly, and provincial legislatures. Although very popular (a poll released in January showed 80.8% of respondents were satisfied with his performance in his last year in office), the incumbent President Jokowi of the Indonesian Democratic Party of Struggle (PDIP) was not eligible to stand for re-election as he was ending his second consecutive five?year term. The President-Vice President duo formed by his defence minister Prabowo Subianto and his running-mate Gibran Rakabuming, the eldest son of outgoing leader Joko Widodo, was the undisputed winner of the election. It won by a landslide lead, securing 58.6% of the votes and therefore avoiding a runoff. However, despite the duo’s massive lead in the presidential votes, Prabowo’s Gerindra Party is secured only 13.2% of the votes in the legislative race. Furthermore, Prabowo’s Advanced Indonesia Coalition, which encompasses eight political parties, including Gerindra, is unlikely to secure a simple legislative majority. Despite the announced continuation of Jokowi’s policies, it remains unclear if the PDIP - which secured the most seats - will support the coalition, which could challenge his ability to reform. This risk comes on top of a backward slide in democracy linked to Prabowo's personality and past. According to The Economist Intelligence Unit's Democracy Index, Indonesia had already slipped two places in 2023, to 56th out of 167 countries.

On the external front, Indonesia should maintain its non-alignment policy with respect to US-China geopolitical rivalry. After having faced a 20-year ban from entering the US until he became defense minister in 2019, Prabowo may have reluctance towards the West. Given China's economic weight in the Indonesian economy, Prabowo is likely to maintain an understanding with Beijing, although he may be firm with China on territorial issues in the South China Sea. Although China has recognised Indonesia's sovereignty over the Natuna Islands, it claims part of the waters surrounding them that host fisheries resources and an Indonesian oil platform.

Payment

Cash, cheques, and bank transfers are each popular means of payment in Indonesia. SWIFT bank transfers are becoming more popular as an instrument of payment for both international and domestic transactions due to the well-developed banking network in Indonesia.

Standby Letters of Credit constitute a reliable means of payment because a bank guarantees the debtor’s quality and repayment abilities. Furthermore, the Confirmed Documentary Letters of Credit are also considered reliable, as a certain amount of money is made available to a beneficiary through a bank.

Debt Collection

Amicable phase

The first step to recovering a debt is to negotiate the issue with the debtor to attempt to resolve the issue amicably. There is an inherent Indonesian culture and ideology (Pancasila) where amicable settlement is encouraged. Creditors usually issue a summon/warning letter to the debtor, which outlines a statement concerning the debtor’s breach of commitment. The letter also calls for a discussion to determine whether the dispute should be settled through the court system. If the amicable phrase does not result in a settlement, the parties may trigger legal action.

Legal proceedings

The Indonesian judicial system comprises several types of courts under the oversight of the Supreme Court. Most disputes appear before the courts of general jurisdiction, with the Court of First Instance being the State Court. Appeals from these courts are heard before the High Court (a district court of appeal). Appeal from the High Court, and in some instances from the State Court, may be made to the Supreme Court.

Ordinary proceedings

Ordinary legal action may commence when the parties have been unable to reach a compromise during the amicable phase. The creditor may file a claim with the District Court, who is subsequently responsible for serving the debtor with a Writ of Summons. If the debtor fails to appear at the hearing to lodge a statement of defence, the court has discretion to organize a second hearing or to release a default judgment (Verstekvonnis).

Prior to considering the debtor’s defence, as previously mentioned, the court must first verify whether the parties have tried to reach an agreement or amicable settlement through mediation). If the parties have undergone the mediation process, the panel of judges will continue the hearings and the parties’ evidence will be examined. The judge will render a decision and may award remedies in the form of compensatory or punitive damages.

District Court will usually take from six months to a year before rendering a decision in the first instance. The proceedings may take longer when a case involves a foreign party. 

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Enforcement of a Legal Decision

When all appeal venues have been exhausted, a domestic judgment becomes final and enforceable. If the debtor does not comply with the judge decision, the creditor may request the District Court to commend execution by way of attachment and sale of the debtor’s assets through public action.

Indonesia is not part to any treaty concerning reciprocal enforcement of judgments, making it highly difficult to enforce foreign judgments in Indonesia, or to enforce Indonesian court decisions abroad. Because foreign judgements cannot be enforced by Indonesian courts within the territory of Indonesia, foreign cases must therefore be re-litigated in the competent Indonesian courts. In such a case, the foreign court judgment may serve as evidence, but this is subject to certain exceptions as regulated by other Indonesian regulations.

Insolvency Proceedings

There are two main procedures for companies who are experiencing financial difficulties:

Suspension of payments proceedings

This procedure is aimed at companies that are facing temporary liquidity problems and are unable to pay their debts, but may be able to do so at some point in the future. It provides debtors with the temporary relief to reorganize and continue their business, and to ultimately satisfy their creditors’ claims. The company continues its business activities under the management of its directors, accompanied by a court-appointed administrator under the supervision of a judge. The company must submit a composition plan for the creditors’ approval and for ratification by the court. The rejection of the plan by the creditors or the court will result in the debtor’s liquidation.

Liquidation

The objective of liquidation is to impose a general attachment over the assets of bankrupt debtors for the purpose of satisfying the claims of their creditors. It can be initiated by either the debtor or its creditors before the Commercial Court. Following the submission of the petition, the court will summon the debtor and its creditors to attend a court hearing. Once bankruptcy has been declared, the directors of the debtor company lose the power to manage the company, which is transferred to the court-appointed receiver who then manage the bankruptcy estate and the settlement of the debts. The debtor’s assets will be sold by way of public auction by the appointed receiver.

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Last updated: June 2023