By Dan Berthiaume
Indonesia offers an intriguing sourcing option for BPO buyers. With an estimated 237 million residents and democratic government, it is the world’s fourth-most-populous country and features a large service industry.
Economic Outlook: Steady but Moderate Growth
According to an IHS Global Insight Report on Indonesia, economic growth in the country reached a level of 6% in 2010 and should maintain a fairly steady pace through 2015. Growth in GDP, private consumption, investment, imports and exports should all hover around the 6% for the next few years, with moderate increases in government spending and inflation and increased foreign direct investment resulting from efforts at political and economic reform. Economic corruption remains an issue.
Various Factors Produce Overall Moderate Risk
However, IHS analysis indicates the country on the whole offers a moderate risk as a place to do business, with a trend toward moderate economic growth as its largest bright spot contrasted against some operational and legal issues. On an overall risk scale of 1 to 5, with 1 minimum risk and 5 maximum risk, IHS places Indonesia squarely in the middle with a rating of 2.76. This encompasses medium individual risk scores of 2.5 for political and tax issues and 2.75 for economic and security issues, along with significant risk scores of 3.0 for operational issues and 3.25 for legal issues.
Following are brief overviews of IHS analysis of Indonesia’s risk factors in each of these areas except the economy, which has already been reviewed (see above).
Political – President Susilo Bambang Yudhoyono began his second five-year term in October 2009 following a first term of economic and political reforms, but in his second term has seen his Cabinet hit with several scandals. In addition, although Indonesia functions as a democratic republic, the military retains a large degree of control.
Tax – The government ended a tax amnesty policy in 2009 that allowed taxpayers to settle government debts after admitting previous violations. The measure was allowed to expire despite bringing in an estimated $500 million USD in tax revenue. IHS says Indonesia has a high personal income tax rate and a moderate corporate tax rate, with taxes relying heavily on withholding due to difficulties in tax collection. In January 2009, President Yudhoyono officially designated a free-trade zone for Batam, Bintan, and Karimun in the Riau Islands. Companies operating on the islands no longer need to pay value-added tax (VAT), import duties, or luxury tax, although enforcement is strict and imports and exports can only be loaded and unloaded in certain ports.
Security – Indonesia has experienced terror attacks both from global anti-Western groups and domestic separatist groups, although IHS says the risk has subsided since improved counter-terrorism measures were implemented in 2005. In addition, Indonesian waters are subject to piracy attacks and as a large archipelago nation, Indonesia does not have consistent policing and security can vary greatly from one island to the next.
Operational – IHS credits Indonesia for having “positive governmental attitudes” toward foreign investment and instituting business regulation reform. However, HIS says corruption is “endemic” and inefficient bureaucracy and red tape also pose business challenges. In addition, an “undereducated” labor force and “empowered” labor unions can also pose problems.
Legal – IHS says Indonesia’s legal system can be “opaque, incoherent, and time-consuming.” Although legal reforms are taking place, it will take for them to have significant impact.