Overseas view of Indonesia
Overall Standards Summary
Indonesia achieves low overall compliance with international standards and codes, with a score of 38.33 out of 100 in our Standards Compliance Index. The country achieves a relatively high level of compliance for the three standards on macroeconomic policy and data transparency. In the areas of institutional and market infrastructure, however, Indonesia’s compliance with international norms is less promising. Indonesia’s legal framework to combat money laundering and terrorist financing is deficient in several key areas despite the country’s recent attempts to the contrary.
Although the country’s corporate governance regime has a sound legal framework, its effective implementation has been questioned by the World Bank in its assessment of Indonesia. Indonesia has been assigned an ‘intent declared’ compliance level for its Payment Systems, Accounting and Auditing practices as the authorities have clearly identified their willingness to comply with international standards in these areas. Standards regarding financial regulation and supervision all share a common theme – there is a strong intent on the part of the regulators to implement international standards but there is little evidence of actual adoption or implementation of these standards.
For instance, in the case of banking supervision, the Bank Indonesia, the banking sector supervisor, conducts regular self-assessments of Indonesian banks’ adherence to the Basel Core Principle. However, comprehensive results of these self-assessments are rarely made public making it difficult to assign a higher compliance level for the country.
With an overall score of 5.07/12, Indonesia is below standard on the economic, legal, and political indicators that make up our Business Index. Indonesia has a market-based, mixed economy. Although government expenditure as a percentage of GDP is low, SOEs still play a prominent role in the oil and gas, retail distribution, and electric power generation and transmission industries. Indonesia has significant foreign exchange and capital controls and lacks an adequate foreign investment law.
Trade regulations, on the other hand, are less restrictive although the country does impose protective tariffs. The tax regime in Indonesia is welcoming towards investment, both domestic and foreign, and the country has a well established bankruptcy law. Indonesia has signed and ratified the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States. Corruption is extensive and of concern to investors, reflected in Indonesia’s ranking of 143rd out of 180 countries in Transparency International’s 2007 Corruption Perceptions Index.
Indonesia is ranked either in the 3rd or the 4th quintile of the global indices benchmarking political, economic, business, and human capital climates, as shown below. The exception is the Bertelsmann Index, where its rank in the 2nd quintile reflects progress in transitioning toward a market democracy. Difficulties remain, however. The Heritage Foundation Index shows that the government interferes extensively with market prices and there is a lack of strong economic institutions.
The World Bank’s Doing Business snapshot of 178 countries offers a three-pronged evaluation of the procedure for closing a business, in which it looks at the time required, the cost (as a percentage of the debtor estate) and the recovery rate for creditors (expressed in terms of cents on the dollar). In Indonesia, it takes an average of 5.5 years to close a business compared to the regional average of 2.7 years and the average for member states of the Organization for Economic Cooperation and Development (OECD), which averages 1.3 years. The cost of proceedings averages 18%, whereas the regional average is 23.2%, and the OECD average is 7.5%. Recovery rates are low, averaging 12.6 cents on the dollar in Indonesia. Regionally, the average is 28.1, and in the OECD states the return averages 74.1 cents.
The main obstacles for further development in Indonesia include deficiencies in basic infrastructure as well as health care and primary education, as highlighted by the Global Competitiveness Index. Furthermore, the country is limited in terms of capital access, due to its macroeconomic environment. Corruption is perceived to be very high, as evidenced by Indonesia’s performance in Transparency International’s Corruption Perceptions Index.