Economic Overview of Indonesia

3816 WordsFeb 21, 201116 Pages
Executive Summary Executive Summary This paper examines the economic environment of doing business in Indonesia. It takes into account several dimensions such as political, legal, economics, social and technology factors. However, economics and political factors are covered in depth as they have a greater impact on establishing advantages and challenges when a firm might decide to set up a business in Indonesia. The results show that not only legal origins have an impact on corporate finance, ownership and structure, but also politics. The poor quality of the judiciary and legal system and the bureaucracy is much more a legacy of the Soeharto government than of the Dutch colonial system (and French civil law). From the analysis of…show more content…
In order to understand the causes of these fluctuations and its recent rapid increase, it is crucial to look at the different indicators that have caused the aforementioned fluctuations. Business Environment In 2004, Indonesia overall score dramatically decreased. It was mainly due to a decrease of its monetary and investment freedom indicators (see Exhibit 4 and 5 relatively). Whereas its rapidly increase from 2005, it was mainly due to an increase of its trade (see Exhibit 6) and again monetary freedom indicators. Between 2002 and 2004, the monetary freedom indictors decreased as a result of a number of factors, including a loss of policy credibility, currency weakness, deteriorating terms of trade and a reduction in fuel price subsidies. In 2004 the annual inflation reached 18.14%, Inflation became the principal threat to economic stability; the government intervened reforming the monetary policy. (see Exhibit 7) As a result of this action, the capital of the banking system become more adequate and liquidity indicators improved over the years. The quality of loan portfolios has also been strengthened. State-owned banks have a large presence in the sector and the non bank sector is relatively small. Interest rates have been declined and this contributed to increase lending. Rapid increase in credit expansion compared to funding growth is a
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