Leadership and Democracy LabWestern Social Science

Introduction to Energy in Indonesia

The World’s Largest Archipelago: An Overview of Indonesia as a Political Risk Target

Written by: Nicholas Dang, Team Leader

Politically, Indonesia represents a positive trend towards democratization. Indonesia has held three rounds of peaceful parliamentary and presidential elections[1], in 2004, 2009, and 2014, suggesting that democracy is finally taking root after a highly uncertain period following the fall of President Suharto in May 1998. The current head of state in Indonesia is President Joko Widodo. Some notable policy initiatives Widodo has taken since in office has been the government’s war on drugs, which has led to an increase in death sentences and executions[2], particularly of foreign drug traffickers.                   

In terms of sources of instability, Indonesia faces demands for independence[3] in several of its provinces, where secessionists have been galvanized by East Timor's 1999 success in breaking away after a traumatic 25 years of occupation.

The country also faces activity of Militant Islamic groups. Some have been accused of having links with al-Qaeda, including the group blamed for the 2002 Bali bombings[4], which killed 202 people. Furthermore, the emergence of the Islamic State has led to renewed alarm about terrorism in Indonesia. According to the Indonesian police, some 254 Indonesian jihadists were confirmed[5] as fighting in Iraq and Syria, but it was likely that the actual figure exceeded 300. More recently, there was a series of explosions and gunfire[6] in Jakarta in January 2016 which killed at least eight people, and two luxury hotels were attacked in July 2009.

Indonesia is the largest economy in South East Asia and is a significant actor in Asian trade, with its largest trading partners being China, Japan, and Singapore. The country also routinely participates in various trading blocs such as APEC and the G20. On a similar note, numerous policy reforms[7] have been announced since late 2015 with the goal of increasing private sector investment. Indonesia is increasingly earning a reputation as a standout in the global economy due to these pro-market reforms as well as the strong domestic economy and GDP growth.

Further to that, Indonesia boasts the fourth largest population in the world with over 250 million people. However, it remains a poor country due to an increasingly uneven income distribution. Indonesia's Gini coefficient[8] (which measures income inequality) rose to 41 in 2014, from 30 in 2000, indicating a wider wealth gap. In addition, while the official unemployment rate is 6.2%, this masks a high degree of underemployment; part-time workers make up 70% of the total number of employed Indonesians.

The country’s natural resources, potential in renewable energy and food security offer a sustainable buffer to the climbing prices being seen in oil and foodstuffs which is fueling social discontent in other markets. 

Due to its large and growing population, Indonesia has an increasing domestic consumption rate of energy. Moreover, Indonesia is one of the worlds largest energy producers, being very well endowed with natural resources[9]; the 5th largest coal producer and 7th largest producer of natural gas[10].

Its unique topography yields highly sought after attributes. For example, its coal offers low sulphur content and high calorific value while its deposits of both coal and other minerals are found close to the earth’s surface, thus maintaining competitive extraction costs[11]. Further to that, Indonesia possesses the worlds largest reserves of geothermal energy, but has utilized a very small amount so far. The reason for this being strict mining laws in protected areas, where consequentially the geothermal reserves are located. Given this, environmental deregulation would allow for significant investment opportunities, both foreign and domestic.

Overall, Indonesia presents an opportunity for foreign investment. Investors are attracted by a large consumer base, rich natural resources and political stability, but often equally deterred by poor infrastructure, rampant corruption and growing calls for economic protectionism.[12]

The subsequent assessment reports by our Indonesia team will go into-depth on specific elements of political risk, with a particular focus on the country’s energy sector.  The researchers will discuss the implications of domestic political issues/events as well as the Indonesia’s relationship with foreign states and international organizations in order to provide a well-rounded guide for prospective investors.