Indonesia's Economy and Trade Development in 2016 EU HoMS Meeting 14 March 2017

Employment situation in 2016 Indonesian labour force reached 125.4 million in 2016 Unemployment rate of 5.6% = 7 million people High youth unemployment, high urban unemployment > 50% of the workers are still engaged in informal employment. Low educational attainment of the labour force. Only 9% has a university degree. Most of workers work in agriculture sector (

Indonesia's trade performance continued to weaken in 2016 (in line with the global trade slow down), but it has been improving in Q4, mainly on the back of higher commodity prices..

Indonesia's exports amounted to USD 144 Indonesia's exports amounted to USD 144.4 billion, down by -4% from 2015 . The EU became the 3rd largest non-oil-and-gas exports destination for Indonesia with 11% share of total exports (surpassed by China). Indonesia's imports amounted to USD 135.7 billion or fell by -5% from 2015. The EU remained as the 3rd largest import source for Indonesia, with 9% share.

FDI to Indonesia grew steadily by 8.4% to USD 29 billion in 2016 Industry / Sector Share of total Amount in USD Metal, machinery, and electronics 13.4% 3.9 billion Chemical and pharmaceutical 10% 2.9 billion Paper and printing 9.6% 2.8 billion Mining 9.5% 2.7 billion transport equipment and other transport 8.2% 2.4 billion

FDI in Indonesia in USD Million investment values (USD MILLION) EU FDI in Indonesia YEAR NO. OF PROJECTS investment values (USD MILLION) 2016 2,812 2,606.1 2015 1,448 2,258.2 2014 779 3,764.2 China is getting more aggressive, FDI in Indonesia grew by 233% from 2014 to 2016.

1st and 2nd Phase of Tax Amnesty (July – December 2016): Newly declared assets: USD 321 billion Repatriated assets: USD 10.6 billion Extra tax intake of USD 8.4 billion Stemmed from more than 600 thousands taxpayers Already exceed initial government target of USD 300bn Only 3.3% of the total declared assets or14.1% of the initial target 68% of the target of USD 12.4bn Tax reform is on-going, covering human resources, business process, IT, and regulations (a task force has been created in December 2016). A number of revision in tax laws are currently discussed in the parliament.

State Budget 2017: continuous commitment to re-direct wasteful energy subsidy to productive spending. IDR trillion Education Infrastructure Health Energy subsidy

Conclusion: Throughout 2016, Indonesia’s economy has regained a recovery momentum and macroeconomic stability has been maintained. EU trade and investment relation with Indonesia continued to grow, but its share vis-à-vis other key Indonesia partners was slightly declining, notably compared to China. Reform in the state budget is on-going, with more money allocated for productive spending. However, low tax revenues and budget efficiencies remained a challenge. Long term benefit from tax amnesty would depend on successful tax reforms. Challenges Indonesia needs to push for a more sustainable and inclusive growth through shifting the source of economic growth from consumption-led to investment-led growth, which requires significant reforms to improve the business and investment climate. The implementation of the economic packages introduced throughout the year has been relatively slow and the impact has so far been limited. In particular, we have seen a significant gap between political will at the leader's level and the implementation on the ground (especially in some key Ministries), as well as the gap between reforms in the central government and the regional level. Going forward, policy consistency to reform the economy and remove trade and investment barriers need to be closely assessed, especially to build solid environment for the on-going CEPA negotiations.