BMI View: Indonesia ' s armed forces remain heavily dependent on imports to meet equipment requirements as the domestic defence industry is still in a nascent stage. The sector has some technological ca pabilities for development of small arms and ammunition , a rmoured transport aircraft and patrol craft and frigates, but infrastructure and research capacity is restricted - the result of years of underinvestment . This will remain the case over much of our forecast period, as the government continues to focus on the urgent procurement of modern equipment from abroad.
We note that budgetary constraints imposed by structural economic issues and slow progress on reform will mean that Indonesia will not be able to make the most advanced and high-end procurements available to it. Nonetheless, owing to its long-standing strategy of multilateralisation, the country will be able to avail contracts with a multitude of foreign partners. Those foreign defence contractors able to offer lucrative technology transfer arrangements along with competitive pricing will be best placed to capture future procurement contracts.
|e/f = BMI estimate/forecast. Source: US Dept. Of State WMEAT, BMI|
|Defence expenditure, USDmn||6,929||7,140||7,710||9,041||10,796||12,155|
|Defence expenditure, USD, % y-o-y||6.1||3.1||8.0||17.3||19.4||12.6|
|Defence expenditure, % of GDP||0.8||0.8||0.8||0.8||0.8||0.8|
In August 2016, Indonesia and Ukraine signed a Memorandum of Understanding aimed at expanding cooperation in defence industry and trade.
In July 2016, in a bid to improve transparency and accountability, Indonesian President Joko Widodo called on the Ministry of Defence to ensure that military procurement is conducted through proper government-to-government channels.
In July 2016, the Indonesian National Police announced that they believed that they had killed a prominent Indonesian Islamic State-linked terrorist, Santoso, in an exchange of fire during an anti-terrorist operation. Santoso was the leader of the East Indonesian Mujahidin and was one of the first militant leaders in the country to pledge allegiance to Islamic State.
In July 2016, Widodo appointed former military general Wiranto, who was previously indicted by a UN panel for human rights abuses in East Timor, to the country's Coordinating Minister for Political, Legal and Security Affairs.
In July 2016, Indonesian state-owned shipbuilder PT PAL initiated sea trials of the country's first SIGMA 10514 Perusak Kawal Rudal guided-missile frigate, jointly developed with Dutch shipbuilder Damen Schelde Naval Shipbuilding.
In June 2016, the Indonesian House of Representatives' Defence Commission announced an increase to the country's 2016 defence budget to IDR108.7trn (USD8.3bn), a y-o-y rise of 9.2% despite across-the-board cuts in other government departments.
On June 18, 2016, an Indonesian Navy Parchim I-class corvette opened fired on a group of 12 Chinese fishing ships after the vessels were detected in waters around the Natuna islands.
In June 2016, the Indonesian Navy deployed various vessels and aircraft to the area surrounding the Natuna islands region for a 12-day naval exercise.
In May 2016, Russia and Indonesia signed a defence cooperation accord in Sochi, although details have not been released.
In May 2016, against a backdrop of expanding pirate activity, the governments of Indonesia, Malaysia and the Philippines agreed to establish a coordinated patrol regime in the Sulu and Sulawesi seas.
In April 2016, reports surfaced that the Indonesian Air Force was planning to deploy four units of its Korps Pasukan Khas special forces ground corps to the Natuna Islands along with a Rheinmetall-made Oerlikon Skyshield air defence system and the possibility of aircraft and UAV accommodation facilities.
In March 2016, during a meeting between Indonesian National Armed Forces commander General Gatot Nurmantyo and the Indonesian House of Representatives commission on defence, intelligence, and foreign affairs (Komisi I), plans were stated to develop a third submarine base on Pulau Natuna Besar, the largest of the Natuna Islands cluster in the South China Sea.
In March 2016, Beijing released a statement announcing that the waters around the Natuna Islands, which are within Indonesia's Exclusive Economic Zone are part of its 'traditional fishing grounds', heightening concerns in Jakarta despite the country not being party to the South China Sea disputes.
In February 2016, Indonesia and France initiated a collaboration project in the realm of science and technology to the benefit of each countries' respective defence sectors.
In January 2016, Singapore and Indonesia agreed to boost their intelligence-sharing activities to counter the spread of the Islamic State-related activities in the region.
On January 14, 2016, Islamic State-affiliated militants launched a series of explosives and small-arms attacks at the Sarinah shopping complex in Jakarta. Eight people were killed, with 20 more injured.
Defence Industry Risk Reward Index
Although there is a need for Jakarta to heavily invest in modernising its armed forces - especially in light of growing security concerns - and aspirations to develop the local industry are high, the defence budget remains constrained, limiting opportunities for multinational defence companies. Nonetheless, we hold a bullish growth outlook for Indonesia's economy over the long term and given that the domestic industry remains incapable of meeting domestic demand, any modernisation will require imports from foreign states. There will also at least be a continued drive for foreign partnerships and technology transfers. However, should Widodo fail to deliver significant results on promised structural reform, we caution that the attractiveness of Indonesia's defence industry will suffer as its priority in policy declines. In 2016, Indonesia scores 52 out of 100 in our Defence Industry Risk/Reward Index (RRI), placing it eighth regionally out of 14 states.
The Indonesia Defence & Security Report features BMI Research's independent forecasts for national and international security, the defence industry, military expenditure, employment in arms production, and arms imports and exports, as well as examining industry trends and prospects, national and multinational arms producers and the regulatory environment.
BMI's Indonesia Defence & Security Report provides professionals, consultancies, government departments, regulatory bodies and researchers with independent forecasts and regional competitive intelligence on the Indonesian defence and security industry.
- Benchmark BMI's independent defence and security industry forecasts on Indonesia to test other views - a key input for successful budgetary and strategic business planning in the Indonesian defence and security market.
- Target business opportunities and risks in the Asia defence and security sector through reviews of latest industry trends, regulatory changes and major deals, projects and investments in Asia.
- Assess the activities, strategy and market position of your competitors, partners and clients via our Company Profiles (inc. KPIs and latest activity).
Global and Regional Political Outlooks
A strategic overview of the world’s major political risks, identifying countries facing leadership successions and nations at risk of upheaval, inter-state conflict, or separatism and insurgencies, plus a summary of the world’s ‘wild card’ low-probability high-impact risks.
Snapshot evaluation of the major issues affecting the defence and security sectors, economy and politics, with issues subdivided into strengths, weaknesses, opportunities and threats.
BMI Industry Forecast Scenario
Historic data series and forecasts to end-2019 for key industry indicators supported by explicit assumptions, plus analysis of key downside risks to the main forecast.
- Defence Expenditure: Defence expenditure (local currency and USDbn); defence expenditure (% of total budget); defence expenditure per capita (USD); defence budget (local currency and USDbn).
- Armed Forces (to 2012): Manpower available for military service, manpower fit for militaryservice, army personnel, navy personnel,air force personnel, total armed forces, (‘000) (% population).
- Arms Trade: Arms and ammunition exports and imports (USDmn); bombs, grenades and missiles exports and imports (USDmn); revolver and pistol exports and imports (USDmn); weapons excluding guns and swords exports and imports (USDmn).
Political Risk Assessment
Drawing on BMI’s heritage of more than 25 years of Country Risk analysis, this comprehensively evaluates the key risks to domestic politics and foreign relations, focusing on issues most likely to affect either domestic security or the defence sector.
Security Risk Analysis
BMI’s proprietary Security Risk Indices provide investors with a reliable and country-comparable guide to conflict, terrorism and criminal risk, backed up by our analyst’s latest assessment of each component. Furthermore, drawing on our Country Risk expertise, we assess the state’s vulnerability to a serious, or prolonged, terrorist campaign.
Armed Forces Spending/ Expenditure
The reports contain a detailed breakdown of areas of expenditure by the armed forces, these include spending on international deployments, WMDs and missile defence systems as well as individual breakdowns of the cost-per-soldier.
The domestic security overview lists the various potential internal security threats facing a country, ranging from internal security issues such as terrorism, cyber terrorism, crime and drugs, to external security issues including general defence procedures and potential threats from specific countries. The reports also provide a regional overview which details specific issues and flashpoints affecting the Americas, along with potential risks in the coming year.
Examines the competitive positioning and short- to medium-term business strategies of key industry players. Strategy is examined within the context of BMI’s industry forecasts, our macroeconomic views and our understanding of the wider competitive landscape. The latest financial and operating statistics and key company developments are also incorporated within the company profiles, enabling a full evaluation of recent company performance and future growth prospects.
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