Tourism Industry Indonesia

Although Indonesia harbors great attractions for tourists - beautiful countryside, interesting
cultures & historical remnants, beaches, nightlife (Jakarta and Bali), and much more - the
country fails to attract a large number of foreign tourists. Yes, Indonesia may achieve its target of
welcoming 10 million foreign visitors in 2015, but this figure is considerably lower than the
number of tourists that visit neighboring peers Singapore (15 million) or Malaysia (27 million).
Indonesia is not less beautiful nor less interesting than its neighbors. So, what has been blocking
more rapid development of Indonesia's tourism sector?

It is important that the tourism industry of Indonesia enhances its contribution towards the
country's gross domestic product (GDP) because it will trigger more foreign exchange earnings
(as each foreign visitor spends between USD $1,100 and USD $1,200 per visit on average) while
also providing employment opportunities to the Indonesian people (based on the latest data from
Statistics Indonesia, the country's unemployment rate stood at 5.81 percent in February 2015). It
is estimated that nearly nine percent of Indonesia's total national workforce is employed in the
tourism sector.

Currently, Indonesia's tourism sector accounts for approximately four percent of the total
economy. By 2019, the Indonesian government wants to have doubled this figure to 8 percent of
GDP, an ambitious target (possibly overly ambitious) which implies that within the next four
years, the number of visitors needs to double to about 20 million. In order to achieve this target,
the government will focus on improving Indonesia’s infrastructure (including ICT
infrastructure), accessibility, health & hygiene as well as enhancing online promotional
(marketing) campaigns abroad. The government also revised its visa-free access policy in 2015
(for further elaboration, see below) to attract more foreign tourists.

Below we present foreign visitor arrivals into Indonesia in recent years. Please note that
Indonesia's Statistics Agency (BPS) adjusted the definition of foreign visitor arrival per January
2016. This explains the sharp increase in foreign visitor arrivals between 2016 and 2015.

What is Blocking Development of Indonesia's Tourism Industry?

In the World Economic Forum's Travel & Tourism Competitiveness Report, which "measures
the set of factors and policies that enable the sustainable development of the Travel & Tourism
sector, which in turn, contributes to the development and competitiveness of a country,”
Indonesia jumped from rank 70th in 2013 to 50th in 2015, an impressive improvement. This
jump was caused by Indonesia's rapidly growing number of foreign visitor arrivals, national
prioritization of the tourism industry and investment in infrastructure (for example the mobile
phone network now covers most areas of the country, while air transport infrastructure has been
expanded). The report states that the competitive advantages of Indonesia are price
competitiveness, rich natural resources (biodiversity), and the presence of several heritage sites.

However, the report also stated that Indonesia is not placing enough emphasis on environmental
sustainability (resulting in deforestation and endangered species, while only a minimal fraction
of the used water is treated). The report also mentions safety and security concerns, specifically
the business cost of terrorism. Another concern is that Indonesia lags behind Singapore (11th),
Malaysia (25th) and Thailand (35th) in the ranking of the 2015 Travel & Tourism
Competitiveness Report.

The lack of adequate infrastructure in Indonesia is a persistent problem, not only because its
raises logistics costs steeply thus making the investment climate less attractive but also because it
limits the smoothness of traveling for tourists. Infrastructure on Bali is great and acceptable in
Jakarta (except for the grave traffic congestion) but outside Bali and Jakarta most of the country's
infrastructure is inadequate, particularly in the eastern part of Indonesia where there is a shortage
of airports, ports, roads and hotels. The lack of inter and intra island connectivity means that a
number of Indonesian regions that contain huge tourist potential cannot be reached easily.

Besides infrastructure, education also forms an obstacle. Although on the island of Bali as well
as in the luxury hotels of Jakarta most native people working in the tourism sector are pretty
fluent in English (and sometimes even other non-Indonesian languages), in the more remote
areas of Indonesia natives have difficulty to communicate with tourists. Therefore, a focus on the
study of English would help to overcome this situation. This language barrier has been reason for
a portion of Singaporeans to choose Malaysia as their holiday destination instead of Indonesia.
Most foreign visitors that enter Indonesia come from Singapore, followed by Malaysia and
Australia.

Points of Entry

Most foreigners enter Indonesia at Ngurah Rai International Airport on Bali, the island that is the
most popular holiday destination for foreign tourists in Indonesia. This island is home to most of
Indonesia's Hindu minority and offers tourists all sorts of Balinese Hinduism-related arts and
culture as well as a lively nightlife and beautiful countryside.

The second main point of entry is Soekarno-Hatta International Airport, located just outside of
the capital city of Jakarta. Many tourists start their holiday by staying a couple of days in Jakarta
before traveling to other parts of Indonesia. Jakarta is also the economic center of Indonesia and
although it is not allowed by law there are many foreigners that use a tourist visa (valid for 30
days) to participate in business meetings or events in Jakarta.

The third-most used port of entry in Indonesia is Batam, the largest city in the Riau Islands
Province of Indonesia, across the Strait of Singapore. Batam has rapidly developed into an
industrial boom-town and transport hub. The city is part of a free trade zone in the Indonesia-
Malaysia-Singapore Triangle. Since 2006, Batam (together with Bintan and Karimun) form part
of a Special Economic Zone with Singapore, implying that trade tariffs and value-added taxes for
goods shipped between Batam and Singapore are eliminated.

New Visa Policy Indonesia

In 2015 the Indonesian government granted an additional 45 countries visa-free access to

Indonesia (Presidential Regulation no.69/2015 on Exemptions of Visit Visa) in an attempt to
boost the tourism industry. Previously, citizens of these countries had to obtain a visit visa before
entering Indonesia. In March 2016 the amount of countries for which residents are allowed to
enter Indonesia without a visa was raised again through Presidential Regulation no.21/2016 on
Exemptions of Visit Visa, meaning there are now a total of 169 countries that not need a visa to
enter and stay in Indonesia (for a maximum period of 30 days). Meanwhile, the government also
introduced a new regulation on yacht and cruise ships. This new regulation lifts cabotage rights
for international cruises and yachts, meaning that international cruise liners can now lift and
disembark passengers in 5 Indonesian seaports: Tanjung Priok (Jakarta), Tanjung Perak
(Surabaya), Belawan (Medan), Soekarno-Hatta (Makassar) and Benoa (Bali). Previously, only
Indonesian-flagged ships were allowed by law to lift and disembark passengers in Indonesian
waters.

These policy changes were made in order to attract more foreign visitors. Although granting
more tourists visa-free access to Indonesia implies that the country misses out on an estimated
USD $11.3 million per year (as currently USD $35 is charged for a ‘visa on arrival’), it is
expected to attract an additional 450,000 foreign tourists per year. Considering that each foreign
tourist spends an average of between USD $1,100 and USD $1,200 during his/her holiday in
Indonesia, the country will thus gain around USD $500 million in additional foreign exchange
revenue each year (a domestic tourist spends an average of IDR 711,000 per trip).

Through its Ministry of Tourism and Creative Economy, Indonesia promotes itself as a tourist
destination in foreign countries with its "Wonderful Indonesia" campaign. It is important for the
government to invest in such promotional campaigns to spread a positive image of Indonesia as
most western countries mostly receive negative headline stories from Indonesia (for example
radical Islam, natural disasters such as a tsunami or massive volcanic eruptions), causing an
undue negative image of the country.

It is also important for authorities to build a magnetic brand for the country as a whole. While the
island of Bali already has a strong brand that is widely known across the globe, Indonesia as a
whole hasn't.

Opportunities in the Tourism Industry of Indonesia

With increasing numbers of foreign visitor arrivals (both tourists and foreign businessmen) in
combination with +5 percent GDP growth and investment growth, there is growing demand for
hotels, condominium hotels (which combine features of apartments and hotels), as well as
conferences and exhibition venues. If the government target of welcoming 20 million foreign
visitors by 2020 is indeed achieved then there is plenty of need for investment in the country's
hospitality industry. Moreover, the ASEAN Economic Community (AEC), which will see its
birth at the end of 2015, implies intensifying trade relations in the ASEAN region (resulting in
more demand for hotel accommodations etc).

However, Bali and Jakarta have already seen a large influx of investment in recent years
(especially in the upper end of the market) leading to excessive supply. Investors who want to
establish hotels in these regions (as well as existing hotels) need to come up with original and
creative new concepts to become market leaders.