Indonesia's tourism sector indicates strong expansion

Despite a range of economic and political challenges both at the national level and across the region, Indonesia’s tourism industry posted strong growth in most segments in 2016. According to data from the Ministry of Tourism (MoT), the country welcomed 12.02m foreign visitors, an increase of more than 15% on 2015. This figure matches almost exactly the government’s target of 12m tourist arrivals for the year.

A NEW TARGET: With this in mind, it was perhaps not surprising when in late December 2016 Arief Yahya, minister of tourism, announced that Indonesia had upped the ante further, targeting 15m tourist arrivals for 2017. This figure, which represents expansion of around 25% on the previous year, is considered to be a key stepping stone for the country to reach its long-term growth target of 20m arrivals by 2019. Given thriving tourism markets in Bali and Jakarta, plus rising public and private investments in a slew of other destinations, the new target is likely within reach.

Further supporting this objective is the MoT, which is currently implementing a range of projects across the industry, including initiatives aimed at digitising tourism operators and other service providers, improving transport links across the nation and attracting visitors in a number of niche areas.

OBSTACLES TO GROWTH: Indonesia faces a range of challenges with regard to expanding the tourism industry in the coming years. Long-standing issues include the country’s challenging geography and topography, and the related underdevelopment of transport infrastructure in many rural areas. Indeed, many of Indonesia’s remote adventure destinations, such as Wakatobi and Morotai for instance, remain difficult to access. Striking a balance between remoteness – which is an attraction in itself for some visitors – and continued growth is a long-term challenge for the nation’s tourism operators and regulators.

Given Indonesia’s vast tourism resources, including diverse habitats, eight UNESCO World Heritage sites, affordability, a large and well-educated workforce, and a well-developed industry, many observers consider the country to be hitting below its weight. According to the MoT, this situation may be ascribed to a number of causes, not least Indonesia’s susceptibility to natural disasters, including flooding, volcanic eruptions, earthquakes and tsunamis, and the ongoing threat of terrorism and social conflict. The fact that the country has seen strong and steady growth in terms of incoming visitors in recent years indicates that, overall, its many assets outweigh any potential risks.

HISTORY: Unlike some of the so-called sun-and-sand destinations which cropped up across South-east Asia through the 1960s and 1970s, Indonesia got a relatively late start in terms of formalising its tourism sector. Prior to the 1970s, Bali – Indonesia’s leading destination today – was relatively unknown among global leisure travellers. In 1971 the state launched the Bali Tourism Development Corporation, which took the lead on developing and implementing a transformation of a village on Bali’s southern coast into a major tourist destination. Known as the Nusa Dua Master Plan, this effort involved a series of major improvements to regional infrastructure and an extensive investment programme, which resulted in the establishment of a range of international and Indonesian hotels – along with other commercial entities – in the area.

The success of the Nusa Dua Master Plan – which turned Bali’s southern coast into a key destination in an increasingly popular region relatively quickly – inspired other villages on the island to undertake similar initiatives. Since then, Indonesia’s tourism industry has developed rapidly, drawing an ever-growing number of visitors both from relatively nearby destinations, such as Australia, and from further afield. A 2013 expansion of the island’s Ngurah Rai International Airport resulted in new capacity for flights from Asia and Australia, which today make up the largest source markets for incoming tourists. Indeed, in 2016 Australians made up the single largest percentage of incoming tourists to Bali, accounting for 23% of all visitors, followed by China, Japan, the UK and India.

More recently, Jakarta, Indonesia’s densely populated capital city, has become a key business destination in South-east Asia and is increasingly seen to rival regional tourism stalwarts such as Bangkok, Singapore and Kuala Lumpur. Much of Jakarta’s rise has to do with the increasing number of low-cost carriers that have set up shop at the capital’s Soekarno-Hatta International Airport in recent years (see Transport chapter), and the city’s growing reputation as a major retail shopping destination, among other attributes. The government, for its part, is working to ensure that Bali remains a global leisure destination, that Jakarta continues to attract visitors and, as part of more recent development plans, that other parts of the country become tourist destinations in their own right.

OVERSIGHT & REGULATION: The MoT is the state’s primary tourism-focused entity, with a mandate to develop and implement federal-level initiatives, and to ensure that the industry increasingly operates in accordance with international standards. However, a number of additional state-run entities are also involved in various aspects of Indonesia’s tourism sector, including the Ministry of Manpower and the Ministry of Transportation, among others. In general, the regulatory environment is relatively liberal, with the MoT evincing a light touch in most cases in order to continue to attract an increasingly diverse investment base.

However, a handful of noteworthy regulations have been implemented in recent years. In 2014, for instance, the MoT introduced a regulatory framework for sharia-compliant hotels, in an effort to ensure that Indonesia’s rising status as a halal tourism destination and world leader in the segment was maintained (see analysis). Similarly, as of early 2017 the government was working to reduce regulation in the nation’s airline industry in order to attract new carriers, and to allow existing players more opportunities to add flights to Jakarta and other local destinations.

From a tourism perspective, one of the most significant regulatory changes implemented in recent years has been the government’s newly relaxed visa regime, which has had far-reaching effects since it was launched in 2015. While initially the programme covered visitors from 30 countries – who were allowed to enter Indonesia on a free 30-day tourist visa – at the end of 2015 this list was expanded to include another 60 nations, bringing the total number covered by the plan to 90. In early 2016 another 84 countries were added to the list, bringing the total to 174.

MOVING FORWARD: The MoT has laid out an ambitious blueprint for the ongoing development of Indonesia’s tourism industry. Perhaps the highest-profile component of this far-reaching initiative is the 10 New Balis programme, which was initially announced by the ministry in 2016. Broadly, the plan calls for the development of 10 new tourism destinations, all of which are being groomed to compete with Bali. Five of the new locations – Lake Toba, Borobudur, Bromo, Mandalika and Thousand Islands – have been the focus of tourism development since at least the 1990s. As such, the MoT’s plan is to encourage additional investments at these locations, in an effort to introduce them to a new, larger group of visitors. The remaining five destinations – Wakatobi, Morotai, Belitung, Tanjung Lesung and Labuan Bajo – are either almost entirely undeveloped in terms of tourism infrastructure and services, or known to only niche groups of visitors, such as divers or adventure tourists.

Borobudur is perhaps the most developed of all 10 New Bali destinations. Home to the Borobudur Temple, a major cultural destination in its own right, the area also boasts relatively well-developed leisure, recreation, food and beverage (F&B), and lodging options, including international branded hotels. Additionally, Borobudur is relatively easy to access from Yogyakarta. Currently, most international tourists visit Borobudur in conjunction with nearby Prambanan, a Hindu temple complex, in the context of a day trip from Yogyakarta. Under the 10 New Balis plan, the state aims to attract visitors for longer stays. At the other end of the visibility scale is Wakatobi, a remote island diving destination near South Sulawesi. Wakatobi, like Morotai, is difficult to access and has very little existing tourism infrastructure. The plan here is to maintain Wakatobi’s niche status, while improving lodging availability and tourism-related services. “The newly promoted destinations are expected to attract both first-timers and repeat travellers,” Yahya told local media in late 2016. “Millennials are among the potential targets. Origin-wise, our target is mainly regional visitors, including China, Singapore, Malaysia, Australia and Japan. We are also targeting long-haul visitors with special interests including diving, snorkelling, surfing and hiking.”

IN FIGURES: By all accounts 2016 was a banner year for tourism in Indonesia. According to statistics from the MoT, the country welcomed 12.02m foreign visitors over the course of the year, up from 9.73m in 2015, 9.44m in 2014 and 8.8m in 2013. This most recent figure represented growth of around 15% on 2015, and was more than double the number of foreign arrivals seen as recently as 2007, when just 5.51m tourists visited the country. It should be noted that Statistics Indonesia, the nation’s data agency, changed the way it counted foreign visitors in 2015. Whereas previously the agency defined foreign visitors as foreigners either with or without a visa in addition to nationals who live abroad, since the switch a range of new groups have been added to this category, including foreigners arriving through border crossing posts and foreigners who stay in Indonesia for less than one year.

ECONOMIC CONTRIBUTION: According to the World Travel and Tourism Council (WTTC), Indonesia’s tourism industry contributed some Rp770.31trn ($58.1bn) to the nation’s GDP in 2016, which was equal to 6.2% of overall GDP. This figure includes all direct contributions to the economy plus indirect and induced contributions, such as public and private investments in the sector and F&B spending by tourism employees, for instance. The industry’s direct contribution reached Rp226.41trn ($17.1bn), which was equal to 1.8% of GDP for the year, WTTC data shows. While the industry’s direct GDP contribution has risen relatively slowly over the past decade, from around Rp175trn ($13.2bn) in 2007, tourism’s overall contribution has been significantly larger. Indeed, according to the WTTC, from a total GDP contribution of just over Rp400trn ($30.2bn) in 2007, the industry is expected to have nearly doubled in value by the end of 2017 to top Rp800trn ($60.3bn). Furthermore, if all goes according to the MoT’s plans over the coming decade, tourism will nearly double in value once again, with forecasts from the WTTC indicating a total GDP contribution of just under Rp1500trn ($113.1bn) by 2027.

Tourism is also a continuing contributor to employment opportunity. In 2016 the sector provided 1.9m direct jobs to the economy, according to WTTC data. This represents a relatively small uptick on a half decade earlier, for instance, when tourism jobs totalled 1.7m. Meanwhile, capital investment in tourism peaked at Rp180.88trn ($13.6bn) in 2016, up from around Rp100trn ($7.5bn) as recently as 2010. Investment in the industry is expected to skyrocket in the coming decade, with the WTTC forecasting total investment of upwards of Rp350trn ($26.4bn) by 2027.

PROFILE: Given the centrality of Bali in the history of Indonesian tourism, it is perhaps not surprising that leisure tourists accounted for around three-quarters of total incoming tourists in 2016. Business tourism spending, meanwhile, was at around 25%, almost all of which went towards products and services located in Jakarta. That said, business travel is widely understood to be a growing niche segment across the country. WTTC forecasts indicate that business travel expenditure in Indonesia will grow by 5.7% in 2017, compared to growth of 4.1% among leisure tourists. This reflects not so much a slowdown in leisure expenditure but rather an uptick in Jakarta’s continued attractiveness as a business travel destination.

Another shift currently taking place is the expansion of domestic tourism, which as of 2016 accounted for the bulk of total tourist spending in Indonesia. According to WTTC data, domestic travellers accounted for 57.5% of overall tourism expenditure in 2016, while foreign travellers made up the remaining 42.5%. Furthermore, domestic travel spending is expected to grow by 5.5% in 2017. These figures reflect the steady expansion of Indonesia’s middle class over the past decade, a situation which is expected to play an increasingly important role in terms of tourism industry development for the foreseeable future. Indeed, forecasts by Indonesia Investments, a unit of the Dutch private investment company Van der Schaar Investments, indicate that the number of domestic tourists in the country will grow from around 260m in 2016 to 275m by 2019.

THE ISLAND OF GODS: Home to pristine beaches, coral reefs, major religious and cultural sites, and a well-developed tourism industry, Bali has been at the centre of Indonesia’s tourism sector for nearly half a century. In recent years the number of foreign tourist arrivals to the island has grown rapidly. In 2016 just over 4.9m foreign travellers visited Bali, up 23% on the 4m of the previous year. This figure also represents growth of 100% over the past decade.

Australians have long made up the largest percentage of visitors to Bali, and Indonesia in general, though this situation is widely expected to change over the course of 2017. Indeed, the rise of Chinese consumer spending on travel and tourism has the potential to dramatically change the face of Indonesian tourism. The number of Chinese tourists visiting Indonesia grew to 990,000 in 2016, representing growth of over 660% since 2008. Other major source markets to Bali in 2016 included Japan, the UK, India, Malaysia and the US. Despite these strong growth figures and its many assets, tourism operators in Bali face a handful of challenges. Broadly, the local industry is dealing with issues related to oversupply of hotel rooms and other tourism products, which has pushed down revenues slightly in recent years. Similarly, the shift to serving tourists from China has resulted in shorter stays across the island, and lower expenditure on hotels and daily services.

Social issues related to tourists’ home culture and expectation are a key challenge moving forward, though, as many local operators have acknowledged, this is an opportunity for the industry as well.

THE CAPITAL CALLS: Indonesia’s capital city has also seen considerable growth in terms of tourist arrivals over the past decade. In 2015 Jakarta recorded some 2.3m international visitor arrivals. Key source markets to the capital city include China, South Korea and, increasingly, Middle Eastern countries, which comprise a key growth market for Indonesia in the coming years (see analysis). Unlike Bali, which caters almost exclusively to leisure visitors, Jakarta’s main arrivals are business-orientated or relatively low-value weekend getaway visitors from elsewhere in South-east Asia. Since the 2008-09 global economic crisis and throughout the subsequent period of low global economic growth, corporate lodging bookers have pushed for lower rates around the world, also affecting average room rates in Jakarta. As the sector continues to develop, however, local operators expect to see slow but steady growth in the leisure segment, which will be attracted to the capital in large part by several new luxury hotel offerings, including Four Seasons and Westin properties.

NICHE GROWTH SEGMENTS: The MoT is currently working to develop a handful of new niche segments as potentially key sources of revenue in the coming years. Halal tourism – destinations, products and services aimed at Muslim visitors – has been a key area of focus in recent years. Given Indonesia’s status as home to the largest Islamic population in the world, this is perhaps not surprising. However, to date Muslims only make up a very small percentage of total visitors, totalling less than 500,000 in 2016, according to estimates from the MoT. The state has set a target of attracting 5m Muslim tourists to the country by 2019 (see analysis).

Adventure sports, a relatively high-value tourism offering, are well-established in Indonesia. Many of the nation’s mountaineering, hiking and diving offerings are well known and attract large numbers of visitors each year. Hand-in-hand with adventure tourism is sustainable, or green, tourism, which emphasises low-impact travel, volunteering and cultural immersion.

Ecotourism has become a key area of focus at the MoT recently, in conjunction with the UN declaring 2017 the year of sustainable tourism. In this vein the ministry has encouraged the industry to utilise sustainable materials in the construction of new tourism facilities, and to focus on water conservation, energy saving, tree planting and recycling in daily practices.

OUTLOOK: Over the course of the last few years, government and the private sector alike have made a concerted effort to address outstanding issues that threaten the stability and long-term profitability of Indonesia’s tourism industry. Given this effort – and taking into account the country’s many strengths and rising global reputation as a tourist destination, including a variety of niche, high-value segments – most local players expect the future to be bright for the sector.