Tourism in Indonesia has more than doubled over the past decade, with some media reports claiming that 2017 saw more than 15 million tourists visit the archipelago state. The tourism industry has flourished and become a major driver of the economy and a central feature of the government’s economic growth strategy. To facilitate further growth, the Indonesian Government is hoping to replicate the success of Bali as a tourist destination in a number of other locations spread across Indonesia.
The tourism industry is a major economic driver for Indonesia. In 2016, foreign exchange earnings from tourism topped $16.3 billion. When indirect and induced incomes from travel and tourism are included (such as investment spending and spending by employees), that figure increases to $72.4 billion, or approximately 6.2 percent of GDP in 2016. This level ranks Indonesia’s tourism industry as the twenty-second largest in the world, according to the World Travel & Tourism Council. It is larger than the average tourism industry in Southeast Asia, but smaller than those of Australia, Thailand and the Philippines. Strong growth is expected for the Indonesian industry, with indirect and induced incomes predicted to reach $141.3 billion annually by 2027, according to the World Travel & Tourism Council report.
The Indonesian Government, however, may be too optimistic in its growth projections. In 2016, Tourism Minister Arief Yahya claimed that he wishes to double the number of international visitors coming to Indonesia to total over twenty million by 2019. In 2014, he stated that he wished to double the number of Chinese visitors by 2016, but, in reality, the number grew by only 45.6 percent.
His most recent claim also appears too ambitious. Given that 2017 saw 14 million foreign arrivals, the minimum growth rate required to reach 20 million tourists by 2019 is 19.4 percent per year. Given that the growth rate for foreign arrivals over the past five years has averaged 11.9 percent. Consistent growth of around 20 percent for three years straight would be unprecedented in Indonesian history and is a rare occurrence for other tourism industries throughout Southeast Asia. So, while not impossible, achieving such a high target does seem unlikely.
There are also obstacles facing Indonesia’s tourism industry, namely, poor infrastructure and the lack of investment required to fund the necessary infrastructure projects. From 2015 to 2019, the funds required to meet Indonesia’s overall infrastructure needs amount to approximately $450 to $520 billion. Looking at projected government spending in contrast to investment and other contributions, it is likely that the government will fall short of the required funds for infrastructure by at least $120 billion. To fill that funding gap, the Indonesian Government has made a number of bilateral agreements with countries such as China and Japan and sought loans from the World Bank and the Asia Infrastructure Investment Bank. According to PricewaterhouseCoopers, however, many of those agreements are fraught with challenges, due to being politically, rather than commercially, driven. As a result, funds tend to be slowly dispensed and often not fully utilized.
That has left tourist-related infrastructure in a poor position. According to the World Economic Forum (WEF) in its 2017 Travel and Tourism Competitiveness Report, tourist service infrastructure was the worst performing area in its analysis of the Indonesian tourism industry. With a score of 3.1 out of seven, Indonesia’s tourist service infrastructure is worse than that of Kenya and only slightly better than Venezuela. Ground and port transport infrastructure is also ranked poorly in the report. While the Indonesian Government has recognized the poor state of infrastructure, in remedying that problem it must consider the potential environmental impact of developing new hotels, roads or airports. That must be done not only for the sake of general environmental concerns, such as native wildlife, but also to preserve the forests and beaches as tourist attractions.
President Joko “Jokowi” Widodo and his ministers have spent time seeking overseas investment to fund the project known as the “Ten New Balis”. The project, announced in February 2016, is a government initiative to develop ten new tourist hubs across the country. According to 2016 statistics, the vast majority of foreign tourists spend their time in Indonesia on Bali (49 percent) and Java (30 percent). Those two islands together account for just 7.6 per cent of Indonesia’s total land mass. Attracting visitors to other areas will be essential to plans aimed at expanding the Indonesian tourism industry. According to the Ministry of Tourism, the tourist destinations chosen for development are already known as tourist attractions, but would greatly benefit from better access and more amenities.
One of the locations selected, Lake Toba, is a good example. Lake Toba is well known among tourists travelling to Indonesia, but has lacked easy access. Before a new international airport was built in Silangit, to get to Parapat near Lake Toba, most tourists had to catch a domestic flight to Medan (over two hours from Jakarta), then head to the lake via bus or car, which took another four to six hours. With the new airport, however, travel times will be reduced to only two hours. That will significantly increase the prospects for tourism in the Lake Toba area. The government hopes to see the first international flights to the new airport sometime this year.
The chosen locations of the “Ten New Balis” are: Lake Toba (North Sumatra), Tanjung Lesung (Banten), The Thousand Islands (Jakarta), Tanjung Kelayang Beach (Bangka Belitung Islands), Borobudur Temple (Central Java), Mount Bromo (East Java), Mandalika (West Nusa Tenggara), Labuan Bajo (East Nusa Tenggara), Wakatobi (South Sulawesi), and Morotai Island (North Maluku). The three priority locations that will be focused on first are Mandalika, Borobudur Temple and Lake Toba.
In developing those locations, the government hopes to expand tourism as an economic behemoth, without devaluing existing tourist destinations. It is highly unlikely that Indonesia could accommodate twenty million tourists in 2019 without diverting some of those tourists to locations other than Bali. That would have the added benefit of creating local jobs in the new tourist areas.
The purpose of developing these areas is to increase Indonesia’s profile as a marquee tourist destination outside of Bali. Bali alone accounted for over 5 million of last year’s 14 million visitors, including a huge increase in Chinese tourists. But if Indonesia’s tourism industry is to remain sustainable, the country needs to diversify the destinations it has to offer, weaning itself off an overreliance on Bali and distributing the benefits of tourism more evenly throughout the country.
Comparing the number of foreign and local tourists within a given province during 2016 shows that the vast majority of foreign tourists stayed in Bali, while Indonesian tourists mostly confined themselves to Jakarta, Central Java and East Java. The figures are somewhat generalized, however, as they look at the number of tourists staying in the entire province, rather than the specific locale of the tourist attraction that the government wishes to develop.
It is likely that the government sees an opportunity to replicate the success of Bali elsewhere. In their current state, however, most of the destinations earmarked for the “New Balis” do not have the capacity to handle a major influx of tourists, nor do they have easy access in the first place. It raises the question of whether the government is being too ambitious in its plans, especially when taking into account the previously-mentioned lack of funding for the associated infrastructure projects.
In the last few years, Lake Toba in North Sumatra has seen a flurry of construction activity. The stunning caldera lake lies several hours from the provincial capital of Medan, and in the past could only be reached by small propeller airplanes or by taking a minibus or car several hours over poorly maintained roads. After Jokowi took office, he pushed hard to accelerate infrastructure projects in order to improve access to the area. In 2017, he opened the renovated Silangit Airport, which now has a longer runway and much larger passenger terminal. It has also been equipped with customs and immigration facilities to handle direct international flights.
In addition to the airport expansion, the Ministry of Public Works is improving and widening over 400 km of the inner and outer ring roads that connect various destinations around the lake. The infrastructure upgrades, including a railway line connecting Medan to the Lake Toba area that went into service in February 2018, and a toll-road connecting Medan directly to the outer ring road which is under construction and should be completed in 2019. Lake Toba, which just a few years ago was difficult to reach, is now accessible via high-capacity international airport, rail and toll-road access will shortly following. Anticipating coming growth in tourist numbers, hotel development in the Lake Toba region has accelerated, with 39 new hotels built between 2012 and 2016.
Airport construction has been something of a theme in Indonesia under Jokowi and earlier this year in the Yogyakarta Special Administrative Area, the state-owned airport operator Angkasa Pura I completed the acquisition of 587 hectares of land at a cost of Rp 4.1 trillion ($295 million) which will be used for the development of a new international airport. Once completed, it is expected to have a capacity of around 15 million annual passengers, an increase of 13.5 million over Yogyakarta’s current very over-capacity international airport.
The Mandalika Special Economic Zone is a major development project located about a 30-minute drive from the existing Lombok International Airport. Thanks to relaxed investment regulations, this massive project has seen a flurry of activity since Jokowi officially opened it as a special investment zone in 2017. It is being developed as a high-end luxury resort area, similar to Nusa Dua in Bali, and already several international hotel chains have begun construction. Initial numbers, which are almost certain to rise, have attracted Rp. 2.2 trillion ($159.5 million) in investment. The development is expected to eventually create more than 58,000 jobs in the tourism sector and attract 2 million visitors by 2019.
If the Indonesian tourism industry is to achieve the targets that have been set for it, Jokowi will need to concentrate on the Chinese market. Chinese visitor numbers have just overtaken those from Singapore, Malaysia and Australia, the three source markets that have traditionally dominated the Indonesian tourism industry. Over the past ten years, tourist numbers from China have grown by 428 percent, a growth rate only topped by Bangladeshi tourists, who still only account for 0.34 percent of all inbound visitors. If current trends continue, Chinese visitors could make up 20 percent of all inbound tourists by 2019, up from 14 per cent in 2016.
While the growth in the number of Chinese tourists is strong, the Indonesian Government also has an opportunity to entice them to spend more. On average, a Chinese tourist spends approximately $1,383 per visit, compared to the average of $1,423. In developing strategies to increase tourist spending, however, it is worth considering that shopping no longer appears to be the primary motive for travel among Chinese tourists.
While Chinese tourists make up the bulk of inbound arrivals in the Indonesian tourism industry, some attention should be focused on promoting halal tourism. Halal tourist services are differentiated from standard services by adherence to Muslim laws and customs, such as alcohol- and pork-free hotels and restaurants and separated swimming areas or prayer rooms for men and women. That can be difficult to offer due to a lack of international standards and the fact that many Islamic customs and laws can be interpreted differently among different Muslim communities. It is, however, an emerging market that could hold great potential for the Indonesian tourism industry.
Tourists from the Middle East, for instance, spend approximately $2,284 per visit, far more than the average tourist, but only around 200,000 nationals from that region choose to holiday in Indonesia annually. Halal tourism is a relatively new concept in Indonesia, with the soft launch of a halal tourism program taking place in 2012 and regulations for Sharia-compliant hotels being introduced in 2014. In an annual report produced by Thomson Reuters, Indonesia is ranked as the fourth-best developed Islamic economy for Muslim travel, behind Malaysia, the United Arab Emirates and Turkey.
Promoting halal tourism should not be confined to Middle Eastern countries alone. South Asian countries, such as India, Pakistan and Bangladesh, are all in relatively close proximity to Indonesia. In 2016, approximately 500,000 tourists from the South Asian region visited Indonesia.
Given the popularity of Bali for Australian holidaymakers, Australia may be seen more as a solid, reliable market, rather than a priority for the Indonesian tourism industry. Even so, it still holds great significance in the overall bilateral relationship. In a previous Strategic Analysis Paper, tourism was identified as the most important aspect of the Australia-Indonesia economic relationship, from the perspective of Jakarta.
Things are looking up for the Indonesian tourism industry. Although challenges such as the lack of infrastructure will need to be addressed, they will not necessarily damage the industry and are more likely to merely restrict its potential.
Marketing efforts efforts have been helped by a weakening rupiah, which increases Indonesia’s allure as an affordable tourist destination. But that is only a one part of a bigger picture which includes multifaceted efforts to restructure the Ministry of Tourism, market Indonesia more aggressively as a tourist destination, enact regulatory reforms to attract investment, and target strategic destinations outside of Bali for development and promotion.
While the ministry’s strategic plan is well on its way to hitting broad-based metrics like overall visitor numbers, higher GDP, billions in foreign investment and the creation of hundreds of thousands of jobs, it is unclear the extent to which the attainment of these national-level goals will have negative consequences for local businesses and the environment.
Furthermore, much of the government’s efforts have targeted foreign visitors and the currencies they bring. Less attention has been paid to developing the domestic tourism market, even though in 2016 there were over 264 million domestic visitors, vastly outnumbering the 11.5 million who came from overseas. As they chase overseas tourists, there is a risk of overlooking the enormous potential of the domestic travel market, a market that will almost certainly continue to grow in lock-step with the Indonesian middle class and the increasing amount of disposable income they are acquiring.
Nevertheless, the government’s effort to develop the tourism industry, and diversify its non-export economic sectors, has been largely very successful. This success can be directly linked to a coordinated, multi-faceted effort to address weaknesses in the sector through regulatory reform, aggressive marketing campaigns, bureaucratic restructuring, increased fiscal resources, and the targeting of strategic locations for development and improved accessibility with major infrastructure projects.