The Indonesian arms trade is currently diversifying from its traditional partners and patterns to incorporate greater breadth in choice and obtain more cost-efficient deals. Traditional allies such as the US have been overlooked in favour of other arms suppliers, as international politics has become less of a decisive factor in the purchasing process. Furthermore, developing defence industries outside the top tiers of arms suppliers are able to provide Indonesia with less costly weapons platforms.
Following the death of Osama bin Laden, Indonesian authorities are on high alert on fears that there may be reprisals in the coming weeks. Indeed, the country has had several major incidents of terrorist attacks including the devastating 2002 Bali bombings. More recently, there has been a spate of 'book bombs' and an attempt to bomb a church in April. Although Indonesia is a secular Muslim state, we have become more worried about the recent rise in Islamic militancy.
We believe that a cabinet reshuffle is in order in the coming months as Indonesian President Susilo Bambang Yudhoyono seeks to account for his administration's failure to curb religious extremism and rein in corruption. We also highlight the possibility of a broader shakeup within the ruling coalition that may lead to the departure of Golkar party.
Easing headline consumer price inflation (CPI) has provided Bank Indonesia (BI) with more room to hold off on rate hikes in the short term. However, with core inflation ticking up, monetary tightening cannot be held off indefinitely this year, in our view. We reiterate our call for two more 25bps rate hikes this year, taking the BI rate to 7.25% by end-2011.

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Executive Summary . 5
SWOT Analysis 6
Indonesia Security SWOT . 6
Indonesia Defence Industry SWOT .. 7
Indonesia Political SWOT . 8
Indonesia Economic SWOT . 9
Indonesia Business Environment SWOT . 10
Global Political Outlook .. 11
Japan After The Quake 12
Global Hotspots: Libya, Iran, Afghanistan, Korea 13
Wild Cards To Watch 17
South East Asia Security Overview .. 19
South East Asia In A Global Context 19
Challenges And Threats To Stability And Security. 19
The Outlook For South East Asia 30
Security Risk Ratings .. 31
BMI’s Security Ratings 31
Table: Asia Pacific Regional Security Ratings . 31
Table: Asia Pacific State Vulnerability To Terrorism Index . 32
Indonesia’s Security Risks . 32
City Terrorism Rating .. 33
Table: BMI’s Asia City Terrorism Index . 34
Political Overview 35
Domestic Political Outlook 35
Foreign Policy . 36
Long-Term Political Outlook 37
Security Overview .. 41
Internal Security Situation . 41
Table: Indonesia’s Insurgent Groups .. 44
External Security Situation 44
Latest Developments . 46
Armed Forces 48
Defence Budget 49
Army . 49
Navy .. 50
Air Force 50
International Deployments . 50
Weapons Of Mass Destruction . 50
Market Overview .. 52
Industry Trends And Developments .. 52
Competitive Landscape 53
Table: Key Players In Indonesia’s Defence Sector 53
Arms Trade Overview .. 53
Procurement Trends And Developments . 54
Industry Forecast Scenario 57
Armed Forces .. 57
Table: Indonesia’s Manpower Available For Military Services, 2008-2015 (aged 16-49, unless otherwise stated) .. 57
Defence Expenditure . 57
Table: Government Defence Expenditure, 2009-2015 . 58
Table: Defence Expenditure Scenario – Changing % Of GDP, 2008-2015 (US$mn) 59
Defence Trade .. 59
Table: Indonesia’s Defence Exports, 2008-2015 (US$mn) 59
Table: Indonesia’s Defence Imports, 2008-2015 (US$mn) 60
Table: Indonesia’s Defence Trade Balance, 2008-2015 (US$mn) .. 60
Key Risks To BMI’s Forecast Scenario 61
Macroeconomic Forecast .. 61
Table: Indonesia – Economic Activity, 2009-2015 . 64
Company Profiles 65
PT Dirgantara Indonesia (IAe) 65
PT Pindad .. 67
PT Penataran Angkatan Laut (PAL) . 68
BMI Methodology 70
How We Generate Our Industry Forecasts 70
Defence Industry . 70
City Terrorism Rating .. 71
Table: Methodology .. 73
Sources 74
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