Global Business Guide Indonesia

Indonesia
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Why Indonesia | Indonesia’s Economic Outlook in 2016 and Beyond

Having weathered the worst of 2015 and its challenging economic climate, Indonesia entered 2016 with the expectation that the new year would offer a welcome reprieve to local industries placed under an uncharacteristic amount of pressure. With several key indicators from Q4 2015 pointing to a rebound from the country’s slight dip in economic performance, there was reason to believe that 2016 would be a period of recovery, characterised by a rediscovery of the accelerated growth enjoyed by the country for most of the last decade (See Indonesia Economic Outlook 2016 – Economy not at the Mercy of Global Markets). This idea was strongly reinforced by the administration of President Joko Widodo, in seeking to build market confidence and restore some semblance of feasibility to its campaign pledge of 7% GDP growth by 2017. Certainly, the launch of 12 economic policy packages by the government lent credence to the notion of a speedy recovery, fueled by delicate stability in the global economy as well as serious state action (See Action Needed to Put Indonesia's Economy Back on Track).

Indonesia Economic Outlook 2016
Working with international partners with the specific goal of building upon the capacity of the country’s human resources through education and training should be among the government’s foremost priorities.
 

Despite what appeared to be positive momentum at the close of 2015, early results from this year suggest that Indonesia is not yet out of the woods. Much in the same way that Q4 2015 indicators were taken by many analysts to be a sign of upwards progress – an inflection point following several quarters of sub-5% growth – data from Q1 2016 should provide plenty of cause to pump the brakes on any premature celebrations. Indonesia, at least in the immediate term, will continue to face several of the same pressing issues that put a damper on its economy in 2015, namely:

  • Disappointing GDP Growth – Itself a function of the other economic indicators detailed below, Indonesia’s GDP growth in Q1 2016 came in at 4.92% year on year (yoy) – a decline from Q4 2015’s growth rate of 5.04%. Though dismissed in some corners as a momentary blip in the country’s return to an upward trajectory, this data has to some extent served as a wake-up call confirming that the new economic realities of 2015 are, for the moment, here to stay. At a time when so much of Indonesia’s recovery depends upon positive sentiment at both the consumer and investor level, any less than stellar GDP movement has the potential to quash confidence; a turn of events that does not bode well for the rest of 2016.
    However, given that several of the aforementioned economic policy packages have not yet been fully implemented across the country, this drop and its significance should not be overstated; Indonesia will not be able to fix its most pervasive vices overnight and as such, GDP figures in the short-term may not always reflect the effort being put in by the government to shore up long-term prospects.
  • Wavering Household Consumption – Accounting for 58% of the country’s overall economic growth, household consumption in Indonesia has long been viewed as a central pillar of its success. With a market comprised of more than 250 million people typically characterised by a willingness to spend, much of Indonesia’s ability to draw interest from multinational corporations can be attributed to its immense potential as a consumer base. Though this competitive advantage is inherent to the demography of Indonesia and should thus be relatively unaffected by recent economic headwinds, slowing household consumption growth in Q1 2016 suggests that some of the consumer reticence witnessed in 2015 has rolled over into this year. While the decline in this growth rate is marginal – from 5.01% yoy in Q1 2015 to 4.94% yoy in Q1 2016 – it also belies the notion that consumer confidence has recovered amidst highly publicised government action and instead suggests that concerns run deeper than the topic of inflation (since stabilised as a result of Bank Indonesia interventions). An uptick in household spending is anticipated for the rest of the year, primarily spurred by the holy month of Ramadan, but it is worth keeping expectations in check as similar projections made in 2015 ultimately proved to be overly optimistic.
  • Worrying Trends in Unemployment – Data from the Central Statistics Agency (BPS) demonstrates that Indonesia’s unemployment rate in February 2016 dropped to 5.5% from 5.81% during the same month in 2015. On the surface, this development stands as a welcome reversal of last year’s trend but in truth reveals an even more concerning reality, namely: the decline only took place as a result of people leaving the labour force (defined by BPS as members of the population who are employed, older than 15 and work at least one hour per week), which shrank from 128.3 million to 127.8 million in spite of Indonesia’s vaunted youthful demographic. Of particular note is the decrease in the number of people working in agriculture and manufacturing, which fell by 4.5% and 2.5%, respectively. As reported by the Jakarta Globe (04/03/2016), Indonesia also saw the number of people working less than 35 hours a week rise from 35.7 million to 36.3 million – an increase that points to worsening prospects for Indonesians in search of permanent employment. Complicating the situation is the government’s recent decision to raise costs for BPJS coverage this year to over 8% per employee – a course of action with clear long-term benefits that are somewhat offset by the immediate repercussion of making employers more reluctant to hire in the present.
  • Inconsistencies in Government Spending – Discussions about Indonesia’s capacity to recover in 2016 begin and end with the following question: will the government be able to carry out the spending required to not only drive progress in infrastructure development but also bring about a multiplier effect for the many local businesses that rely upon state projects? Having initially enjoyed success in this regard with government spending in Q4 2015 rising by 7.31% yoy, results from Q1 2016 are less promising, in that government spending during this period rose by only 2.93% yoy. While much of this discrepancy can be accounted for by the way in which the national budget is typically disbursed towards the tail end of the year; the fact remains that the vast majority of the state’s highly touted priority projects have yet to break ground. A report from The Jakarta Post estimates that only 86 of the 225 ‘national strategic projects’ have moved beyond the planning stage.
    Slow progress in this domain has skeptics questioning as to whether these new ambitious plans are truly implementable, particularly beyond the relatively developed confines of Java. As was the case with previous administrations, the core issue with attempts to overhaul existing inefficiencies and enact major reform is ensuring that said change is carried out consistently at the regional level – a challenge given the sheer size and scale of the country, made even more difficult by decentralisation. The current government has not yet demonstrated that it is better equipped to address this fundamental problem than its predecessors, and therefore its eagerness to announce and publicise new projects and grand initiatives should still be taken with a pinch of salt. 

Overseas interest persists

In spite of misgivings related to the indicators described above, Indonesia continues to thrive in ways somewhat unexpected of a country in its current position. Even with the market’s distinct lack of certainty over the short-term, Indonesia in 2016 strengthened its standing as a hub for investment, with FDI growing by 17% in the first quarter as a result of attracting $7.27 billion USD over this period of time. Even more remarkable is that this overall increase took place despite a gargantuan dip in mining sector investment to $189.2 million USD from $1.135 billion USD a year earlier.

In many ways, the resolute persistence of FDI into Indonesia speaks to the general understanding among investors that this market is not one in which you can afford to wait around for the perfect conditions before entering. As has been proven time and again by the incongruity between overseas interest in Indonesia and the country’s middling ranking in business indices, investors are generally willing to overlook the archipelago nation’s warts in tapping into its current bevy of lucrative business opportunities and even brighter economic prospects should the government make good on its promises to reform and actualise infrastructure development plans (See High Stakes for Indonesia's New Infrastructure Push). The addition of a few blemishes (especially ones viewed as temporary) in the form of disappointing economic indicators will therefore do little to dissuade foreign entities that have likely already factored in a fair amount of short-term turmoil upon making their decision to invest in Southeast Asia’s largest market. Moreover, Indonesia’s continued popularity on the international stage is helped by the relative straightforwardness of its perceived issues and challenges compared to other emerging markets such as Brazil that were often grouped with Indonesia as major countries on the precipice of advanced economic development.

No better time to reform

This is not to say that Indonesia can rest easy and dismiss its present struggles with the understanding that foreign investors will always be so accommodating. International attention is fleeting, and countries can quickly go from today’s darlings to yesterday’s news. Brazil, as an example that offers many parallels to Indonesia as a commodity-driven economy that also offers the lure of a sizeable consumer market, has seen its number of FDI projects plummet in recent years, from 522 in 2011 to 268 in 2015 (Financial Times, fDi Markets).

Indonesia must therefore strike while the iron is hot, and to use another cliché, take advantage of its time in the spotlight. Working with international partners with the specific goal of building upon the capacity of the country’s human resources through education and training should be among the government’s foremost priorities. (See Higher Education: Indonesian Academia Must Open Up and Vocational Education in Indonesia; Crucial to Compete in the ASEAN). Results from the OECD’s 2013 Program for International Student Assessment (PISA) placed Indonesia 64th out of the 65 countries examined, and revealed a systematic weakness in its availability of practical education opportunities. The country must therefore move beyond the rhetoric of its commitment to allocate 20% of the national budget to education, and ensure that this investment is not lost by seeking out a more permanent fix to an education system currently unable to produce enough work-ready graduates. Equally important is the development of value-added industries to lessen the blow of the eventual departure of low-skill manufacturing to countries offering even cheaper labour. Myanmar and Cambodia come to mind as immediate candidates to challenge Indonesia in this arena.

Without taking these steps to capitalise on global interest in a manner that not only brings about immediate profits but also puts into motion transformative economic restructuring, Indonesia runs the risk of seeing its competitive advantages become weaknesses. Recent history offers useful lessons aplenty for Indonesia, who needs only to look at developments in Egypt to see the promise of a burgeoning youth demographic turn into the perils of an unsettled and disruptive population. Similarly, Indonesia’s oft-referenced growing middle class offers no guarantee that the country will be able to move beyond the middle-income trap. In short, the country must learn from its current economic predicament that it can no longer afford to ignore problems set to arise further down the line and must resist the temptation to trust so blindly in the promises of its potential.

Global Business Guide Indonesia - 2016

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