Global Business Guide Indonesia

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Why Indonesia | Indonesia’s Second Semester Economic Outlook: Focusing on Investments

Weak economic performance in the first semester of 2017 has forced the Indonesian government to be more creative in shaping its economic policy throughout the remainder of the year. The Ministry of National Development Planning estimates that GDP growth of 5.4% is needed if the government wants to achieve the overall growth target this year of 5.2%. This will not be an easy task amid sluggish household spending and the continued slump in commodity prices. That is why investment will play a crucial role in Indonesia’s economy in the second semester of 2017.

A disappointing start

Despite starting the year with rising optimism and bright forecasts (See Indonesia’s Economic Outlook in 2017: Remain Cautiously Optimistic), Indonesia closed the first half of 2017 with a somewhat disappointing economic performance. The Central Bureau of Statistics (BPS) recorded that the country’s economy in the first semester of the year only grew by 5.01%, or down from 2016 which recorded 5.18%. This was also below the target set in the revised 2017 state budget of 5.2% and the World Bank’s forecast of 5.3%.

Bank Indonesia (BI) blamed limited household consumption which only grew by 4-4.5% and the decline in some commodity prices, especially palm oil (See Indonesian Palm Oil Industry Overview – Biodiesel as a New Source of Revenue Growth), and rubber (See Indonesia’s Rubber Industry: Increased Competition and Falling Prices), for the stagnant economic growth in the first and second quarters of 2017. BI Governor Mr Agus Martowardojo explained that Indonesians tended to put a brake on spending at the end of the first semester because of school tuition fees which are due in June (See An Overview of the Indonesian Education System). Indonesian household consumption was further limited by the the increase in the basic electricity rate (See Investment in Indonesia’s Electricity Sector; Sparks of Life); the removal of the electricity subsidy which accounts for a significant portion of 900 VA customers, and the late disbursement of civil servants’ 13th salary for the religious holiday period.

Moreover, BI also noticed a change in the behaviour of the middle-up segment who are now showing a preference for saving money rather than spending it. One of the indicators is the increase from 1 billion to 2 billion IDR in the amount held in savings accounts. In addition, exporters have started to halt consumption and save their money to anticipate volatile commodity prices.

Lots of catching up to do

Senior Economist at Standard Chartered Bank Indonesia Mr Aldian Taloputra predicts that Indonesian economic growth in the second semester of 2017 will be more evenly distributed between exports, government spending, and investment. He said that infrastructure projects (See High Stakes for Indonesia's New Infrastructure Push), a well-maintained inflation rate, and the government’s fiscal boost will play a crucial role in driving the Indonesian economy in the second semester of 2017.

In the natural resources sector, many companies have started importing heavy equipment and raw materials which indicates increased investment for the remaining six months of the year. The Indonesian government, however, cannot expect much from the oil and gas sector which remains sluggish amid low oil prices. This can be seen from the lack of bidders in recent oil and gas block tenders (See Overview: Indonesia’s Downstream Oil and Gas Sector)..

Various regulations issued by the Ministry of Energy and Mineral Resources that are meant to boost investment have become a disincentive to the industry and were openly criticised by President Joko Widodo. Nevertheless, the implementation of the gross split scheme will help local supporting industries to better compete with foreign companies through incentives in the form of an additional split to investors with higher local content (TKDN) levels (See Going Local: Understanding Indonesia’s Local Content Requirements).

Whilst we see the Joko Widodo administration carry out several initiatives to improve the business climate, they must also speed up the process in which these plans are implemented.

In the commodity sector, iron and nickel ore exports will positively contribute to Indonesia’s export growth (See Indonesia’s Metal Mining Sector: Rewriting the Rules). Overall, export performance in the second semester is expected to improve, which will help sustain the economic growth.

In the capital market sector, the Association of Indonesian Securities Analysts (AAEI) is optimistic that the Indonesian Stock Exchange (IDX) will pass the 6,000 mark in 2017. Since 2016, the IDX has recorded tremendous growth and the trend has continued robustly to date. Currently, the index still hovers around 5,700-5,800 basis points (See Indonesia’s Capital Market: Growing Beyond Expectations).

From a macroeconomic perspective, the overall conditions that underpin Indonesia are still sound. The budget deficit is projected to reach 362.9 trillion IDR or 2.67% of GDP. This is lower than the projected level in the revised 2017 state budget of 397.2 trillion IDR or 2.92% of GDP. Meanwhile, the inflation rate is expected to be stable due to the relatively lower demand for goods and well-controlled food prices. The steady increase in GDP and the decline in poverty rate will also serve to make Indonesia more attractive to investors.

The improvement in global trade and economic growth which is predicted to grow 3.5% this year and will help Indonesia pursue its economic growth target. This will be further sustained by stability in China’s economic growth — one of the country’s largest trading partners — which is expected to reach 6.8% this year (See What China’s Slowdown Means for Indonesia: A Trade Perspective).

On the negative side, the lack of breakthrough programmes such as the tax amnesty has made it difficult for the Indonesian government to boost economic growth in Q3 and Q4 (See Indonesian Government Banking on Tax Amnesty to Plug Tax Shortfall). That is why further action needs to be taken to optimise the existing tax base to drive revenue. Moreover, Indonesia is also subject to the shocks caused by external factors, particularly The Fed’s policy (See Indonesia’s Fragility & The Fed). If the Fed fund rate is increased, there will be more capital outflows from the country which could hamper investment.

That being said, the Indonesian central bank remains optimistic that the economic growth target of 5.2% can be attained. BI has introduced measures to coordinate with the government to boost public consumption so that the economy in Q3 and Q4 will grow above 5.2%.

Investment: The last resort

Indonesia will need to rely on investment to compensate for the sluggish growth in the first semester and achieve the overall economic growth target of 5.2% for 2017. The Ministry of National Development Planning expects investment to grow higher beyond 5% so that the economy will grow 5.4% in the second half of 2017.

Meanwhile, Coordinating Minister for Economic Affairs Mr Darmin Nasution said that the government has set a target to boost investment in the second semester above 5.8%, well beyond the growth in Q2 of 5.35% (See FDI Growth in Indonesia: A Timely Reminder of Long-term Upside). To achieve this, BPS suggested to the Indonesian government to drive the growth of three sectors, namely agriculture, industry, and trade to accelerate the economy in the second half of the year. Moreover, the property (See Indonesia’s Mass Housing Sector: The Rise of Vertical Housing) and commodity sectors are also expected to help drive economic growth, create jobs, and improve Indonesians’ purchasing power. In addition, the government’s capital spending, which will be more accumulated in the second semester, will also support an upward growth trajectory.

The 16th economic policy package is also on the horizon and is set to focus on fast tracking investment and resolving permit processing constraints in Indonesia’s outer lying regions. The package will be comprehensive as it will involve all ministries and government agencies; including local governments.

The new policy package will offer a model to speed up the policy synchronisation process between central to local governments with the main goal being on license restructuring. To ensure its implementation, the government will require all ministries, agencies and regional governments to form a special task force. Its function will be to supervise, monitor, and facilitate the implementation of the economic package. That way, the regulations at central and local government level can be synchronised to boost investment in Indonesia. A report must be prepared each month and there will be sanctions for failing to comply with the rules.

To date, the Joko Widodo government has launched 15 policy packages to improve the investment climate in Indonesia (See Indonesia’s 14th Economic Policy Package to Kick-Start E-Commerce Industry). The latest policy package is expected to bring investment regulations more in line with the current conditions. In addition, the package will further streamline the licensing process to optimise investment. Under the steam of these new measures, investment is expected to expand which will help in attaining Indonesia’s economic growth target in the second half of 2017 and beyond.

Global Business Guide Indonesia - 24th August 2017

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Indonesia Snapshot

Capital: Jakarta
Population: 259 million (2016)
Currency: Indonesian Rupiah
Nominal GDP: $936 billion USD (IMF, 2016)
GDP Per Capita: $3,620 USD at Current Prices (IMF, 2016)
GDP Growth: 5.0% (2016)
External Debt: 36.80% of GDP (BI, Q2 2016)
Ease of Doing Business: 91/190 (WB, 2017)
Corruption Index: 90/176 (TI, 2016)