Minimum Wage Rises in Indonesia Won’t Hurt Investment: Economists
Despite hefty minimum wage increases across the country next year, Indonesia remains an attractive destination for foreign companies due to the solid pace of its economic growth, global banks UBS and Deutsche Bank say.
Economists at the banks said foreign direct investment into Indonesia would continue at a rapid clip even though the wage increases, led by Jakarta’s 44 percent rise, may dampen sentiment slightly.
“We expect Indonesia to remain popular as an investment destination despite less friendly industrial policies being debated and introduced ahead of the 2014 election,” Edward Teather, an economist with UBS, said in a teleconference from Singapore on Tuesday.
Teather said that relative to Europe, which is grappling with a debt crisis, and the United States, which is heading toward a “fiscal cliff,” Indonesia and its solid economic growth were attractive to investors.
“The reason is that underlying growth prospects remain good,” he told the Jakarta Globe in an e-mail.
Indonesia’s economy, which expanded by 6.2 percent in the third quarter this year from a year earlier, is forecast by the government to expand by 6.5 percent across the whole of 2012, a similar pace to last year.
“Six percent real GDP growth … estimated by UBS for Indonesia this year will look attractive to firms looking to sell into Indonesia’s domestic market,” Teather added.
He said consumption in Indonesia of goods and services, in particular cars, motorcycles and other consumer products, was relatively low, creating an opportunity for foreign investors.
Heriyanto Irawan, an executive at Deutsche Bank, said he believed the minimum wage rises across the country may actually stimulate investment because higher wages lead to more consumption.
“The positive consequences from the wage increase is an increase in consumption,” Heriyanto said in a meeting with reporters on Wednesday in Jakarta.
He said that on average an increase of 5 percent of sales turnover at a company should be enough to absorb the increase in labor costs.
He said the momentum of growth in Indonesia remained strong and the economy was in a virtuous cycle.
Meanwhile, based on Deutsche Bank’s latest research, he said in urban areas there was a 9 percent increase in employment in the third quarter.
Chatib Basri, the head of Indonesia’s Investment Coordinating Board (BKPM), said last week that foreign direct investment is expected to reach $31 billion next year, with total investment — including domestic investment — to hit $40 billion next year. The foreign investment figure is 25 percent higher than this year’s estimated investment of $32 billion.
Chatib said the consumer sector, which accounts for two-thirds of the country’s economy, would continue driving the investment.
Automotive companies such as Japan’s Toyota Motor and Germany’s BMW have announced plans to invest billions of dollars on production in the country, where car sales grew 24 percent in October.
In the January-to-September period, foreign direct investment rose 27 percent to Rp 164.2 trillion ($17.1 billion) from the same period last year, BKPM said. The realization up to September is about 79 percent of the government’s 2012 target.