Trade Minister: Hurdles Loom for Indonesia’s Growth This Year

Shoeb K. Zainuddin

The United States may have just barely avoided the fiscal cliff, but the country faces long-term economic uncertainty. Europe will continue to muddle on with its own economic challenges while emerging economies — the main growth engines for the global economy — are all facing slowing growth.

Indonesia has done comparatively well and will continue to enjoy foreign fund inflows for much of 2013, allowing its economy to grow by 6.0 to 6.3 percent this year, Trade Minister Gita Wirjawan noted in a broad ranging interview with the Jakarta Globe on Thursday.

He cautioned, however, that unless Indonesia reduces its cost structure and revives its manufacturing sector, the country too could face longer-term economic challenges.

“There is no long-term solution in the US and no clear direction in Europe,” he said. “Indonesia will continue to enjoy funds inflow until the middle of this year but after that it is uncertain.”

The trade minister said that domestically, “without a shadow of doubt, politics will dominate economics in 2013, which means we will not see large infrastructure projects but small ones will proceed.”

The key drivers for growth this year will remain investment and domestic consumption. “However, I cannot be that complacent that investment and consumption will remain robust,” he added. This is because the investment climate is dependent on legal certainty and the impartiality of law enforcement.

“If law enforcement can be bent and aligned to political interests, I am not quite sure the targeted growth can be achieved,” he noted. Looking beyond 2013 and 2014, the big question is whether there will be policy continuity after Susilo Bambang Yudhoyono’s presidency.

“I think it’s a 50/50 bet,” Gita noted. “The choice is clear between a general, a businessman and a politician but I am optimistic that 170 million [largely] young and female voters will make the right choice.”

But the political uncertainty will cause investors to hold off making decisions until after the 2014 elections. “This will cause a dent in investments down the road, but for 2013 and 2014, there will be a realization of investments already approved.”

Looking further down the road, Gita said he was confident that the US will be able to lower its cost structure through lower energy prices with the discovery of shale gas, which is much cheaper than oil. Moreover, the demographic spread in the US is also favorable due to immigration. The US also has greater fiscal room to boost growth, compared with Europe, which is undergoing a strict austerity drive.

“This will reduce the cost structure in the US economy and allow the country to raise production,” he noted. “With a lower cost structure, the US will compete head on with China and other emerging economies, including Indonesia.”

Such a scenario means that Indonesia must also work hard to watch its cost structure and lower the cost of energy, labor and borrowing. If the country’s investment climate keeps improving, the cost of money will fall but if there is legal and political uncertainty, the cost of money will rise, driving away investment.

On trade, Gita noted that while Indonesia will continue to record a trade deficit in the short term, the country is well placed to boost its manufacturing sector over the medium term. This will in turn raise exports of value added goods, turning the trade deficit into a trade surplus.

His ministry has therefore set itself three major deliverables this year: promoting greater trade facilitation at the World Trade Organization meeting in Indonesia in September; signing a Comprehensive Economic Partnership Agreement with South Korea by August; and getting palm oil on the list of environmentally sustainable products.

The country could also achieve a major coup if Tourism and Creative Economy Minister Mari Elka Pangestu is elected as the next director-general of the WTO. “Competition for the post will come from Africa, Korea, Brazil and New Zealand, which is a dark horse,” Gita noted. “At the end of January, we will present our mission and vision in Geneva.” If the country is successful in securing the position, it will further increase its stature on the global stage.