Risks That May Hinder Boom in Indonesia

Pedestrians cross a road in front of buildings in the financial district of Jakarta, Indonesia, on Jan. 8, 2013. (Bloomberg Photo/Dimas Ardian)

Pedestrians cross a road in front of buildings in the financial district of Jakarta, Indonesia, on Jan. 8, 2013. (Bloomberg Photo/Dimas Ardian)

Indonesia’s economy is expected to power ahead this year, as its vast domestic market and natural resources continue to pull in investors.

But clouds are looming — a restive labor force and rising economic nationalism could see businesses hold back. Nevertheless, many believe the rewards will outpace the risks.

“Strong and growing household consumption amid the global slowdown means growth will be sustained in the coming year,” says University of Indonesia economics lecturer Muslimin Anwar.

Indonesia saw 6.3 percent growth last year, and is projected to grow 6.5 to 6.8 percent this year. The fastest-growing sectors in recent years signal a country on the move — mining, trade, hotels and restaurants, and transportation and communications.

The fastest-growing regions and cities such as Balikpapan, Makassar and Pekanbaru are enjoying growth of nearly 10 percent.

Domestic demand accounted for some 65 percent of the gross domestic product (GDP) — boosted largely by rising incomes that have seen the middle class expand to more than half the national population of 240 million.

Meanwhile, foreign direct investment, estimated to have hit US$21 billion last year, is expected to reach $29 billion this year as multinationals seek bases with long-term potential.

The World Economic Forum’s 2012 competitiveness report on Indonesia ranked it 25th in terms of macroeconomic stability, ahead of Thailand and Malaysia, while the McKinsey Global Institute expects Indonesia to be the world’s seventh-largest economy by 2030.

But strains are showing too, especially in Java: roads, railways and airports are congested as infrastructure fails to keep up with demand.

Another worry, says Standard Chartered senior economist Fauzi Ichsan, is that the rupiah is falling against the greenback, with the rate at nearly 10,000 rupiah to the dollar — well below the 9,300 rupiah targeted by planners.

One reason is that the trade deficit — exports weakened following slowdowns in markets such as China — limits dollar supply from exporters while demand to finance imports continues to rise.

Fauzi says Bank Indonesia should intervene more aggressively in currency markets, and the government should cut the fuel subsidy and divert spending to more urgent areas.

“As the country approaches the 2014 elections, there is the risk that policymakers will lose focus,” he says.

Vice President Boediono has already sounded the alarm, warning in a speech this month that politicians might not make unpopular but necessary economic decisions should global conditions worsen.

“The weather might be calm, but when the fighting comes from within the ship, the effect is the same — it could sink,” he added.

“Let us not get to the point where we destroy our own ship.”

Others feel that while politics might get in the way a little, it will also help, as aspiring candidates start spending on campaign supplies ahead of national elections next year.

“Rising household consumption is backed by strong purchasing power and steady consumer confidence, as well as preparations in the lead-up to the 2014 elections,” says Muslimin.

However, observers fear that the clamor for higher wages by militant union leaders, which forced industries to stop work for several days last November as unions took to the streets, might continue this year.

Arief Budisusilo, the editor of leading financial newspaper Bisnis Indonesia, says rising wages will reduce the country’s attractiveness to investors if workers’ skills and productivity are not raised.

Growing economic nationalism — evident in attempts to reduce foreign dominance in a slew of sectors from banking to mining and oil and gas — could also slow the Indonesian vessel. It has dragged out DBS Bank’s bid to acquire Bank Danamon, which was launched in April last year.

Further, rising wages will push inflation up temporarily, but on the bright side, economists say workers will have more disposable income, which they can use to buy everything from cereal to clothing and cosmetics.

Already, companies from L’Oreal to Nestle and Toyota are expanding their presence here.

Ndiame Diop, the lead economist for Indonesia at the World Bank, sees a need to reduce regulatory uncertainty, to sustain such investments and ensure that the fruits of growth are shared more equitably across society.

However, Fauzi says, some of the moves that worry would-be investors have little to do with coordinated policy. Rather, certain stakeholders are seeking to pull the government in various directions, but this is all part and parcel of Indonesia’s democracy, he says.

“In spite of all the noise, given the current global environment, Indonesia looks pretty good,” he says.

Reprinted courtesy of The Straits Times