A new equilibrium in Indonesia

Indonesia is on the cusp of a new ‘golden era’ where the principal arms of economic policy in the country coordinate to implement new President Joko Widodo's development plan.

"The plan should radically improve the efficiency of the Indonesian economy and deliver higher and more stable growth."

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The plan should radically improve the efficiency of the Indonesian economy and deliver higher and more stable growth, lower inflation and reduced financial market volatility.

Speaking at ANZ Indonesia’s flagship 2015 Outlook event, senior Indonesian ministerial officials and policymakers outlined a policy roadmap to a more efficient, well-structured and higher-yet-sustainable Indonesian growth epoch in the coming years.

The tone for the evening was set in the keynote speech delivered by by Dorodjatun Kuntjoro-Jakti, a former Indonesian ambassador to the USA and former coordinating minister of economy and finance.

In his presentation, Dorodjatun remained bullish about the growth prospects of the Indonesian economy for this year and beyond. He underlined the need for continual development and synergy between monetary and fiscal policies in order to better manage the impacts of global economic volatility on Indonesia.

“In the future greater emphasis should be placed on fiscal policy, not only monetary policy, because history shows that monetary policies will struggle to anticipate global economic pressures,” he said.

Dorodjatun would have been well pleased with the panel discussion that followed his keynote.  I was fortunate enough to be invited to participate in that discussion that included senior industry, fiscal and monetary policy officials. These speakers candidly shared their assessment of the Indonesian economic, financial and policy outlook in the formal panel discussion and informally throughout the evening.

I was left with the impression that the three arms of economic policy – monetary, fiscal and structural reform – are entering a more coordinated phase that should build the base for a stronger and more durable medium term expansion.  The latter half of this decade could thus prove to be a golden period for Indonesia.

A clear thread could be seen sown through all the comments from senior ministerial and policy officials.  There is a positive feedback loop between infrastructure development and the allocative efficiency of the Indonesian economy.

Infrastructure will create an environment where Indonesia can not only emerge as a manufacturing hub, but the abundant natural resources of the Indonesian archipelago can be more efficiently utilised and Indonesia’s cost competitiveness will improve. This in essence is the Jokowi development plan.

The Bank Indonesia is still very optimistic that Indonesia’s economy will improve to between 5.4 to 5.8 per cent growth compared to 2014 that grew at 5.1 per cent. Bank of Indonesia deputy governor Perry Warjiyo said at the event that by the year’s end, the central bank’s target inflation rate of 4 per cent will be realised, plus or minus 1 per cent.

The government should be praised for removing fuel subsidies in order to free up capital for infrastructure which stimulates employment, spending and demand for commodities. Adding to this, the falling global oil price will provide more disposal income to consumers thus increasing spending and offsetting the slowing Chinese economy.

If Indonesia wants to reach its potential as a manufacturing hub, it requires infrastructure. The money saved from the abolishment of fuel subsidies has to be spent on seaports, airports, roads and electricity.

Indonesian ministry of transportation experts staff Sugihardjo said the government has planned to build 3258 kilometre of railway, monorail and the MRT. In order to achieve this, he said management of financial resources in terms of policy and planning is the key, in addition to creating appeal to the private sector to assist with raising capital.

With this robust economic potential, Indonesia must design economic policy with a focus on avoiding the middle income trap. Director general of Indonesia’s manufacturing industry Harjanto said manufacturing could be the answer.

Industrialisation, and a manufacturing focussed industry policy, was suggested as a key enabler of sustainable increases in per-capita income in Indonesia.  Indeed, manufacturing is considered the key sector likely to advance the countries overall economy and improve formal employment.

The sector needs to be improved by increasing its competitiveness and cost structures. Harjanto said this could be done through investing in the development of local raw materials as the current industry is too reliant upon imports, paired with the development of alternate energy sources to reduce this cost to business.

The ocean is also a natural resource that Indonesia can potentially harness. As the Indonesian diet changes alongside rises in per-capita income, aquaculture and fisheries are likely to be the most efficient – and local source - of protein.

Indeed, this makes sense given roughly 30 per cent of Indonesia sovereign territory is ocean. Saut Hutagalung, Indonesia’s director general of fisheries processing and marketing believes continual development of the seas could provide for the future and good logistics are the key to developing the industry. He said overcoming crowding could be done through tightening permit licensing as currently many boats operate using fake permits.

National business continues to face conditions unfavourable in comparison to neighbouring counterparts such as high interest rates and high tax rates, according to Suryo Bambang Sulisto, chairman of the Indonesian Chamber of Commerce and Industry.

Improvement within this sector lies in synergy between governments and regions in creating clearer policies to create a more attractive environment for investors.

“Furthermore, an environment must be created to derive more value from local natural resources that are currently being sold to richer countries," Suryo said. "For instance, the energy sector is shouting out for a greater supply of gas due despite rich local availability."

ANZ Indonesia CEO Joseph Abraham said this year’s economic outlook for Indonesia further reinforced the positive strides ANZ Indonesia was taking. The group expects it will achieve its optimistic financing portfolio target due to corporate clients within the infrastructure sector.

“We are expecting a credit growth of between 15 and 17 per cent,” Abraham said. “At least in the range of banking industry growth”.

“Although there is volatility in the external, Indonesia remains attractive for investors.”

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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