Indonesia: A Bright Start and Solid Foundation
    Category: Column By : Luc Cardyn Read : 269 Date : Thursday, March 01, 2018 - 23:11:40

    Indonesia enters 2018 in a solid position with full-year GDP growth forecast above 5%. The government’s own forecast is 5.4%, the fastest pace in five years. Bank Indonesia (BI) is supporting this growth: Exchange rates are stable and currency reserves are up. Despite rising interest rates in the U.S. and in Asia, the strength of Indonesia’s economy has allowed BI to hold off on following suit. Importantly, inflation is under control. Business and foreign investment are benefiting. A series of economic stimulus packages in the last two years has led to improvements in areas such as deregulation and foreign ownership liberalization.

    European businesses confident in infrastructure and FDI

    European businesses are confident about Indonesia’s trade and investment outlook—especially infrastructure and FDI. The Joint European Chambers’ 2016 Business Confidence Index showed strong confidence in long-awaited infrastructure investment, likely leading to better prospects for international investors. The Index also indicated a belief that the government is ready to act to support FDI, and more than one third of European businesses here want to make further major investments in the next two years.

    Private Sector Investment—Greater potential to be tapped

    Public sector investment in the country’s infrastructure program is full steam ahead, but lacks a Private Public Partnership (PPP) structure. Currently, local private investment into infrastructure—and other sectors—is wanting. At the same time, fiscal policy remains disciplined, and the government will want to keep the budget deficit relatively stable at 2.5% of GDP versus 2.6% in 2017. For FDI, European businesses have welcomed moves to open up areas from e-commerce to tourism. Between 2010 and 2016, the EU member states collectively represented the third-largest FDI source into Indonesia, at $13 billion—behind only Japan and Singapore, according to the Indonesian Investment Board (BKPM). Yet challenges such as foreign ownership restrictions capital expenditure requirements and fierce regional competition remain. For example, Indonesia lags Vietnam in the year-on-year FDI growth, according to UNCTAD and BKPM figures.

    What’s next?

    Increasing private sector investment has to come from the company level and the government level. Both must work together to build the investment confidence form both the local and international private sectors. Indonesia should also deepen its connectivity to Europe to enable the flow of trade, capital and best practices between them. International agreements such as the EU-Indonesia Comprehensive Economic Partnership Agreement (CEPA) are thus more timely than ever, and can accelerate trade and investment between the regions. Global banks such as BNP Paribas can also bring their global networks, local expertise and integrated business solutions to connect clients in Indonesia within the region and in our home markets in Europe, with opportunities in Indonesia and vice-versa.

    Indonesia’s potential is huge, the right environment is key

    Indonesia’s growth potential remains huge. The local market is large, with significant resources, and competitive costs and quality of labor. The economic fundamentals are sound, and the foundation is set. The right messages must be sent to the private sector through initiatives that encourage investment by local businesses, and improve the ease of doing business for international companies, while deepening connectivity between the two regions.