Transforming Indonesia in the Midst of Uncertainties
    Category: Column By : Haryanto T. Budiman Read : 1119 Date : Friday, February 13, 2015 - 20:11:58

    The new Indonesian government under President Joko Widodo brings hope to the Indonesian people, investors and the country’s economy. The President appears committed to an ambitious reform agenda that includes reallocating budget away from energy subsidies toward infrastructure, education and other productive programs. So far, the government seems to be delivering. It has already reduced the gasoline subsidy and is appointing top executives within State Owned Enterprises (SOEs) based on their competence and experience.

    However, global uncertainties, coupled with a challenging domestic environment will make implementing wide-reaching reform more difficult. One example is the dramatic decline in the price of oil. If the price stays depressed for a long time, it could dampen upstream investment—something that Indonesia desperately needs to boost falling oil production, as well as hurting the use of alternatives such as biodiesel. A prolonged depression of oil prices could also hurt Indonesia’s export and tax revenues.

    J.P. Morgan economists are forecasting China’s growth to slow to around 7.2% from 7.4%. Concurrently, the Fed is expected to soon raise interest rates. As the cost of borrowing goes up, emerging markets (EM), such as Indonesia, that lack structural reform, and have significant current account and fiscal deficits, run a risk of capital outflow.

    While the President is signaling he is serious about reform, these have so far been more symbolic and therefore their impact minimal. Indonesia must address market realities while reinventing itself to become one of the world’s leading economies.

    The government has set an aggressive growth target of 7%. While consumption remains an important growth driver, exports will not contribute much due to weakened demand from major trading partners such as a China, Japan, and Europe. Real transformation of the economy can only be achieved by attracting and maintaining domestic and international private sector investment. Thus the government needs to create a conducive investment environment with new legislation aimed at removing obstacles to investment. Discussions around protectionism must be avoided, especially in sectors where capital injection is perpetually needed to support growth.

    In the financial sector, imposing limits on foreign ownership of banks will deprive them of needed capital and hinder their growth. The biggest headache facing investors is obtaining licenses to operate. The President’s plan to revamp the Investment Coordinating Board (BKPM) is welcomed and should alleviate some issues.
    With the new ASEAN Economic Community in 2015, many ASEAN countries are offering incentives to lure FDI. Indonesia must be made attractive to international investors, and should introduce tax incentives to maintain competitiveness.

    Simultaneously, the government should also focus on existing investors, ensuring they don’t face problems that make them think twice about staying, such as prolonged tax disputes. While compliance must be enforced, we should treat them fairly as they can be ambassadors for more FDI.

    As market volatility increases, the country should anticipate any excesses impacting our economy. The Financial Sector Safety Net legislation gives a strong legal framework and crisis management protocol, and the new government and parliament should ensure it becomes law. Much must be accomplished in 2015 to give the country a strong growth foundation—and the President and the new administration must ensure progress on the reform agenda.