Building a value-added economy ~ Daewoo Indonesia

6:15 AM | January 7, 2016 Macro View No Comments

Bumpy road towards an independent and competitive Indonesia

As president, Mr. Widodo’s “nine priorities” mission announced in 2014 (“Nawacita”) aims to improve Indonesians’ productivity and competiveness in the international market, and also to achieve economic independence by developing strategic domestic sectors. In order to achieve an independent and competitive Indonesia, the government needs to boost infrastructure development, and improve the investment and business climate.

The government realizes that in order to boost the economy, it cannot depend only on consumption. As we know, Indonesia’s GDP is supported mostly by private consumption (see Figure 1); however, the pace of this private consumption is steadily hovering around c.5% (see Figure 2), and is not much adding value to Indonesia’s economy. That is why the government wants to boost government spending and investment as a portion of GDP.

The nine missions will not be easy at all, and are even more challenged amid the global economic slowdown that has hit Indonesian exports, especially commodities (see Figure 3). Instead of improving, Indonesia’s GDP growth came in below expectations: 4.72%, 4.67%, and 4.73% YoY growth in 1Q15, 2Q15, and 3Q15, respectively, vs. the 5.7% GDP growth target in 2015’s revised state budget (see Figure 4).

Government support through stimulus: Working, but not enough

In 2015, the government started to unveil stimulus packages to boost the economy. As of end-2015, there were already eight stimulus packages, and the government indicates that there will be more in 2016. We can see from the released packages how the government is giving a lot of incentives for business and investment, especially in Package 1 via de-regulation, and Package 2 via the three-hour processing program for business licensing.

A press release from The Investment Coordinating Board of the Republic of Indonesia (BKPM) dated December 3, 2015 stated that four companies have begun to use the three-hour fast-track program for business licensing, indicating that the plan is working. BKPM also announced that the total value of principle license submissions between January – December 28, 2015 was IDR1,886.04tr, up 45.29% from 2014 (see Figure 5).

Although we are seeing the success manifest in BKPM data, we are still cautious about conditions in the real economy. According to a Nikkei news release, the Indonesia Manufacturing Purchasing Managers’ Index (a composite indicator designed to measure the performance of the manufacturing sector) came out at 47.8 in Dec. 2015, signaling a further deterioration in business conditions.

Let the manufacturing industry lead the economy

We think government support through stimulus packages is bringing positive sentiment to Indonesia’s investment climate, although perhaps the full effects haven’t yet been felt in the real economy. An independent Indonesia will decrease its dependency on imports and perhaps simultaneously reduce foreign-currency exchange volatility. Value-added goods from the manufacturing sector would help create a competitive advantage for Indonesia in international markets.

160106 (KDB Daewoo Indonesia) Building a value-added economy.pdf