A worker cuts metal at a small metal factory in Sidoarjo, Indonesia's East Java province, September 30, 2015. (Reuters Photo/Sigit Pamungkas)

Indonesia's Small Firms Struggle, Dealing Economy Another Blow


OCTOBER 08, 2015

Pasuruan, East Java. Fuad Fultoni has been selling wooden furniture from Pasuruan city on the eastern side of Indonesia's Java island for 15 years: gazing out as his workers sat idly in an empty showroom, he says business has never been so bad.

"People don't have the purchasing power for things like this anymore," Fultoni said, gesturing towards intricately carved tables, chairs and cabinets on display. "Now they are prioritising their primary needs."

At least Fultoni is still in business. He says hundreds of small furniture enterprises in the town have shut, bringing mass layoffs, after sales plunged and the cost of imported raw materials such as thinner and paint shot up.

Small and medium-sized firms (SMEs) like his account for at least 50 percent of Indonesia's economy, but they have been sideswiped by the rupiah's slide to 17-year lows against the dollar, faltering consumption and a jump in minimum wages.

The struggle of SMEs - traditional pillars of the economy that rescued Indonesia from the depths of the 1998 financial crisis - is bad news for President Joko Widodo, himself a former furniture businessman who is now battling the weakest growth in six years.

The growing ranks of jobless may widen the rich-poor divide and push up crime in Indonesia, dealing a blow to the man-of-the-people image that swept Widodo from small-town mayor to governor of Jakarta and then, a year ago, to the presidency.

A monthly central bank survey showed that consumers were pessimistic about the economic outlook in September, the first time since August 2010, mainly due to rising unemployment.

Wage jump

Apart from weaker consumption, the plight of SMEs can be blamed on an "abnormal" jump in wages as a result of local elections, where politicians agreed to unions' demand for higher minimum pay in their regions to win votes, said Nur Cahyudi, an official at a business association in East Java province.

There were about 6.8 million SMEs employing 10 million workers in the province, Cahyudi said, estimating that "tens of thousands" have been laid off this year. There are no reliable unemployment data in Indonesia.

"Minimum wages are used as a tool for political propaganda," Cahyudi said. "Policies tend to be populist, without taking into account the long-term economic development."

Over the past three years, minimum wages have more than doubled in East Java's capital, Surabaya, to Rp 2.71 million ($187) per month, slightly higher than in Jakarta.

Starting from January, unions want a further 25 percent increase in the main cities of East Java due to rising costs of living, said Arief Supriyono, an official at the Federation of Indonesian Metal Workers Union.

The wage increase will help lift the purchasing power of workers, which will in turn benefit the businesses, Supriyono said. "We are politically independent, we are just thinking of the wellbeing of workers."

But businesses are already struggling with rising costs of fuel, electricity and taxes, and will not be able to cope with even higher wages, said Miftakhul Ulum, a metal spare parts producer in Sidoarjo, near Surabaya.

Cash flow is drying up, with businesses taking up to three months to collect their receivables, compared with a maximum of 45 days just three months ago, Ulum said. "We are just waiting for people to pay their bills, so it creates a chain effect."

Tougher funding

In the shoe sector, a flood of cheap imports from China led to a price war that eroded profit margins as stocks piled up, said Syaiful Anam, a shoe maker in Sidoarjo.

Anam used to employ as many as 30 regular workers who could not keep up with orders, but now retains only six as orders have slowed to a trickle.

SMEs are struggling more than during the 1998 crisis because many have not been able to get financing from banks, said Wellian Wiranto, an economist at Singapore's OCBC Bank.

"SMEs probably suffer more than the bigger guys because funding is tougher and interest rates are higher. SMEs have less buffer when it comes to dealing with downturns," Wiranto said.

To help SMEs, the government has tasked the export-import bank to give cheap loans to certain firms so they will not fire workers, or to help them export products overseas, Finance Minister Bambang Brodjonegoro told Reuters in an interview.

The government also plans to cut lending rates for small businesses to 9 percent in 2016 from as high as 24 percent this year.

But for Fultoni, such steps might be too little, too late to pull his furniture business back from the brink.

"I feel like I'm not getting any help from the government," he said. "We businessmen have to survive on our own, succeed on our own and die on our own."