A huge crowd thronged to a job fair in Sidoarjo, East Java, in November last year. (Antara Photo/Umarul Faruq)

Can Indonesia Leverage a 'Golden Moment' in Its Economy?

BY : MUHAMAD AL AZHARI

MAY 27, 2019

Jakarta. Indonesia, an emerging middle-income country, is already the world's 16th largest economy by gross domestic product and the 10th strongest in terms of purchasing power parity, and a member of the G-20.

A number of global consultancy firms and banks have reported that the world's fourth most populous nation, which has charted impressive economic growth since overcoming the Asian financial crisis in 1997-1998, has yet to unleash its true economic potentials, given the country has a large young population, is rich in natural resources and is currently seeing a middle class boom – which has boosted the number of its affluent consumers.

Bloomberg reported in January, citing a report from Standard Chartered, that Indonesia could shake up the world's gross domestic product rankings by breaking into the top five in 2030.

This is a much more optimistic prediction than the one made in a report by McKinsey in 2012, which said Indonesia may climb to become the world’s seventh largest economy in 11 years but only if the country could boost productivity and attract international investment.

President Joko "Jokowi" Widodo said earlier this month, as reported by Reuters, that his administration will go all out in boosting economic reforms in order to achieve the ambitious target of making Indonesia the world's fifth biggest economy with a GDP of $7.3 trillion by 2045 – the 100th anniversary of its independence.

Jokowi had jus won his re-election last week according to an official count by the General Elections Commission (KPU), although rival Prabowo Subianto is still disputing the election result.

Indonesia's business community has said that after the presidential election is over, it is imperative that Indonesia's leaders maintain political stability to boost investors' confidence and get them to accelerate their investment plan in the country.

Current Economic Shape

Graph by JG
(JG Graphics)

Indonesia is currently showing stable macroeconomic indicators, which should encourage investors. Last year, despite heightened global uncertainty, Indonesia managed to post a growth of 5.17 percent.

Sumit Dutta, the president director of Bank HSBC Indonesia, the local subsidiary of the London-based lender, praised Indonesia's stable macroeconomic indicators, saying they are "conducive for business [growth]." He said Indonesia will become a more strategic market for HSBC in the future.

Although the growth rate was only a tick above 2017's 5.1 percent, the Coordinating Minister for Economic Affairs Darmin Nasution said many other countries in Asia were not able to post comparable growth amid global economic uncertainty.

(Photo courtesy of HSBC)
Darmin Nasution was speaking in "The Glolden Moment of Indonesia's Economy" forum held by HSBC and Indonesian news site Katadata.co.id. (Photo courtesy of HSBC)

Darmin was speaking in "The Golden Moment of Indonesia's Economy" forum held by HSBC and Indonesian news site Katadata.co.id last month.

The event was attended by high-level government officials. Aside from Darmin, there were the Coordinating Minister for Maritime Affairs Luhut Pandjaitan and the chairman of the Financial Services Authority (OJK) Wimboh Santoso.

Others in attendance included Deputy Finance Minister Mardiasmo, former finance minister Muhammad Chatib Basri, chairman of the Chamber of Commerce and Industry (Kadin) Rosan P. Roeslani, chief executive and co-founder of Tokopedia William Tanudijaja and top executives from HSBC, including group manager Mukhtar Hussain and chief Asean economist Joseph Incalcaterra.

Darmin, a former central bank governor, said Indonesia had to bear the brunt of the global economic slowdown last year, but still managed to post excellent macroeconomics indicators.

These include cutting poverty rate by more than half compared to 1999 level, lower open unemployment rate, lower gini ratio and a relatively low inflation rate.

Graph by JG
(JG Graphics)
Graph by JG
(JG Graphics)

Attracting Investment

Darmin said growth is likely to continue this year and the government will try to push it by making policies that will boost the economy and "leverage a golden moment in Indonesia's economy."

Strong domestic demand – a main driver of growth, stable inflation and robust investment are expected to support Indonesia's positive economic outlook.

The government has made an estimate of a 5.3 percent growth for 2019.

As part of its growth-friendly policies, the government has already improved the Online Single Submission system, its web-based business licensing facility.

Launched in July 2018 and initially run by the Coordinating Ministry for Economic Affairs, the system was handed over to the Investment Coordinating Board (BKPM) on Jan. 2 this year after some upgrades.

The system, aimed at cutting red tape for investors when they try to obtain business permits, was upgraded in March to fix flaws, including outdated software and weak synchronization between central and regional governments.

In the past, many have also complained that the system was useless for applying for incentives, including tax holidays.

Darmin said the government will also try to reduce the cost of exports. He did not provide details on how they will try to achieve this goal, but the government has previously announced it has revoked the requirement for surveyor reports for exporting vehicles.

The government has also revoked other export restrictions to help prop up the rupiah, which is currently under pressure from capital outflows.

On top of these efforts, Darmin said the government has also expanded its tax holiday offers to attract more foreign direct investment.

The government has a new five to 20-year corporate income tax waiver for new FDI-backed businesses, depending on the size of the investment.

This tax waiver is available in several industries including petrochemical – and its downstream sector, iron and steel manufacturing, and electronic.

"This is the first time ever we are offering [a tax holiday] for such length of time," Darmin said.

Same Old Story: Legal Certainty is Key

HSBC Indonesia update
From left to right: Mukhtar Hussain, Head of Belt and Road & Business Corridor, HSBC; Rosan Roeslani, Chairman of Kadin; Chatib Basri, Former Minister of Finance; Luhut Pandjaitan, Coordinating Minister for Maritime Affairs, Sumit Dutta, President Director Bank HSBC Indonesia; Joseph Incalcaterra, Chief Economist ASEAN, HSBC; and Stuart Tait, Regional Head of Commercial Banking, HSBC Asia Pacific. (Photo courtesy of HSBC)

Rosan Roeslani, chairman of the Indonesian Chamber of Commerce and Industry (Kadin), who also attended the HSBC forum, said the country must keep improving its legal certainty – one of the key factors that investors consider before investing in a country.

Indonesia slipped one place to 73rd behind Greece, the Ukraine and Kyrgyzstan in the 2019 Ease of Doing Business report released by the World Bank in November.

The report mentioned that even though the country has made a considerable progress in reforming regulatory environment for businesses since 2014, it is still showing limited capacity to continue with these reforms.

Meanwhile, Incalcaterra, the chief Asean economist at HSBC, praised Jokowi's 16-package economic reforms, which include relaxing the negative list of investment for foreigners and simplifying application for business permits.

Still, the impact of Jokowi's economic reforms has been criticized as "minimum," with many business players singling out overlapping policies and regulations between different government agencies as the main problem.

Coordinating Minister for Maritime Affairs Luhut, who also spoke at the forum, said he the government is doing all it can to improve coordination between ministries, agencies and regional governments.

"Inefficient government bureaucracy" was mentioned as the second worst problem after "corruption" that put Indonesia 36th out of 137 economies in the Global Competitiveness Index 2017-2018 report released by the World Economic Forum.

Educating the Youth

To improve its human resources, the Indonesian government has also opened up more vocational training centers and offered more programs for graduates of vocational high schools and polytechnic institutes.

Indonesia needs to pay serious attention to its youth, as the country's demographic bonus, its large young population, may boomerang its economy if they can't get a better education – fast becoming the only way to find decent jobs when they enter the work force.

According to the World Population Review, the median age of the population in Indonesia is about 30.2. Currently, 42.4 percent of the Indonesian population are between 25 and 54 years of age. The country's population is currently estimated at 260 million.

The 0-14 age group, currently just over 25 percent of the total population, is part of this demographic bonus. They will join the workforce as the current generation of workers move into retirement.

However, according to a United Nations Population Fund report, Indonesia is also racing with time, as the share of younger groups (aged 15-29) in the country's working population will decline from 40 percent to 34 percent between 2010 and 2035.

That means, the country must also seize this "golden moment" in its demography before it fades away.

No More Business As Usual

Chatib Basri, a senior economist and former finance minister, said in the forum that if Indonesia wants to leverage this "golden moment," then the country must speed up its economic growth beyond 5 percent.

"If [the economy] keeps growing at just 5 percent, income per capita will remain low," he said.

Indonesia's GDP per capita has steadily risen to $4,130 in 2018 from $807 in 2000, but currently the country still languishes in the upper-middle income group of world economies according to the World Bank.

Jokowi has set a target to boost Indonesia's per capita income to $29,000 and catapult the country into the high-income group.

Chatib said if Indonesia wants to be one of the world's top five countries by GDP size in 2045, then relying on fiscal and monetary policies will not be enough.

He said there needs to be a concerted effort between the government and the financial sector to boost savings and FDI and accelerate economic reforms, including reforming Indonesia's labor law. 

Indonesia's labor law, one of the toughest in the world for employers, with so many benefits to be paid on job termination, is considered one of the factors that can deter investors from pouring money into the economy.

Chatib said it is not enough for the government to do "business as usual" to keep the country from falling into the middle-income trap.

"If the economy grows just like it is now, we might grow old before we get rich," he said in the forum.

Chatib also said that apart from boosting productivity, the government must keep an eye on the 4.0 industrial revolution to leverage the power of the internet to run its economy. 

SHARE