Indonesia’s government appears to be taking its role in driving economic growth seriously. Its progressive attitude is helping businesses, both domestic and foreign-owned, to grow and become more competitive.
Peter Fanning doesn’t have much time for relaxation these days. The gray-haired lawyer, an eight-year veteran in Indonesia, spends most of his weekends taking part in meetings to create a ‘road map’ for a stronger Indonesian economy. As head of the International Business Chamber, an association of the major foreign business groups in Jakarta, Fanning is intimately involved in a process that could just answer the demands that so many have been making of Indonesia—not least the need for business and government to work together.
Led by the Indonesian Chamber of Commerce and Industry (Kadin), the road-map process is setting out not only the well-established list of what needs to be done, but also how to achieve these ends. Kadin’s role in creating the road map is in itself a sign of progress. “This is the first time that Kadin has started to operate effectively,” Fanning says. “It’s a collection of associations, and this is the first time they have presented a single voice.”
More important, says Fanning, there is every sign that the government is taking notice. Locked in a process of elections for virtually the whole year, the country was due to elect its next president on September 20. The two remaining candidates were incumbent Megawati Sukarnoputri and her former chief security minister, retired four-star general Susilo Bambang Yudhoyono.
Though Megawati was typically late, both turned up to present their policies on the economy to a Kadin-hosted meeting on August 2, the first time Indonesian politicians have seen the need to discuss policy in a public forum. Since then, says Fanning, the lines of communication have widened. “There is every sign that the two candidates are taking notice.” The pressure from business is producing real effects. Fanning notes that there has been significant movement in tax reform. “The government stopped parliament from rushing through half-baked reforms, preferring to wait for something more substantive,” he points out, adding that the creation of new, efficient tax offices for large tax payers and for foreign investment firms is one step in the right direction.
Laws aren’t the major problem, according to Joe Bartlett, chairman of AmCham Indonesia. In the August 2 presentation to the presidential candidates, he made the point that the problem is more the way the bureaucracy impedes the work of business. “The major problems investors face are often not with the actual rules themselves but with their implementation throughout the bureaucracy, which is badly in need of streamlining, rationalization and discipline,” he said.
The new attention to the voice of business is very much overdue. Critics have accused the country of ignoring rapidly declining competitiveness. Tax rates are among the highest in the region, and the country offers no real incentives to investment. Add to these factors the psychological impact of six years of deep economic crisis, a major political transition and the impact of hard-line Muslim terrorism, and there’s good reason for concern.
Economy On The Right Track
Despite all the remaining problems, all agree that Indonesia has come a long way since the ouster of autocrat Suharto in 1998. Megawati’s government has received praise for achieving macroeconomic stability, with inflation down and stable at around 6.7%—a far cry from double-digit figures only two years ago—foreign reserves are at an all-time high at over $34 billion, and debt as a ratio of GDP is down to around 70% from the crisis level of 120%.
The economy grew by 3.7% in 2003 and by 4.32% in the first half of 2004. Driving the economy is domestic consumption, which rose by 5.26% in the first half of 2004 compared with the same period of 2003, representing 68.74% of gross domestic product. And while critics say Indonesia has under-performed in export growth, particularly to the hungry China market, exports grew 7.68% percent to $5.68 billion in July 2004 from $5.27 billion in the same month the previous year.
Industry and trade minister Rini M.S. Soewandi is predicting export growth of 10% next year. “While this export growth is related to improved economies in destination countries, it also represents the continuing efforts of Indonesian producers to restrain costs and maintain competitiveness,” she says.
Soewandi herself has been deeply involved in trying to create a more efficient economy, not least in shortening distribution chains, and in pushing trade with new markets to reduce Indonesia’s dependency on its traditional developed country markets.
Imports are also up, but the government and independent analysts say the strongest growth is in raw materials and capital goods that will drive further growth in the real sector.
Domestic Investment Grows Strongly
While foreign investment approvals continued to be low through the first half of 2004, domestic investment was up strongly, as were applications for expansions by foreign investors, a clear sign that investments in Indonesia are producing strong returns.
Approved foreign investments during the first seven months of 2004 declined 33.6% to $3.3 billion compared with the same period in 2003, but domestic investments in the first seven months rose by 34% to 18.72 trillion rupiahs ($2.03 billion). And while new foreign investment was down, existing foreign-owned businesses were rushing to expand. Approvals for expansion in the first seven months of 2004 increased by almost 78% to $1.12 billion, up from $630 million in the same period of 2003.
Despite problems with the law and its arbitrary implementation, an overbearing bureaucracy and unattractive tax regimes, many companies doing business in Indonesia are smiling. Not least among them is Jardine Cycle & Carriage, the Singapore-based investment vehicle of the Jardine Group, which now has more than 40% of shares in PT Astra International, the automotive-based giant that is luxuriating in a consumer boom.
First-half figures for banks, telecommunications companies and other consumer-based operations were strongly positive, underlining the reality that with Indonesia’s 215 million people now once again reaching the annual per capita income level of $1,000, there is enormous scope for growth. PT Astra International recorded net profit growth in the first half of 44.6% at 2.6 trillion rupiahs ($288 million) on car sales up by 47.6% and motorcycle sales growth of 35.9%. Bank Mandiri, the country’s largest lender by assets, recorded a 37.2% increase in net profits in the first half to 3.1 trillion rupiahs ($330 million).
Cellular phone subscribers are expected to reach 28 million by the end of this year, up from 23 million at the end of June, according to the Association of Cellular Telecommunications (ATSI).
Some remain critical. James Castle, principal of the CastleAsia advisory group, says he believes the Indonesian economy will continue to “muddle through” for the next three to five years. But, says Castle, Indonesia’s remarkable performance in establishing a working democratic system may be the country’s salvation. “Across the country voters will be asking how much longer they must tolerate a decline in living standards and demanding higher standards of government performance.”
· Keith Loveard