Indonesian Economic Growth Stays Strong but Could Be Better

By webadmin on 07:54 pm Aug 17, 2012
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Dion Bisara, Tito Summa Siahaan& Muhamad Al Azhari

As Indonesia celebrates its 67 years of independence on Friday, questions loom on the quality of the country’s economic growth.

Indonesia is one of the few economies in the region that has been insulated from the global economic slowdown. Yet poverty, coupled with rampant corruption, remain sticking points that need to be resolved.

Bankers and industry players in Jakarta say that Indonesia’s economic growth could have expanded by the more than 6 percent rate recorded in the past few years if the government had been more aggressive in building much-needed infrastructure such as seaports, airport and toll roads. Aside from that, energy subsidy bills, which have ballooned in the past few years, could have been used to finance building projects and other needs such as education.

Suryo Bambang Sulisto, chairman of the Indonesian Chamber of Commerce and Industry (Kadin), a strong private lobby group, said that the country needs to remove energy subsidies that have curbed the country’s efforts to spur economic growth.

“We have never been free from fuel subsidy. That is not something impossible. All we need is a political will,” Suryo told the Jakarta Globe on Wednesday.

Energy subsidies, which include fuel and electricity, are expected to rise by more than half to Rp 306 trillion ($32 billion) this year. The country heavily subsidizes gasoline, diesel and electricity to shield the country’s poor from being impacted by the global slowdown. Indonesia pegs the subsidized gasoline price at Rp 4,500 a liter, the cheapest in the region.

Raising the price of subsidized fuel and electricity is a politically and socially sensitive issue. The House of Representative rejected the government’s proposal to raise subsidized fuel prices by 33 percent in late March after widespread protests across the country.

Harry Warganegara, secretary general of Indonesia Young Entrepreneur Association (Hipmi), called on the government to spend more money on infrastructure projects to spur economic growth and reduce unemployment. And more than that, red tape must be reduced.

“We hope that there will be some more offensive policies to boost economy growth … not defensive ones such as imposing various tariffs. In particular, we would like to see initiatives from the government to encourage start-ups and young entrepreneurs,” Harry said.

Lack of decent infrastructure coupled with rampant corruption practices have hampered growth in Southeast Asia’s biggest economy. Indonesia has grown more than 5 percent in the past five years thanks to robust consumer demand and political stability. Still, that has not matched the pre-crisis level of 7 percent before 1997.

Kadin’s Suryo Bambang said that the energy subsidy was not good for the country’s economy. “The subsidy does not teach us a lesson,” he said.

Executives like Erwin Maryoto, a vice president at Exxon Mobil Indonesia, however, remained positive about the country’s oil and gas production and its impact on Indonesia’s 67 years of development.

“Exxon Mobil believes that developing Indonesia’s energy resources speaks beyond oil and gas production. It is also about improving the quality of life in the communities where we operate,” he said.

Pri Agung Rakhmanto, an executive director at think-tank group Reforminer Institute, called on the government to improve leadership.

“The most practical solution is for the president to display firm and strong leadership. That way the regional government will follow the central government’s policy,” he said.

While the country needs to eradicate corruption practices, some overseas companies have announced investment plans in Indonesia.

Foxconn Technology Group’s investment of up to $10 billion in Indonesia will allow the main supplier of Apple to tap one of the cheapest labor forces in Asia and a duty-free zone of some 600 million consumers.

Japanese carmakers including Suzuki Motor, Toyota Motor and Honda Motor have embarked on massive expansion plans in Indonesia.

Cars are being sold at a record pace, indicating surging demand among the middle class, in a nation in which personal spending accounts for about 60 percent of economic activity. Average per capita income has climbed to $3,500 last year from $3,000 in 2010, and borrowing costs are at record low levels.

Private consumption and investment continue to rise, lifting many in the nation of 240 million people from poverty. At the same time, the World Bank estimates that about half of Indonesia’s 240 million population lives on less than $2 a day.

“The banking sector should benefit from such growth,” Zulkifli Zaini, president director of Bank Mandiri, the country’s largest lender by assets, said in a text message recently.

Still, Finance Minister Agus Martowardojo warned on Tuesday that the global economic slowdown would sap demand for the country’s exports, curbing economic growth. Coal, crude palm oil and rubber are some of Indonesia’s main export commodities and slowing demand from Europe and China might crimp profit for companies including coal miners and palm oil producers.

Exports tumbled 16 percent in June from the previous year, while imports rose 11 percent, the Central Statistics Agency (BPS) announced last week.

This led to a trade deficit of $1.3 billion, causing Indonesia’s current account deficit to widen to a record $6.9 billion in the second quarter, or equivalent to 3.1 percent of the country’s gross domestic product. In the first quarter, the deficit widened from a revised $3.2 billion, or 1.5 percent of GDP.

Indonesia’s economy is forecast to expand by 6.8 percent to 7 percent in 2013. That is at the low end of the 6.8 percent to 7.2 percent range targeted by the government and House of Representatives last month. Economic expansion has been forecast at 6.5 percent this year, which would match the rate in 2011. Growth is the second fastest among the Group of 20 nations after China. The economy expanded 6.4 percent in the second quarter.

“The fundamentals of the Indonesian economy are very strong,” Dileep Srivastava, a director at Bumi Resources, the country’s biggest coal miner, said in an e-mail on Friday.

“The nascent democracy is working. Lessons from the maiden economic crises of 1997 and 2008 have been learnt. The nation is well positioned to negotiate the present global turbulence and emerge relatively unscathed.”