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Indonesia in good stead to attract more businesses
EVER since he came to power in October 2014, President Joko Widodo has made courting business investments into Indonesia a major goal of his administration. One of his earliest policy actions was to undertake a bold move of cutting fuel subsidies to free up funds for infrastructure development. That initiative helped to show to businesses that this is a government that is serious about tackling difficult reforms to improve the country's economic prospects further.
While there were elements of hit-and-miss in the economic platform pursued by his Cabinet early on, the president soon found enough political footing to bring in technocrats, instead of political appointees, in rounds of reshuffle that bolstered confidence further. In particular, in the last Cabinet reshuffle in July this year, Mr Joko appointed Sri Mulyani Indrawati as finance minister, a movelauded by the business community given her can-do reputation.
Such initiatives appear to be bearing early fruits. Going by the ease of doing business index compiled by the World Bank, Indonesia's perception in the eyes of investors moved up 15 places in the latest survey findings. To be sure, even after the improvement, Indonesia still ranks at a relatively dismal 91st place, but the uptick should nevertheless serve as an encouragement for the policymakers that they are on the right track when it comes to winning over the trust of investors.
Still, to turn around an economy the size of Indonesia - the 16th largest in the world at nearly US$1 trillion - would take a lot more than just a few years of good policymaking. Indeed, in the near term, Indonesia is facing a period of relatively slow growth, thanks in part to the malaise of the global economy.
That said, with just weeks left in 2016, and as we start to gaze into the outlook for 2017 once more, the same steady-as-she-goes pace of growth pick-up still looks to us to be the most likely scenario. Indeed, we see a good chance that GDP growth for Indonesia to be at 5.2 per cent year-on-year (y-o-y) next year, compared to 2016's growth that is probably going to clock around 5.0 per cent.
At first glance, such growth rates are not exactly exciting. This is especially so, when compared to talk of 7 per cent growth rate that Mr Joko floated when he first came into office in late 2014. It is also markedly lower than the 6.0-6.5 per cent growth rate that the economy used to post just a few years ago.
However, if we take a step back and notice how much the overall global growth outlook has shifted over the last few years, we would better realise the true value of the Indonesian growth story. For instance, even at a seemingly humdrum growth rate of 5 per cent, Indonesia would still likely be among the top 5 best performing economies in Asia this year.
At a time when the developed countries are struggling with low-for-longer growth rates and some of its commodities-dependent emerging market peers such as Brazil and South Africa are facing an unhelpful combination of tepid economy and toxic politics, the very fact that Indonesia could still buck the odds and achieve steady growth should not go unnoticed by businesses looking for opportunities in our region.
On this front, the key role played by Indonesia's consumers as a ballast to counter global volatility is worth bearing in mind. To be sure, the commodities slowdown has hurt spending power in some regions. At the nationwide level, however, things are looking relatively encouraging, with household consumption holding steady at 5.0 per cent y-o-y growth.
In the near term, such steady private consumption growth might see some challenges. In particular, the success of the government's tax amnesty programme - which has already seen nearly 3,900 trillion rupiah (S$414 billion) of assets declared, close to the lofty official target of 4,000 trillion rupiah - has an unintended consequence of draining liquidity from households. This is because the amnesty participants had to fork out at least 2 per cent of their declared assets to pay the tax office, as part of the deal of coming in clean for their past tax malfeasance.
Such enthusiasm inevitably caused a bit of a squeeze on household spending power, at least in the near term, and would curb the chances of any significant improvement in private consumption just yet.
The issue of a potential soft patch in the next quarter or two has also received attention from policymakers. In particular, Bank Indonesia (BI) has been busy cutting its policy rates in an attempt to ensure a smooth provision of liquidity in the banking system. Already, so far this year, the central bank has eased its policy rates by as much as six times or an aggregate of 150 basis points, in order to nudge down the bank rates. While the average deposit rate has declined by more than 100 basis points thus far, it appears that the lending rate has dropped less enthusiastically.
This has prompted the central bank to continue to signal an easing stance. Indeed, our view is that, even though BI may pause on its easing for the rest of the year - waiting out key global event risks such as the US elections and potential increase in Federal Reserve funds rate - we think that the central bank will resume easing early next year. Given that inflation rate has remained relatively subdued and the current account deficit has become less of a concern, BI does indeed have the space to undertake further easing. Into 2017, however, we are unlikely to see the kind of protracted easing we have witnessed in 2016, simply because the space would have naturally become narrower after the previous rate cuts.
Given that BI has eased and looks to cut rates at least one or two more times next year, we believe that the policy environment will remain one that is supportive of growth, especially on the domestic consumption front. This is especially more so if we consider the fact that the fiscal policy would also retain a broadly supportive role.
In particular, the government continues to put its money where its mouth is when it comes to infrastructure spending, with as much as 300 trillion rupiah allocated for infrastructure expenditure in the 2017 budget. This goes to show that, despite the legal restriction in which the government is forbidden to run a budget deficit that exceeds 3 per cent of GDP, it has managed to find wiggle room within the limited space and to prioritise spending for important infrastructure spending, rather than squandering it on expensive and unproductive fuel subsidies like before.
When it comes to policy measures to support growth, apart from the fiscal measures and monetary policy easing mentioned earlier, the government has also been busy undertaking structural reforms. Indeed, since he took over as the Coordinating Minister for Economic Affairs in August 2015, Darmin Nasution has been spearheading a series of economic reform packages that aim to cut the bureaucratic red tape faced by foreign investors. While businesses are awaiting clearer implementation of these broad-level reforms, the packages have nevertheless signalled the government's seriousness in pursuing reforms to offer a more enticing environment for investors.
Indeed, such determined policy reform momentum will be the most precious item that Indonesia can have in the coming years, as it continues to wean off its dependence on commodities as a source of growth, towards boosting the contribution of manufacturing sector to the economy.
It is early days yet in the grand scheme of things, but it looks to us that, into the third year of his administration now, Mr Joko's government has made some important inroads into making that transformation process a successful one.
- The writer is an economist with OCBC Bank
- Among the Singapore banks, OCBC Bank has the largest branch network in Indonesia through its subsidiary Bank OCBC NISP with 339 branches and offices spread over all major cities, as well as an insurance arm Great Eastern Life Indonesia (Gelindo) to support its customers going overseas