WARNING SIGNALS IN THE AIR, MOUNTING PRESSURES AHEAD

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– April 10, 2013Posted in: April 2013, Headlines, Opinion, TPP, Volume 2

By Atmono Suryo
A PERIOD OF “GOOD SAILINGS”
After its economic downfall on account of the Asian financial crisis of 1997/98 it is right to say that since then Indonesia has gone through a period of “good sailings”. Indonesia has been rated as one of the Top Ten Emerging Countries, elected as a member of the G20 and considered to be on par with the BRIC (Brazil, Russia, India and China) countries.
The following data gives us a broad overview of Indonesia’s current situation:

Economy of Indonesia
GDP growth 6.2 %	Unemployment 6.56%
Total GDP $945 billion	GDP by sector Agriculture 15.3%
GDP Per Capita $ 4,943	Industry 47%
Inflation 4.61%	Services 37.6%
Exports  $ 208 billion	External debt $ 223 billion
Imports $ 127.4 billion	Foreign reserves $ 110.30 billion
Main trading partners: Japan, China, USA, Singapore, India, South Korea, Thailand, Malaysia
Ease of doing Business Rank 129th

It should be added that the country has developed a very large Middle Class. Estimated to be around 50-100 million, they are armed with better education and increasing purchasing power. However, in the areas of doing business, productivity and competitive strength, Indonesia’s position is still considered to be at a very low level.
During the period of good performance, not enough firm actions have been taken to resolve the long-pending issues and to improve the weaknesses of the economy. As a result thereof the country is presently caught in an unpleasant social situation. For example, the agriculture sector has been left in a state of neglect, causing shortages in the area of food supply for such items as rice, onions, soybeans, sugar, salts, fruits, and meat. At the same time mounting corruption remains to be in full swing among some political elites!

EARLY WARNING BELLS ARE RINGING
It is no surprise that an increasing number of early warnings, emergency signals and noisy demonstration are coming out in greater force. On this score, the World Bank rightly issued some early warning signals in its Quarterly Report of March 2013, stating that Indonesia’s economic growth has remained steady but pressures are mounting. Such warnings should be seen as a real push for the country to give its fullest attention to some unresolved policy issues.
Mounting pressures will occur in the current account area, which already shows a widening deficit of some $24.2 billion for 2012, compared to a surplus in 2011. This deficit is caused by the widening oil deficit which reached the sizable sum of $23 billion in 2012.  The non-oil sector, with its weakening commodity sector as its main pillar of strength, has not been able to compensate (even in a small way) the very large oil deficit.
Another critical area would be Indonesia’s budget which will most likely continue to suffer mounting pressures on account of the huge energy subsidy which has its very sensitive social implications. Apparently the government is presently still in a difficult position to come up with the right solution.
With tight financial situation, the weakening exports sector and the widening current account deficits, there is the need for a greater inflow of capital: FDI (foreign direct investment), Portfolio, IDA (international development assistance), others.
Developing countries are keen to attract foreign investments. Indonesia’s investment outlook, however, may not be as bright as expected. As the World Bank observes, there is the risk of regulatory uncertainties and the increase of political noises, in particular as the 2014 elections is getting closer. These noises are scaring investors away as they often say, “Nothing is certain in this country”.
Indonesia should be aware that it is facing stiff regional competition. As a result, FDI inflows into Indonesia remain modest compared to its peers such as China, Malaysia, Thailand and even Vietnam, as shown below:

Although Indonesia may face mounting political pressures to restrict the inflow of foreign investment, it is urgent that the country retain its right strategy to promote and facilitate the increased inflow of FDI.
The writer is former ambassador to the EU.

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