Indonesia’s economy entered 2010 with a very bright outlook, seeing it hoping to become one of the best performing countries in the region, together with China and India.
This optimism led the government to target to reduce unemployment to 7.6 percent from 7.9 percent in 2009, which meant it would push the 2010 economy to absorb at least an additional 0.3 percent employment this year.
It is worth noting that 70 percent of the total employment in Indonesia was contributed by agriculture, manufacturing industry and hotels and restaurants. Among these three sectors, we would see manufacturing industries providing the most opportunities this year, as well as a threat from delayed infrastructure-related projects.
In the fourth quarter of 2009, manufacturing industries booked a year-on-year (y-y) growth of 4.2 percent.
This was slightly less than the nine-year average of 4.4 percent if we include the financial crises period between 2008 and 2009.
However, the y-y growth in the fourth quarter of 2009 was in fact a rebound compared to 1.3 percent in the third quarter.
In detail, the three highest growth industries were paper and printing, cement, and food and beverages. Those industries were domestic-consumption based and benefited from the large portion of private consumption and government spending in the 2009 economy.
Going forward, we expect manufacturing industries will benefit from the global economic recovery that should boost direct investment in Indonesia. A recent update from the government indicates Indonesia’s y-y economic growth in the first quarter of this year could reach 5.7 percent or from 5.4 percent in the fourth quarter of 2009. Meanwhile the Central Statistic Agency (BPS) estimates a higher figure of up to 6 percent.
The higher growth will potentially be supported by foreign investment and export performance. However, we should not forget that higher y-y economic growth in the first quarter of this year was also supported by slower economic growth in the first quarter of 2009 as the base year.
An indication of an improvement in the performance of manufacturing industries was depicted by a stronger industrial production index (IPI) since the second half of 2009. Currently, the IPI is at 131, which is much higher than the February 2009 figure of 124.
Other indications were also portrayed by an increase in imports of capital goods and primary raw materials for industry. As of February 2010, y-y import growth on capital goods jumped to 39 percent or 5.8 percent month-on-month growth compared to January. The same figure was also posted with primary raw materials imports y-y growth of 52 percent in January - higher than the 16 percent growth in December 2009.
Regarding external pressure, especially from the implementation of the ASEAN-China Free Trade Area (ACFTA), the World Bank quoted an ADB study that mentioned at least four benefits to Indonesia under the agreement. These include increased access to the third-largest consumer market in the world, increased productivity and efficiency, lower prices for the domestic market and greater protection from adverse shocks to the global economy.
Summing up, the implementation of the ACFTA would create an opportunity to widen the Chinese market as well as making raw materials cheaper.
We should also take into account the opportunity for bigger direct investment from the relocation of some Chinese companies.
Thus, now the government’s task is to maintain the momentum of manufacturing industrial growth in Indonesia at between 5 and 7 percent. The current world competitiveness index provides some evidence the government has boosted Indonesia’s rank. In 2009 Indonesia was ranked 42nd - an improvement on 50th in 2005.
However, it is worth highlighting that we are still behind our competitors in the region, including India, Korea, Malaysia and China.
The World Economic Forum (WEF) had mentioned that the biggest obstacles to conducting business in Indonesia were inefficient government bureaucracy, inadequate infrastructure, and corruption. Interestingly, Indonesia’s tax rate was among the lowest of obstacles to foreigners doing business in Indonesia.