2006 - Building for the future<\/p>\n
David O'Brien
\nJakarta<\/p>\n
Next year should mark a period of consolidation for the
\nIndonesian economy. In the wake of the tough decision to reduce
\nfuel subsidies and subsequent price increases, domestic demand is
\nlikely to remain somewhat weaker. This is not necessarily a bad
\nthing.<\/p>\n
The economy was exceedingly dependent upon the consumer, with
\nestimates of this sector driving 80 percent of economic growth.
\nMalls have been constructed at a pace that outstripped demand and
\nconsumer debt has been increasing at an unsustainable rate. In an
\nera of easy credit, consumers remain poorly educated about the
\ntrue cost of \"paying with plastic\". With monthly interest rates
\nin the region of 3 percent, one may be better off borrowing from
\nTony Soprano.<\/p>\n
There has been recent central bank intervention requiring a
\nminimum 10 percent repayment of monthly outstanding balances.
\nWhile companies remain driven by market share, it may be too easy
\nfor a card holder to obtain another card to pay the 10 percent
\nbalance and so on.<\/p>\n
This is the scenario which occurred in Korea. Consumers tired
\nof the austerity since the 1997 crisis went on a spending spree
\nwhen interest rates fell around 2000. This lasted until late 2003
\nwhen the bubble burst and there was a subsequent huge contraction
\nin consumer spending. Thailand has recently instituted measures
\nto curb some marketing \"over enthusiasm\" in relation to less well
\neducated consumers. In Indonesia it may be the less expansive
\nbubble is gently deflated as rates rise to middle of 2006 and
\npeople are reminded about \"easy\" money.<\/p>\n
In a broader economic context, too many uncertainties remain
\nin the global economy to refocus the spotlight on Indonesia in
\nthe forthcoming year. Global opinion remains obsessed with the so
\ncalled \"Chindia\" phenomenon at the moment. With an average 9
\npercent and 7 percent annual growth rate for China and India
\nrespectively for the past four years, they are likely to remain
\nthe at the top of the global investment radar for the moment.<\/p>\n
Eyes will also remain focused upon the ongoing record current
\naccount deficit in the U.S. and how it is sustained. Will foreign
\ninvestors continue their demand for U.S. assets and thus keep the
\ndollar strong (and their currencies weak to foster
\ncompetitiveness) or will interest rates have to rise to continue
\nto attract investment to cover the deficit. Such interest rate
\nrise will have a major impact on consumer sentiment that has been
\nfueled by asset inflation rather than price inflation over the
\nlast several years.<\/p>\n
With all this going on in the world, Indonesia has an
\nopportunity to work out of the spotlight in executing micro
\neconomic reforms. A number of commentators wrote in The Jakarta
\nPost in November of the necessity for ongoing implementation and
\nsuccessful execution of reforms in regulation to match the
\nPresident's vision.<\/p>\n
This is where things can be put right to make a difference to
\nthe investment climate. The broad brush epithets, global road
\nshows and infrastructure summits will not work unless the
\nunderpinning rules and regulations are in place.<\/p>\n
The outline of the vision of where the country will be
\neconomically in three to five years could be better articulated
\nin parallel with the steps necessary to get there. These steps
\ncan be delegated to ministers in order that there are clear
\nindicators which they can be measured against.<\/p>\n
Such an allocation of responsibility may also allow for a re-
\nassessment of the number and type of ministries and allow for a
\nlesser number of better directed ministries. The present number
\nof ministries often seems to be at cross purposes and often act
\nas a counter weight to reform measures.<\/p>\n
To improve the investment climate the aim should be
\ntransparency, equality and simplicity. This needs to be the case
\nfor both foreign and local investors. The small business sector
\nwhich remains engine of growth through innovation should not be
\nforgotten. It often seems that reform measures being undertaken
\nremain focused upon the \"top end of town\".<\/p>\n
There seems to be an emphasis paid to foreign direct
\ninvestment (FDI) as a panacea. However Indonesia does not lack
\nfor domestic capital. For example the last year has seen
\npredominately family companies in Sampoerna and Risjadson reap
\nbillions of dollars in selling their domestic businesses at very
\nfull prices.<\/p>\n
These cash rich companies are struggling to find appropriate
\nnew projects for their capital. Legal uncertainties, rent seekers
\nand the high cost economy remain serious impediments to be
\novercome to promote Indonesian investment locally as well as
\nglobally.<\/p>\n
From the FDI perspective, Western countries are unlikely to
\nrush back next year. The herd mentality associated with other
\ninvestment destinations will dominate. FDI will continue to be
\ndominated by Asian investors.<\/p>\n
Chinese demand for resources and particularly resource
\ncompanies to mitigate their price risk exposure will remain
\nstrong. Japan and Korea are likely to remain active investors in
\nthe manufacturing sector. Malaysian and Singapore investments are
\nlikely to continue in infrastructure and service based industries
\nwhere they feel they have outgrown their domestic market.<\/p>\n
The Asian tiger economies were built on speculative capital
\ninflows and lacked an associated reform program to address the
\ndeeper competitive issues of operating in the global economy. If
\nsuch reform can be instituted there is a bright future for
\nIndonesia, building upon its inherent competitive advantages with
\na mixture of wealth in both natural resources and its human
\nresources.<\/p>\n
The extent to which business is deterred from innovation is
\nhighlighted in charges for broadband access. Where it is
\navailable, the charges for a 2 Mbps connection are 48 times more
\nexpensive than India. International connection to the internet is
\nat a level 3.5 times the Indian price. For innovation to thrive
\nand meet world markets, communications are too important to be
\nsubject to non competitive tariffs.<\/p>\n
For a country so blessed with natural resources, a sustainable
\napproach based on developing skills at the local land owner level
\ncould be better promoted. The agribusiness sector seems sadly
\nneglected in Indonesia, unless discussing palm oil or pulp and
\npaper with their questionable credentials for sustainability.<\/p>\n
By way of example the Post of Nov. 29 reports that there is a
\nlarge potential for salt production in East Nusa Tenggara which
\ncould offset imports of nearly 2 million tonnes a year. The same
\nedition of the paper detailed that fishery exports were likely to
\nbe 50 percent below the level forecast for 2005, somewhat
\nattributable to quality control issues. Indonesia severely lags
\nThailand as an exporter of fresh fruit. In most cases the
\nlimiting factor in innovation seems to be getting market
\ninformation to producers.<\/p>\n
Earlier in the year I wrote about the potential to adapt the
\nIndian success in installing internet access at village level in
\nan Indonesian context. Access is provided by solar power and
\nsatellite and a member of the community is trained to operate and
\nteach. The web access includes a portal that shares information
\nfor farmers on pricing along with sourcing raw materials,
\nmaximizing yields and other technical matters.<\/p>\n
With the Community Service Obligation (CSO) now being
\ncollected by the telecommunications operator, it would be an
\nexcellent time to establish a broader program with content
\napplications. Modern wireless technology is ensuring the costs to
\nserve remote areas are falling rapidly and a mix of CDMA coverage
\nand satellite is an option to develop a program similar to
\nIndia's.<\/p>\n
In the immediate term there are a number of implementing steps
\nto be undertaken at ministry levels to improve the investment
\nprocess by ensuring transparency, equality and simplicity.
\nAccountability needs to be instilled to aid the execution. In the
\nlonger term thought needs to be given to further reforms
\npromoting innovation to leverage the country's wealth. This
\nincludes reform of inefficient industries to optimize new
\ninfrastructure developed.<\/p>\n
The writer is a technical advisor at CSA Strategic Advisory.
\nCSA helps businesses through a combination of \"soft\" behavioral
\nand \"hard\" financial advice. He can be reached at
\ndobrien@csadvisory.com.<\/p>",
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