Dirges of traders and investors<\/p>\n
Puspa Delima Amri
\nResearcher
\nDept. of Economics
\nCentre for Strategic and
\nInternational Studies (CSIS)
\nJakarta<\/p>\n
The past year has undeniably seen substantial improvement in
\nIndonesia's macroeconomic performance. GDP growth is moderate yet
\nencouraging, inflation and interest rates are declining, the
\nexchange rate is stable and the stock market is buoyant. To the
\nsurprise of many, several external shocks, such as the war in
\nIraq, the Marriott bombing and the SARS outbreak did little to
\nfundamentally change the resilient nature of the Indonesian
\neconomy. Country-risk perceptions have also improved, as shown by
\nthe recent upgrade in Indonesia's sovereign debt ratings.<\/p>\n
However, the view seen from the micro side is not as pretty.
\nThe real sector is still stagnant: trade and investment recovery
\nis slow and unemployment is at an alarming level. Why, then, is
\nthe strong macroeconomic performance not translating into higher
\nreal sector growth? Unlike in the other crisis-hit Asian
\ncountries, Indonesia's growth has yet to get back to its pre-
\ncrisis levels. Is there something fundamentally wrong with the
\ngovernment's policies and efforts to restructure the economy?<\/p>\n
One of the reasons behind Indonesia's poor performance vis-a-
\nvis its neighbors is the weak sources of growth. For the past
\nthree years, private and government consumption has been the
\nbackbone of economic growth. But how long can an economy be
\npropelled by consumption alone? While other crisis-hit countries
\nin Asia have turned to exports and investment as their engines of
\ngrowth, Indonesia is still reliant on consumer spending.<\/p>\n
Indonesia's export performance is still weak, with variations
\nacross industries and destinations. Total exports up to the third
\nquarter of 2003 increased slightly by 7.5% compared to the same
\nperiod of 2002, but non-oil and gas exports, especially
\nagriculture and manufacturing, are slowing down. This fragile
\nperformance can be somewhat attributed to the slow down in world
\ndemand, including in the US, Japan and Singapore, Indonesia's
\nmain export destinations. These three countries together absorb
\naround 40% of total non-oil and gas exports.<\/p>\n
The situation is equally discouraging as regards investment.
\nAs shown in Figure 1, foreign investment realization has been
\nstagnant and even declining in 2003. FDI approvals may have risen
\nconsiderably in 2003, however one should note that total
\ninvestment approvals include a category termed "change of status"
\nthat inflates actual investment figures. About 60% of total
\napproved FDI was a result of change in project status from
\ndomestic to foreign, following the government sell-offs of state-
\nowned assets.<\/p>\n
One cannot help but see this as being somewhat ironic,
\nconsidering that President Megawati proclaimed 2003 as the "Year
\nof Investment" in response to the growing concerns over lack of
\ninvestment in the country, particularly foreign investment. The
\ngovernment's policy in this regard includes various investment
\nincentives, including the drafting of a new investment bill,
\nwhich proposes the opening up of all sectors of the economy to
\nforeign investors, reducing the negative investment list to a
\nvery few protected areas, giving equal treatment to foreign and
\ndomestic investors, and reestablishing a one-stop service center
\nfor speeding up investment licensing procedures.<\/p>\n
A number of fiscal incentives for investment in the oil and
\ngas sector, including a review of the VAT on exploration, are
\nalso being proposed. The government has been actively offering a
\nnumber of new blocks for exploration as part of a new upstream
\npolicy aimed at boosting oil and gas investment.<\/p>\n
Yet investment remains virtually stagnant. Foreign companies
\ncurrently operating in Indonesia are not expanding their
\nbusinesses, as shown by the negative growth in imported capital
\ngoods. Worse still, the list of those planning to relocate their
\nproduction away to lower-cost competitors like Vietnam and China
\nis getting longer and longer. By the end of this year, more than
\none hundred foreign companies, 40% of which are Japanese firms,
\nhave reported to the BKPM that they plan to leave the country.
\nAstonishing? On the contrary, who can expect these firms to stay,
\nwhen the cost of doing business here keeps rising?<\/p>\n
Transaction costs, which include costs at ports, electricity
\nand communication costs, and labor costs remain high in
\nIndonesia. For example the cost\/lift in Tanjung Priok port is
\ntwice that of Port Klang in Malaysia, but its efficiency is
\nnearly half that of Malaysia.<\/p>\n
Meanwhile, intangible costs, such as the cost of compliance
\nwith complex regulations, security issues and labor disputes have
\nlong been burdening the business community. A large number of
\nthese are the result of distortive local government regulations
\nissued since the introduction of decentralization.<\/p>\n
A recent survey conducted by JETRO reveals that Japanese
\naffiliated companies in Indonesia face a range of serious
\nproblems in doing business. These problems are related to
\ntaxation, manpower management, customs clearance and
\nexport\/import duties, and the costs involved in obtaining
\napprovals from government agencies.<\/p>\n
The situation is aggravated by the fact that the banking
\nsystem has still not resumed its lending activities, a crucial
\nfactor in moving the real sector. With next year's elections just
\naround the corner, investors are temporarily holding on to their
\nmoney to wait and see whether or not the results are encouraging.<\/p>\n
Clearly, traders and investors perceive that doing business in
\nIndonesia involves great costs. Unfortunately, it will take more
\nthan just tax breaks and other fiscal incentives to fix the
\nsituation. The prevailing perceptions will not change until the
\nfundamental issues, especially those related to regulation, are
\nproperly addressed. The fact that there are inconsistencies and
\nlack of clarity in regulatory provisions, which allows them to be
\ninterpreted at will, is a major turn-off for traders and
\ninvestors.<\/p>\n
How, then, can we restore the confidence of traders and
\ninvestors, and improve their perceptions of Indonesia?<\/p>\n
Naturally, the change will not come overnight as it involves
\nresurrecting deep-rooted institutional issues. The process of
\nrestoring security, political stability and legal certainty will
\ninvolve a time-consuming learning curve. Nevertheless, there are
\nstill some bright spots that we can look to. The new investment
\nbill, an essential legal foundation for investors, is currently
\nbeing discussed by the national legislature. Efforts to revise
\nthe autonomy law are being made. We can also capitalize on a
\nrecovery in world demand, which appears to be just around the
\ncorner<\/p>\n
Finally, the big challenge lies in whether or not next year's
\nelections will produce a strong and disciplined government, one
\nthat can build confidence, promote investment, maintain the
\nreform agenda and deal with lingering domestic constraints. A
\nsuccessful outcome will be the first step to creating a
\nsupportive investment climate, a necessary precondition for
\nsignificant economic growth in Indonesia.<\/p>",
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