2006 - Building for the future
David O'Brien Jakarta
Next year should mark a period of consolidation for the Indonesian economy. In the wake of the tough decision to reduce fuel subsidies and subsequent price increases, domestic demand is likely to remain somewhat weaker. This is not necessarily a bad thing.
The economy was exceedingly dependent upon the consumer, with estimates of this sector driving 80 percent of economic growth. Malls have been constructed at a pace that outstripped demand and consumer debt has been increasing at an unsustainable rate. In an era of easy credit, consumers remain poorly educated about the true cost of "paying with plastic". With monthly interest rates in the region of 3 percent, one may be better off borrowing from Tony Soprano.
There has been recent central bank intervention requiring a minimum 10 percent repayment of monthly outstanding balances. While companies remain driven by market share, it may be too easy for a card holder to obtain another card to pay the 10 percent balance and so on.
This is the scenario which occurred in Korea. Consumers tired of the austerity since the 1997 crisis went on a spending spree when interest rates fell around 2000. This lasted until late 2003 when the bubble burst and there was a subsequent huge contraction in consumer spending. Thailand has recently instituted measures to curb some marketing "over enthusiasm" in relation to less well educated consumers. In Indonesia it may be the less expansive bubble is gently deflated as rates rise to middle of 2006 and people are reminded about "easy" money.
In a broader economic context, too many uncertainties remain in the global economy to refocus the spotlight on Indonesia in the forthcoming year. Global opinion remains obsessed with the so called "Chindia" phenomenon at the moment. With an average 9 percent and 7 percent annual growth rate for China and India respectively for the past four years, they are likely to remain the at the top of the global investment radar for the moment.
Eyes will also remain focused upon the ongoing record current account deficit in the U.S. and how it is sustained. Will foreign investors continue their demand for U.S. assets and thus keep the dollar strong (and their currencies weak to foster competitiveness) or will interest rates have to rise to continue to attract investment to cover the deficit. Such interest rate rise will have a major impact on consumer sentiment that has been fueled by asset inflation rather than price inflation over the last several years.
With all this going on in the world, Indonesia has an opportunity to work out of the spotlight in executing micro economic reforms. A number of commentators wrote in The Jakarta Post in November of the necessity for ongoing implementation and successful execution of reforms in regulation to match the President's vision.
This is where things can be put right to make a difference to the investment climate. The broad brush epithets, global road shows and infrastructure summits will not work unless the underpinning rules and regulations are in place.
The outline of the vision of where the country will be economically in three to five years could be better articulated in parallel with the steps necessary to get there. These steps can be delegated to ministers in order that there are clear indicators which they can be measured against.
Such an allocation of responsibility may also allow for a re- assessment of the number and type of ministries and allow for a lesser number of better directed ministries. The present number of ministries often seems to be at cross purposes and often act as a counter weight to reform measures.
To improve the investment climate the aim should be transparency, equality and simplicity. This needs to be the case for both foreign and local investors. The small business sector which remains engine of growth through innovation should not be forgotten. It often seems that reform measures being undertaken remain focused upon the "top end of town".
There seems to be an emphasis paid to foreign direct investment (FDI) as a panacea. However Indonesia does not lack for domestic capital. For example the last year has seen predominately family companies in Sampoerna and Risjadson reap billions of dollars in selling their domestic businesses at very full prices.
These cash rich companies are struggling to find appropriate new projects for their capital. Legal uncertainties, rent seekers and the high cost economy remain serious impediments to be overcome to promote Indonesian investment locally as well as globally.
From the FDI perspective, Western countries are unlikely to rush back next year. The herd mentality associated with other investment destinations will dominate. FDI will continue to be dominated by Asian investors.
Chinese demand for resources and particularly resource companies to mitigate their price risk exposure will remain strong. Japan and Korea are likely to remain active investors in the manufacturing sector. Malaysian and Singapore investments are likely to continue in infrastructure and service based industries where they feel they have outgrown their domestic market.
The Asian tiger economies were built on speculative capital inflows and lacked an associated reform program to address the deeper competitive issues of operating in the global economy. If such reform can be instituted there is a bright future for Indonesia, building upon its inherent competitive advantages with a mixture of wealth in both natural resources and its human resources.
The extent to which business is deterred from innovation is highlighted in charges for broadband access. Where it is available, the charges for a 2 Mbps connection are 48 times more expensive than India. International connection to the internet is at a level 3.5 times the Indian price. For innovation to thrive and meet world markets, communications are too important to be subject to non competitive tariffs.
For a country so blessed with natural resources, a sustainable approach based on developing skills at the local land owner level could be better promoted. The agribusiness sector seems sadly neglected in Indonesia, unless discussing palm oil or pulp and paper with their questionable credentials for sustainability.
By way of example the Post of Nov. 29 reports that there is a large potential for salt production in East Nusa Tenggara which could offset imports of nearly 2 million tonnes a year. The same edition of the paper detailed that fishery exports were likely to be 50 percent below the level forecast for 2005, somewhat attributable to quality control issues. Indonesia severely lags Thailand as an exporter of fresh fruit. In most cases the limiting factor in innovation seems to be getting market information to producers.
Earlier in the year I wrote about the potential to adapt the Indian success in installing internet access at village level in an Indonesian context. Access is provided by solar power and satellite and a member of the community is trained to operate and teach. The web access includes a portal that shares information for farmers on pricing along with sourcing raw materials, maximizing yields and other technical matters.
With the Community Service Obligation (CSO) now being collected by the telecommunications operator, it would be an excellent time to establish a broader program with content applications. Modern wireless technology is ensuring the costs to serve remote areas are falling rapidly and a mix of CDMA coverage and satellite is an option to develop a program similar to India's.
In the immediate term there are a number of implementing steps to be undertaken at ministry levels to improve the investment process by ensuring transparency, equality and simplicity. Accountability needs to be instilled to aid the execution. In the longer term thought needs to be given to further reforms promoting innovation to leverage the country's wealth. This includes reform of inefficient industries to optimize new infrastructure developed.
The writer is a technical advisor at CSA Strategic Advisory. CSA helps businesses through a combination of "soft" behavioral and "hard" financial advice. He can be reached at dobrien@csadvisory.com.