Cheap oil with caveat Winarno Zain  ;  An economist and commissioner of a publicly listed oil and gas service company

JAKARTA POST, 03 Februari 2015

                                                                                                                                     

                                                

When King Abdullah of Saudi Arabia died last month, speculation was rife that oil prices would move from the current level. But after Prince Salman was appointed the new ruler, it was clear that the new king would stick to the policy of his predecessor, holding Organization of the Petroleum Exporting Countries (OPEC) oil production steady amid declining prices to defend Saudi Arabia’s market share. That means oil prices would remain low and as Saudi Arabian oil minister Ali al-Naimi said, the oil price per barrel would not return to US$100. The low-oil prices will remain for some time, since the steep fall in oil prices were the result of ongoing structural changes in the global oil economy. There are several forces that have driven down oil prices. First, production of shale oil in the US has expanded, enabling the US to reduce its oil imports, increasing supply in the market by nearly 1 million barrels per day. Shale oil companies in the US have drilled 20,000 wells since 2010 (about 10 times that of Saudi Arabia’s wells) and have contributed one-third of the 9 million barrel per day (bpd) of US production. Second, weak economic growth in developed economies such as Euro zone countries and Japan, as well as weakening growth in China have curbed demand for oil. Third, changes in OPEC policy objectives. Saudi Arabia, which normally acted as a swing producer for OPEC, decided to change its policy into defending its market share. Despite the plunge in oil prices, Saudi Arabia did not cut its oil production and according to some reports, it even offered discounts to some traders. Fourth, the continuing strength of the US dollar, with which oil prices are denominated, have made oil too expensive for countries whose currencies are weak, forcing them to reduce demand for oil. Fifth, geopolitical risks have played a smaller role in influencing oil prices. Markets were surprised to see oil production increase in countries such as Iraq and Libya, where armed conflict is raging. Declining demand for oil has stemmed from the continuous effort to save energy since the 1970s, resulting in less energy intensive gross domestic product (GDP) growth. The plunge in oil prices has blessed Indonesia with unexpected windfall benefit, making it easy for the government to implement subsidy reform smoothly. Fiscal burdens from the fuel subsidy and pressure from oil imports in the trade balance would ease considerably. But the fall in oil prices would bring several adverse effects that the government would have to deal with. On the fiscal side, it cuts government non-tax revenues significantly since Indonesia remains an exporter of oil and gas. A more serious impact will be felt in the oil and gas industries. The immediate impact of the sharp drop in oil prices for Indonesia will be the slowdown in exploration activities. Even before oil prices fell sharply, exploration activities had slowed due to various reasons such as legal and fiscal uncertainties. The high cost of exploration has made investment in oil and gas exploration in the country more and more unattractive. Last year, according to the Upstream Oil and Gas Regulatory Special Task Force (SKKMigas), out of 206 planned oil-drilling projects, only 77 were realized, down from 96 in the previous year. Exploration spending fell from $1.9 billion in 2011 to $1.2 billion in 2013. Oil production has continued to decline from 346 million barrels in 2009 to 301 million barrels in 2013. According to the Energy and Mineral Resources Ministry, several oil and gas contractors are considering halting their projects because low-oil prices have hurt their profit margin. Some big oil contractors such as US company Chevron and the French Total may be able to sustain their exploration activities in Indonesia, but if oil prices remain at the rock bottom level, they will scale down their exploration activities too. Drilling activities to discover new reserves for fossil fuel and any findings could determine the potential for future production. If drilling activities keep declining, Indonesia will have less probability for finding new reserves and this will impact its future production. The development of alternative energy projects, especially renewable energy, could suffer a setback. The low prices of fossil fuel would bring competition to these projects. Under pressure from low-oil prices, alternative energy projects would not be commercially viable. As developments for these projects slow down, fossil fuel will continue to dominate energy consumption and the country’s dependence on imported fuel will drag on. The government has announced a plan to set a floor price for domestic fuel. Floor price is the price that the government would maintain regardless the extent of the continuing fall in oil prices. The aim is to guarantee a certain amount of government revenue from oil and gas to safeguard its fiscal sustainability. For investors of alternative energy, this policy could signal price competition. From this they could calculate to what extent their projects would be commercially viable. In any case, cheap oil could threaten the national goal of diversifying energy usage. Moreover, low-oil prices, if sustained over medium-term, may encourage production that is more intensive in fossil fuel or energy generally. This runs counter to the national policy of achieving a cleaner environment. The rapid changes in the global oil economy should alert the government to design a new energy policy, where taking benefit of low-oil prices has to be balanced with providing better incentives for the development of alternative energy, especially renewable energy. Otherwise, the goal of achieving national energy security would be in disarray. ●

Continuing Jokowi’s momentum in 2015 in wake of bold policies

Continuing Jokowi’s momentum in 2015 in wake of bold policies Winarno Zain  ;  A graduate of the school of economics at the University of Indonesia; A commissioner at a publicly listed oil and gas service company

JAKARTA POST,  05 Januari 2015

                                                                                                                       

As Indonesia enters 2015 it still faces several questions on its economic prospects. On the international scene, the prospect of the global economy is still clouded by uncertainties surrounding the timing of the interest rate hike by the US Federal Reserve. In its last statement the Fed said it “would be patient” in hiking rates amid stronger US growth. Coupled with the possibility of the eurozone slipping into recession and the still weak economy in Japan, it means market volatility will continue in 2015. For the Indonesian economy this means the fear of volatility in capital flows and the rupiah exchange rates are still alive. In recent years the Indonesian economy has been riding on the high prices of its commodities but now the commodity boom has ended. It is hard to expect any strong recovery in commodity prices next year. Except in the US, economic growth in Indonesia’s main trading partners remains subdued. Prices of coal and crude palm oil, the two biggest Indonesian commodity exports, will remain weak as growth in China and India, the two biggest buyers of Indonesian commodities, are below their historical trends in recent years. Rubber prices may improve as rubber is mostly exported to the US where the automotive industry is picking up. Exports of minerals will remain weak in the face of the government export ban on raw minerals, and also because there is still oversupply of ores around the world. The drop in oil prices will slow down import growth, hence narrower current account deficits in 2015. This year Indonesian industries will suffer from the impact of the increase in minimum wages. The increases which were fixed by several regional governments recently were the highest in a decade and in some cases even higher than the inflation rate. As inflation went down prior to the increase in the price of subsidized fuels in November, it means workers received a significant increase in their real wages. Even with higher inflation after the fuel price increases workers still achieved higher real wages. The problem is the increase in real wages was not accompanied by increases in productivity. Labor productivity in Indonesia remains low due to low levels of education and technology used. This means Indonesian industries will suffer higher unit labor costs. This could erode the gains in exports by Indonesian manufacturing from the steep depreciation of the rupiah in recent months. And it is questionable whether the manufacturing sector will still enjoy a competitive advantage from labor costs in 2015. The growth prospect in 2015 will also be shrouded by the tight monetary conditions. Bank Indonesia (BI), the central bank, will still prioritize macroeconomic stability over growth in 2015. BI monetary instruments such as interest rates will still be used to stem inflation and current account deficits. Knowing that interest rates were not effective in stemming the fall in the value of the rupiah, BI resorted to market intervention, but after a while this was abandoned when it was realized that it would impose a huge cost on its reserves. Tighter liquidity since early 2014 has pinched the ability of banks to maintain their loan growth as bank deposits are growing slower than bank lending. Bank lending only grew 12.4 percent in October 2014 year-on-year, a steep drop from 22 percent growth in the previous year. The loan to deposit ratio (LDR) has gone up and banks cannot force their LDR to go up further without endangering their liquidity. All of this will have a negative impact on investment. ... the fuel subsidy in the government budget ceases to be a wild card... We hope that the drop in oil prices will have some positive impact on the world economy, however. In the developed economies consumers will save billions of dollars in cheaper gasoline for their cars. These savings will be transformed into consumption, driving up economic activities in those countries. And as inflation softens from lower gasoline prices, central banks everywhere are geared for looser monetary policies that could pump more liquidity into the economy. Here at home the drop in oil prices could boost the momentum for the subsidy reforms started by President Joko “Jokowi” Widodo in November when he raised subsidized fuel prices by an average of 31 percent. As oil prices have dropped and political resistance to reducing fuel subsidies is muted, the situation has become conductive for the government to revamp the fuel subsidy system — which it did — on the eve of 2015. Domestic fuel prices are now floated except for diesel and kerosene, for which some subsidies are being maintained. The finance minister has predicted that fuel subsidies in the 2015 budget could be cut significantly from Rp 276 trillion (US$22 billion) to Rp 60 trillion. This saving in fuel subsidies is so huge that the government could sharpen its budget priorities with higher spending on infrastructure building, social programs and reducing poverty. Another outcome from this new system is that the fuel subsidy in the government budget ceases to be a wild card, and could now be shielded from the vagaries of oil prices and the rupiah exchange rate thus placing the government budget on a sounder footing. Could some kind of snowball effect arise from this? Market confidence in President Jokowi has strengthened, as it is realized that the President has boldly implemented politically difficult and risky decisions. They also see that President Jokowi is impatient with bureaucratic inertia and is serious in making business easier by streamlining bureaucratic procedures and licensing systems. Analysts feel that it is a matter of time before Standard and Poor (one of the three rating agencies besides Fitch and Moody’s) upgrade its rating on Indonesia’s sovereign debt to investment grade. This could lower borrowing costs for the government and Indonesian firms. Market confidence would open the door for more capital inflows and investment, which has to be safeguarded by the government by continuing consistency in policy reforms. Otherwise it will disappoint the market and the momentum for growth will be lost. ●

A half-baked budget for president-elect Joko Widodo Winarno Zain  ;   The writer, a graduate of the School of Economics at the University of Indonesia (UI), is a commissioner of a publicly listed oil and gas service company

JAKARTA POST , 19 Agustus 2014

                                                

                                                                                                                                   

President Susilo Bambang Yudhoyono submitted last Friday the 2015 draft state budget to a joint session of the House of Representatives and the Regional Representatives Council (DPD). However, president-elect Joko “Jokowi” Widodo would execute a budget that he was not involved in preparing. As a transition budget, the 2015 budget will not cure all of the country’s economic ills. It is a budget that mostly deals with mandatory spending, providing the legal basis for the basic functions of the government. It does not address the huge problem in infrastructure and does not address the consequences of ballooning fuel subsidies. The budget assumes gross domestic product (GDP) growth at 5.6 percent in 2015, which would be a significant increase from the 5.2 percent currently projected for 2014. If consumption growth continues to be resilient, then the GDP growth target would depend on the growth of investment and exports. But investment growth would remain subdued as most current hurdles would remain in place, such as broken infrastructure and bureaucratic red tape. In fact, infrastructure development experienced a setback this year as the Public Works Ministry will only get Rp 74.2 trillion (US$ 6.34 billion), slightly less than the Rp 74.5 trillion allocated in the 2014 revised state budget. The more serious challenges to investment are coming from policy and legal uncertainties that could worsen the investment climate. Populist and nationalistic policies that would be carried out by Jokowi would make investors more cautious. Recent developments indicate that Indonesia is becoming less open to foreign investment. Caps on foreign ownership are being extended into more economic sectors, the most recent being a proposed bill that would reduce the foreign ownership cap in the plantation sector from 99 to 30 percent. At the same time, the global financial environment would not be so favorable because global liquidity and interest rates would rise, as the US Federal Reserve ends its quantity easing monetary policies. Exports would get a little lift next year, when the export of some minerals resume, but generally it would be difficult for Indonesian exports to grow strongly next year as growth in the developed economies remains weak. Growth in China, the largest buyer of Indonesian commodities, would not make a spurt amid efforts of rebalancing its economy. Except for oil, prices of other major Indonesian commodities would remain weak. In the 2015 draft state budget, the fuel subsidy was set at Rp 291.1 trillion or Rp 44.6 trillion higher than in the 2014 revised budget, while the electricity subsidy was set at Rp 72.4 trillion. It was the biggest single increase among budget items as it represented 45 percent of the total increase in central government spending. As a net oil importer, Indonesia stands to lose from rising oil prices as higher oil prices would add to fiscal deficit through the direct impact of higher fuel subsidy spending. Last year, out of $182 billion in revenue from exports, $42 billion was used to import oil. In the first semester of 2014, Indonesia’s overall trade balance suffered a deficit of $1.2 billion, as its oil trade deficit reached $13.8 billion. With rising dependence on oil imports, fuel subsidy in the budget is always vulnerable to movement in international oil prices and rupiah depreciation. The fuel subsidy has become the single biggest risk to fiscal sustainability. The current-account deficit and the budget could cause a vicious circle that mutually reinforces each other through changes in exchange rates. As the current-account deficit is pushed higher by rising fuel imports, investor confidence gets shaken. Capital outflows would weaken the rupiah, pushing up government spending on interest payments, its fuel import bills, and ultimately the budget deficit as well. The problem is becoming worse because higher fuel subsidies have to be borne amid slower tax revenue growth. Tax revenue growth fell significantly from 20.7 percent in 2011 to 17.1 percent in 2013. In the 2015 draft state budget, the tax revenue has been projected at Rp 1371 trillion, an increase of only 8.5 percent, from the 2014 revised state budget. The risk that the projected growth of 5.6 percent would not be achieved is high, making it probable that the 8.5 percent projected increase in tax revenues would not be achieved. Corporate earnings would remain under pressure from slower growth. Revenues from value added tax (VAT) would face uncertainty, as robust consumption growth cannot be sustained when subsidized-fuel prices and electricity rates continue to be raised. As it would take time for tax reforms to have an affect on tax revenues, the most immediate measure that could be taken by the next government is to intensify tax collection from registered tax payers. There should be space to do this. There are currently 2.5 million registered companies but only 600,000 are regular taxpayers. There are more than 10 million registered individual tax payers, but only a quarter of them pay taxes regularly. The implementation of the investment budget would remain a challenge, as actual expenditures have always been less than the total budget. But next year, things might be a bit better. Last May, the Constitutional Court issued a ruling that abolished the authority of the House to attach conditions to certain budget items and restricted the involvement of the House only to policy and program levels. This ruling not only would eliminate transactional politics and corruption within the House budget committee but more importantly would reduce hurdles in budget execution, and could help speed up budget disbursement. If subsidized-fuel prices are to be increased, then the poor should be protected from the impact of the price increases. Although growth has slowed, thanks to fairly low inflation and food-price declines, the number of impoverished people will not likely increase this year. However, the depth of poverty could slightly increase. This means that the Rp 11 trillion in temporary cash assistance given to 15 million low-income households in 2013 after fuel prices were increased will not be enough and higher appropriations could be needed for cash allowances for the poor this year. The incoming government should work hard not only to implement bold fuel reforms but to also introduce tax and bureaucratic reforms. Certainly Jokowi will find that the 2015 draft state budget is not to his liking, since it does not accommodate some priority programs promised in his campaigns. So he will certainly review it. But he has to wait until March next year. ●

Market euphoria over Jokowi : How long will it last? Winarno Zain  ;   A graduate of the School of Economics at the University of Indonesia, A commissioner of a publicly listed oil and gas service company

JAKARTA POST,  14 Juli 2014

                                                

Almost Rp 1.6 trillion (US$138 million) worth of foreign funds flowed into the Indonesian stock market on July 8, the day before the presidential election, pushing up the benchmark Jakarta Composite Index (JCI) by 0.7 percent to 5,024. It surged by 1.7 percent the day before. The shares of Bank Mandiri, the biggest Indonesian lender, surged 2.3 percent, with 102 million shares changing hands, more than three times the daily volume average.  The shares of Bank Rakyat Indonesia (BRI) jumped by nearly 6 percent, with volumes twice the daily average. In the afternoon, the trading share price of both banks managed to achieve historic levels, before pulling back. The rally also extended to the rupiah, which has been strengthening since July.  Indonesia’s one-month non-deliverable rupiah forward trade offshore rose 0.1 percent to Rp 11,569 per dollar, extending its rally since July 3 to a cumulative 3.7 percent increase. The day after the election, on July 10, the market continued its rally with the JCI ending at 5,098, up by almost 1.5 percent. Meanwhile the rupiah strengthened to Rp 11,549.  At the same time the Finance Ministry announced it had raised Rp 15 trillion from its bond auction exceeding its Rp 10 trillion target. Investors submitted bids 2.2 times the amount offered. Previously, Indonesia raised ¤1 billion bonds from the market, the first time the government raised its euro denominated bonds. It took advantage of high liquidity in euro area, resulting from the loose monetary policy of the European Central Bank (ECB). Investor enthusiasm was reflected in the amount of bids that were seven times of the amount offered. The enthusiastic reception of investors to Indonesian stocks and bonds reflected their confidence that the election of Joko “Jokowi” Widodo as president, as predicted by most pollsters, would pave the way for the Indonesian government to push further reform. The market considers Jokowi business-friendly, especially given his actions during his short spell as the Jakarta governor when he revamped the bureaucracy and pushed for infrastructure development. The euphoria of the market on Jokowi’s presidential win based on quick counts may not last long, however. As Prabowo Subianto, his rival in the presidential election, also claimed victory, there will be uncertainty and tension for the next 11 days until the General Elections Commission (KPU) officially declares the winner. The market is also aware that the euphoria is largely based on political sentiment from the election of Jokowi who is considered more market friendly compared to Prabowo. Once the political euphoria subsides, the market will face the hard truth of Indonesia’s economic fundamentals. The economy is struggling to restore its growth, to revamp its broken infrastructure, to fend off crushing subsidies and eliminate current-account deficits that have battered its currency for several months.   Even if the succession goes smoothly and Jokowi becomes the seventh president of Indonesia, the market realizes that formidable challenges will immediately confront him in moving the economy forward.  The cabinet that he must immediately form will be influenced by his campaign pledges. A solution for the pressing issue of fuel subsidies cannot wait. During the campaign, Jokowi agreed to cut fuel subsidies gradually but did not elaborate on how he would do it. In the last presidential debate, when the candidates discussed energy, the issue of reducing fuel subsidies was not touched on at all by the two candidates. It was a glaring absence, since most of the people would have liked to know where each candidate stood on this issue. For Jokowi as president, this will be the most politically risky and tricky issue. The market will watch closely how he deals with this. The market apparently believes that Jokowi as president will pursue structural reforms to boost economic growth. But the business community will look at how he deals with labor reform. The minimum wage has been a contentious issue between employers, labor unions and the government. During his campaign, Jokowi boasted that he, as the Jakarta governor, increased the minimum wage by 10 percent to Rp 2.4 million ($209)  a decision that won him support from labor union leaders. But labor union leaders have stated their determination to press ahead with their demands for further higher wages. Businesses have complained about rising labor costs, because it could undermine their competitiveness in the international market. Will Jokowi as president continue to accommodate these labor demands? The economy is not only facing still weak commodity prices and exports. The US Federal Reserve has just announced it will stop its asset purchase program, known as “quantitative easing” in October 2014, the same time the new Indonesian government takes over. This will further tighten global liquidity and may trigger capital outflows from Indonesia, weakening the rupiah. The new president must be ready to face these challenges. ●

Why is the market disappointed with the election results? Winarno Zain  ;   An economist

JAKARTA POST, 14 April 2014

                                      

                                                                                         

                                                             

When the Indonesian Democratic Party of Struggle (PDI-P) officially declared Jakarta Governor Joko “Jokowi” Widodo its presidential candidate on March 13, the market warmly welcomed the announcement. The Jakarta Composite Index (JCI) soured by more than 3 percent. The two biggest banks in the country, state-owned Bank Rakyat Indonesia (BRI) and Bank Mandiri saw their shares jump by more than 10 percent and 9 percent respectively. The “Jokowi effect” apparently did not last long, because the next day, stocks plunged to their previous level. One day after the election quick count on April 9, which put the PDIP-P in the lead, the JCI plunged by 3.3 percent as the Jokowi effect continued to fizzle. Volumes heavy indicating the market experienced a sell off. BRI and Bank Mandiri shares stocks dropped by 5.3 percent and 5.4 percent respectively. Astra International and Semen Indonesia shares plunged by 6 percent and even shares of Adi Karya, the state-owned construction company, one of the market favorites, fell by 11 percent. The severe plunge was unexpected given that the election throughout the country had been peaceful and without serious hiccups. More surprisingly, the steep fall in the JCI occurred in the midst of strong gains experienced by stock indexes in other Asian countries. The sell-off in the Jakarta Stock Exchange indicated that the market was disappointed by the result of the election based on the quick count. One could feel not only the market concern, but a sort of extreme fear regarding the future of the Indonesian economy when the new government from the election takes over the power from the current government next year. There are some possible reasons why the market was worried by the quick count results for the April 9 election. Without any clear dominant winner, the government will be based on a coalition of several parties. First, given the distribution of votes among parties, it is clear that whatever coalition government is formed, it would be weak and not effective, as the debate on government policies and the decision-making process would drag on for a long time in the House of Representatives. Second, during the campaign, the rhetoric of populist and nationalist policies were at high pitch, even harsh words against foreign-business interests were heard, shocking the business community, who are already wary of the back sliding of some government policies in trade and investment, as reflected in the recently approved investment and trade laws. Third, the market did not expect there would be any significant decision for reforms, in the period while political parties jockey for positions in the next Cabinet. As there are many difficult problems to be fixed — the fuel subsidy, infrastructure, bureaucratic reforms — the market started to doubt the ability of whoever would be elected president to fix the problems. The other problems are that investors and the market are still in the dark on where the current presidential candidates stand on some economic issues. Jokowi, the frontrunner, has not even spelled out his thinking on economic issues. We only know that he was a manufacturer and exporter of furniture. As a businessman he is a pragmatist and likely would continue his down-to-earth approach, shown during his brief tenure as Jakarta governor. He could take the stand that infrastructure throughout the country should be immediately fixed. So the main focus of his administration would be to fix infrastructure. When he was elected Jakarta governor he showed serious efforts to revamp the bureaucratic mess and the delivery of public services in Jakarta. If he is elected president, he would do the same, reforming bureaucracy more vigorously at the national level, not only to support the investment climate, but to combat corruption. The only unknown qualities about him would be his stance on the issue of the fuel subsidy. Personally, he is possibly in favor of reducing the fuel subsidy, but this would be a contravention of the current PDI-P stand on the subsidy, which always opposed a subsidized fuel price increase. We will see whether he has the courage to override the official PDI-P policy. On the other hand the other presidential contender, Prabowo Subianto, during his campaigns touched upon the importance of national companies to play a greater role; the Gerindra Party, he said would put vigorous focus on the development sector, which according to him is neglected. His remarks raise speculation that if elected, Prabowo would pursue an affirmative policy, a policy that was discarded a long time ago by the government. The capital outflow from market disappointment from the election result could pose serious risks, as this happened on the back of the declining economic growth and the still-weak balance of payments. The current account deficit has improved but would still pose a threat to the balance of payments. Bank Indonesia (BI) would be put in a policy dilemma, where there would be little room to maneuver. In the meantime, the market and the exchange rate would experience volatility, giving more uncertainty. The market will wait until a vice presidential candidate is chosen. Confidence will return if it knows that the vice presidential candidate is a figure who is credible, and especially if Jokowi is proven to be a figure who has strong lobbying skills with the House. ●

The economy is improving, but is it sustainable? Winarno Zain  ;  An economist

                                                JAKARTA POST,  13 Februari 2014                

                                                                                                                        

                                                                                         

                                                      

The depressing state of the Indonesian economy for the last several months has all of a sudden gone. There is optimism and hope that the worst is over, and that the rebound of the economy is already underway. Inflation has been contained and set on the downward path. The rupiah’s exchange rate has been steady and has even made slight gains against the US dollar.  Foreign exchange reserves are still on the rise, surpassing the US$100-billion mark at the end of January. The sell-off of stocks on the Indonesian Stock Market (IDX) has abated. The Indonesian Composite Index (IHSG) has gained 9.2 percent between the start of January and Feb. 7, a significant rebound from the December 2013 lows.  Foreign funds that fled from the country last year are now coming back in droves, hunting several  blue chips on the IDX, driving up the share price of Bank Rakyat Indonesia (BRI), Astra International, Telkom, Semen Indonesia and others.  The trade balance in the fourth quarter of 2013 returned to surplus after suffering deficits for the previous four quarters. But it must also be noted that the trade balance for the whole of 2013 posted a deficit of $3.9 billion, three-and-a-half times the deficit in 2012. However, if we scrutinize in more detail the gross domestic product (GDP) growth for 2013, which has just been released by the Central Statistics Agency (BPS), it is doubtful that these rosy pictures of the economy will be sustained unless policymakers take some drastic steps. Tighter monetary conditions have impacted most of the tradable sectors: Growth in agriculture, mining and manufacturing were slightly down from their growth in 2012.  After negative growth in first half of 2013, the mining sector grew nearly 4 percent in the last quarter of 2013, but that was because mining companies rushed to produce and export their unprocessed minerals before the ban on exporting raw ore took effect on Jan. 12. Higher interest rates and more stringent conditions for down payments have considerably impacted the construction sector, whose growth fell significantly from 7.5 percent in 2012 to 6.6 percent in 2013. But the biggest drop in growth was in the trade, hotel and restaurant sectors, which together fell from 8.1 percent to 5.9 percent.  The impact on employment could be significant because these sectors were the second-biggest jobs generator after agriculture. On the expenditure side of the GDP, while growth of private consumption was steady despite higher inflation, there were huge jumps in the growth of exports and government spending.  But the overall GDP growth will not hold up, because of the dramatic fall in investment growth from 9.8 percent in 2012 to 4.7 percent in 2013. Investment growth simply cannot be allowed to keep  shrinking.  It is investment growth that generates employment, income and economic growth. So, it is critically important that the continuing slide in investment growth be stopped.  The clear message from the 2013 GDP figures was that if GDP growth is to rebound, increasing investment should be the number one priority for policymakers.  Unfortunately, this is the hardest thing for policymakers to implement, due to domestic as well as external forces. The investment climate, poor infrastructure, bureaucratic inertia and a still weak and uncertain global economy are all hurdles to overcome. But if investment is to become a more significant force in driving up GDP growth, then it might not be enough to talk about quantity. It is time to talk about the quality of investment as well.  Policymakers should focus more on the expansion of investment to industries that give more value added, with higher technology transfer, because it is these industries that can accelerate growth more than basic and simple manufacturing, which currently dominates Indonesian industries.  Most high-tech, high value added industries are foreign-owned.  As competition among countries to lure these industries is fierce, the current approach used by the government (for example, tax incentives) is not enough.  A more proactive approach by government institutions is required. After all, the responsibility of attracting foreign direct investment does not rest with the central government but also with the regional governments.  Regional government heads — governors and district heads — should be encouraged to actively seek and persuade firms to invest in their regions.  The current effort by Jakarta Governor Joko “Jokowi” Widodo to lure Foxconn, the world’s biggest electronic manufacturer, to invest in Jakarta, is one example that other regional heads should emulate.  Foxconn, which produces the devices used by electronic giants such as Sony, HTC and BlackBerry, is working out a plan to build a factory in Marunda, north of Jakarta.  Jokowi took the time to meet the Foxconn chairman himself, and if Foxconn started to invest $1 billion, it would be a “coup” for the Jakarta Governor.  But there is a long way for Indonesia to go to equal Vietnam, for instance, in attracting high-tech industries. Samsung recently announced a plan to build a $2-billion smartphone plant in Vietnam that would produce 40 percent of Samsung cell phone sets. US-based Intel, the world’s biggest chip maker, has already built a $1-billion plant in Ho Chi Minh City.  also has a factory in Vietnam, and LG is building its $1.5-billion plant to produce TVs and appliances. Indonesia is ahead of Vietnam in total foreign direct investment, but clearly, Vietnam has beaten Indonesia in attracting investment from high-tech industries. Reversing the score against Vietnam is  an uphill battle indeed, but it has to be done. The challenge is immense because promoting investment has a lot to do with removing structural restraints, and unfortunately, it would be beyond the capability of the present government or the next government after the election in April to do this.  The inability of policymakers to remove structural restraints come from within the government itself and from the outside. Structural reforms need political consensus, but with competitive politics now on the way, it is difficult to reach a united stance on the need for reform.  Besides, the role played by non-political actors (NGOs, business associations, mass media) in influencing policy making is getting bigger.  All these could undermine government efforts to mobilize more investment, which is urgently needed for the revival of Indonesian economic growth. ●