Will
Indonesia debunk the market pessimism?
Michael Frigo ;
The regional manager for Atradius,
one of the
world´s largest credit insurers
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JAKARTA
POST, 05 Maret 2014
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The year
2013 still saw Indonesia at the center of global attention, being hailed as
the largest economy in Southeast Asia for successfully maneuvering out of
global recession and maintaining both economic and political stability on a
longer term. The archipelago was blessed with a booming middle class and
increased domestic consumer spending in the short and medium term while
managing to book all-time high investments ,which mostly came from direct
foreign ventures, thus, making the nation’s status as the emerging power in
the global economy seem difficult to match.
However,
the last quarter in 2013 proved to be more challenging than expected and
several hurdles were presented for Indonesia. Inflation climbed to 8.4
percent at the end of the year — nearly double the 4.3 percent in 2012 —
interest rate hiked and gross domestic product (GDP) growth was estimated to
have fallen from 6.2 percent to 5.6 percent, according to a Standard
Chartered research.
In
addition, Indonesia’s trade deficit jumped to US$2.3 billion for the
July-September period as imports remained strong while exports shrank due to
the slowdown in China and continuing troubles in Europe and the US, and
finally, the weakening of rupiah against US dollars raised combined fears
that the once stellar-performing Southeast Asian economy could be hitting a
wall so soon.
According
to the World Bank, Indonesia will see a slower economic growth in 2014 and
faces tough economic risks. The risks to growth are high as the needed
adjustments to weaker external balances continue to play out in the domestic
economy, and as a result of shifting economic conditions and policies
internationally (notably the US Federal Reserve “tapering”), which may
further tighten external financing conditions. Indonesia is also expecting a
considerably slower investment flow in 2014, as companies may hold off during
the election year, providing even less stimulus to an economy challenged with
current-account deficit.
Given
the country’s strong reliance on imports, the weakening rupiah is also likely
to add to inflationary pressures. Sensing the potential downfall, the
Indonesian government then launched several initiatives to secure monetary
balance, including using trade finance as a solution to boost trade deficit.
The
finance minister has announced that the government is planning to strengthen
its trade financing scheme to encourage local exporters to tap into
non-conventional markets, so that the country’s export growth could stay
strong amid the weak global demand. Currently, local manufacturers prefer not
to sell their goods outside of Indonesia’s traditional export markets due to
high risks.
Another
concern for businesses this year is the rising percentage of late payment
when doing business in the country. According to Atradius’ recent Payment
Practices Barometer survey conducted for Indonesian businesses, late payment
of domestic invoices due to insufficient availability of funds occurs more
often in Indonesia than in the other countries surveyed in Asia-Pacific. Of
the respondents in Indonesia, 63.5 percent voiced the concern, the highest
percentage of the countries surveyed in Asia-Pacific. Meanwhile for late
payment from foreign Business-to-Business customers, 48.1 percent of
respondents said it was most often due to inefficiencies of the banking
system.
With all
these challenges present, businesses need to start thinking about ways to
provide extra safeguards for their traded goods. This is especially crucial
considering the increasingly competitive global export market, both
bilaterally and regionally, thanks to the growing free trade agreements — and
this is still not taking into account the upcoming ASEAN Economic Community
next year, which promises to lift both trade and non-trade barriers in order
to achieve a single integration of the members.
Once
businesses take a further step in protecting their goods, potential importers
to Indonesia will have additional confidence to buy more products from the
country as they will benefit from stronger trade protection.
But
specifically for Indonesia, the challenge of living in a massive archipelago
spanning across more than 17,000 islands is the provision of infrastructure
to support economic activities.
The
massive archipelago’s physical infrastructure is considered to be the main
issue that needs to be encountered by foreign investors operating in the
country. Infrastructure, which encourages connectivity between regions, will
reduce the cost of transportation and logistics, which will improve product
competitiveness and help the nation accelerate its economic growth.
A proper
infrastructure can also be helpful in boosting intra-regional trade in order
to counter weak — albeit improving — demand from Europe and North America.
The Indonesian Government has indeed launched the MP3EI (Master Plan for the
Acceleration and Expansion of Indonesia’s Economic Development) project among
others to overcome the infrastructure underdevelopment.
However,
the project to date still needs to overcome several factors such as land
acquisition issues, low level of coordination between governmental
institutions and overlapping land concessions. In order for the nation to
gain maximum trade and investment trust, infrastructure remains a priority
sector to be addressed.
In today’s highly dynamic economic landscape, anything from natural disaster
to small trade challenges can cause real issues for business practice. It is
time for Indonesian businesses to start taking a step further to ensure
business continuity to survive this challenging year, and contribute to the
nation’s overall economic stability in a longer term. The door of
opportunities is still wide open for Indonesia to continue charging ahead and
prove the predictions wrong, and be on its way to once again reclaim its
economic throne in the Southeast Asian region. ●
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