Winds of Change
By Sharat Shroff
June 29, 2012
The Jakarta air felt unusually comfortable as I stepped out of Soekarno Hatta International Airport earlier this month. It was certainly still hot and muggy but cool breezes made the evening a bit more bearable. It brought to mind Europe's economic chill, and I wondered if perhaps Indonesian businesses were facing a gloomier outlook due to global concerns.
In my meetings over the next few days, some of these concerns were partly dispelled. Fortunately, the largely domestic nature of Indonesia's economy has offered some resiliency in this difficult macroeconomic environment. The consumption side of the economy continues to hum along and there are some early signs that investment activity is starting to perk up. This is good news because since the end of President Suharto's reign in 1998 there have been very few large-scale investment projects by Indonesia's corporate sector.
The paucity of adequate infrastructure continues to be a drag on the economy. For instance, the country has just one integrated steel firm, which was established in the 1970s, and its cement plants have been slow to increase capacity—still scarred by the sudden collapse in demand during the Asian Financial Crisis. Without developing more cement factories, there is a risk of shortage in supply as most plants are running near maximum capacity.
The infrastructure deficit is made even more acute by the continuing strength in Indonesia's domestic consumption—which has recovered from the shock of the late 1990s as incomes have risen. One Korean expatriate, who has been working in Jakarta since 1989, told me that employees used to report to work in bare feet but now sport foreign, branded athletic shoes.
In a positive move late last year, lawmakers passed a land acquisition bill (yet to be implemented), which may increase spending on roads, ports and airports, and accelerate the growth of such projects. The upgrade to Indonesia's sovereign credit rating last year is also spurring inbound foreign direct investment, particularly from Japanese and Korean companies that are keen to tap the growth in Indonesia's economy.
But authorities will first need to ensure a balance between regional autonomy and common ground with the central government. Over the past decade, Indonesia has devolved significant power to the local and provincial governments, and this may impact increases to foreign direct investment as local governments flex their muscle. In recent months, certain provincial government policies have shown to potentially be in conflict with central government efforts in areas such as mining.
For the winds of change to become a more powerful driver of Indonesia's economy, the country's domestic institutions will need to better tackle these internal issues.
(c) Matthews Asia