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Indonesia Economy - Business Climate

Ayman Hadi
By Ayman Hadi
8 years ago
Indonesia Economy - Business Climate

Ard, Reserves


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  1. Economic Research Higher external risks The outlook for Indonesia ’s external position remains challenging. Subdued global growth, low commodity prices and uncertain global economic and financial conditions will likely continue to weigh on its external balance sheet. Its external financing risks remain elevated, more so because of its shallow financial markets. Drastic financial market gyrations could slow down capital inflows to such an extent that flows may not be big enough to ensure balance of payments equilibrium. In 2015, fleeing capital resulted in Indonesia’s financial account balance falling to USD17.1 billion, the second lowest in the post-GFC period, from USD45.0 billion in 2014. The World Bank sees Indonesia’s CA deficit worsening to 2.3% of GDP in 2016, a level that is lower than the post-GFC high of -3.2% in 2013. In 2015, the CA balance had narrowed to -2.1% of GDP from -3.1% in the previous year, an indication of lower annual external financing requirements. As of June 2015, Indonesia’s net international investment position (NIIP) remained in a net debtor position at -48% of GDP (end-2014: -47%). The NIIP was stable overall in 1H2015 thanks to strong net portfolio inflows comprising mainly government debt, which offset other net outflows. Demand for Indonesian debt has thus not waned despite rising global uncertainties. Indonesia’s external debt-to-GDP ratio has steadily increased from 26.4% at end-2011 to 36.1% at end2015. Its gross external debt of USD310.7 billion (end-2015) is a concern because it is nearly three times the size of its official reserves (USD105.9 billion). Based on a scenario of favourable real GDP growth and slower non-bank private sector debt build-up due to less favourable global financial conditions, the IMF sees external debt as a percentage of GDP stabilising at around the 2015 level of 36.1% before declining to 33.8% by end-2020. While Indonesia’s external position remains sustainable, as indicated by the level and composition of the NIIP and gross external debt, global volatility remains a threat. For example, Indonesia’s external sustainability is, according to the IMF, especially sensitive to exchange rate depreciation. Research shows that a 30% depreciation of the rupiah in 2016 could raise the external debt to GDP ratio to about 51.5%. It is also a risk concern that government external debt may increase if there is increased reliance on external financing for funding infrastructure development projects. Chart 7: Average oil price and CA balance Chart 8: Gross external debt and reserve assets (USD bn) 40 3 30 2 20 130 310 120 290 1 10 0 -20 -30 250 -1 230 -2 110 270 0 -10 100 90 210 80 190 -3 -50 -60 -4 2008 2009 2010 2011 2012 2013 Average oil price (LHS, % y-o-y) CA (RHS, % GDP) Source: IMF, CEIC, MARC Economic Research Country Risk Monitor: Indonesia 2014 2015 170 70 1Q2010 2Q2010 3Q2010 4Q2010 1Q2011 2Q2011 3Q2011 4Q2011 1Q2012 2Q2012 3Q2012 4Q2012 1Q2013 2Q2013 3Q2013 4Q2013 1Q2014 2Q2014 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 4Q2015 -40 7 330 Gross external debt (LHS) International reserves (RHS) Source: CEIC, MARC Economic Research
  2. Economic Research Still weak institutions and business environment Indonesia continues to do poorly in the World Bank ’s World Governance Indicators (WGI), although there have been improvements. In the 2015 update, the percentile rankings of two out of six indicators rose to above 50, where there had been none previously. The percentile ranking of the government effectiveness indicator, for example, improved to 54.8 from 45.5 in the earlier report. However, Indonesia still has a long way to go. As a result of its poor showing in the WGI, it continues to rank low in the World Bank’s Ease of Doing Business report. In the latest 2016 report, it ranked at number 109 out of 189 economies covered. While the government is working hard on jump-starting growth and drawing investors, its efforts are being hampered by structural issues that include weak implementation capacity and poor inter-agency coordination. It continues to face criticism over creeping protectionism and regulatory flip-flops. In its midFebruary 2016 move to open the doors wider to foreign investment, for example, it opened 35 sectors to foreigners but closed 20 others. Jokowi, who heads a minority coalition in the national parliament, will likely continue to have to struggle to get around entrenched vested interests and face resistance in his reform efforts. For Indonesia to reach its economic potential, it will need to improve the quality of its governance and institutions. The government should, for example, complement its expanded infrastructure spending with improved financial management of public investment and stronger governance at SOE and capacity at local governments. The results of recent studies suggest that higher sub-national spending on roads has not led to improved road conditions. Government effectiveness therefore remains woefully inadequate. Terrorism continues to be a threat despite stronger democratic governance, a more stable political environment and steady economic development. If the threat is not contained, political, economic and social stability in Southeast Asia’s largest economy could be affected. While there are claims that poverty no longer plays a big part in driving Indonesians towards radical Islamic causes, economic incentives could become an effective recruitment tool as crippling poverty remains. According to the World Bank, Indonesia’s poverty rate in 2014 was 11.2%. About 28.6 million Indonesians live below the poverty line, while approximately 40% of the total population remain clustered around the national poverty line, which is set at 330,776 rupiahs per person per month (USD22.60). Chart 9: World Governance Indicators, 2015 Update Chart 10: Indonesia: Ease of Doing Business 2016 ranking Voice and accountability Resolving insolvency 100.0 Enforcing contracts 80.0 Control of corruption 60.0 40.0 Political stability and absence of violence/terrorism Trading across borders Paying taxes Protecting minority investors 20.0 Getting credit 0.0 Registering property Getting electricity Government effectiveness Rule of law Dealing with construction permits Malaysia Regulatory quality Indonesia Starting a business Ease of Doing Business Rank 0 Hong Kong Source: World Bank 8 Country Risk Monitor: Indonesia Source: World Bank 20 40 60 80 100 120 140 160 180