Are Indonesian business leaders satisfied with Jokowi as election looms?

26 Nov 2018

Patrick Cooke, Asia Regional Editor

Patrick Cooke
Asia Regional Editor
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As the first term of President Joko Widodo draws to a close, executives who participated in Oxford Business Group’s latest Business Barometer: Indonesia CEO Survey remain upbeat about business conditions, even if they are divided over the progress of his administration’s efforts to catalyse private investment in infrastructure. 

Better known simply as Jokowi, the former Jakarta mayor was the rock star candidate back in 2014 when he was elected to the highest office in the land, promising to narrow the country’s chronic infrastructure deficit, improve the business climate and address gaping wealth inequality.
As he steps up his bid for re-election in the 2019 polls, OBG gave CEOs the chance to reflect on the progress of the Jokowi administration and the economic direction of the country in our face-to-face survey conducted in Jakarta. 

Broadly speaking, they are optimistic about the country’s near-term prospects, with 80% of the 112 participants describing their outlook for business conditions in the year ahead as positive or very positive. Optimism is even higher than it was in our survey published at the beginning of the year, when 76% registered a favourable outlook.
 

The fact that such positive sentiment was recorded despite the country facing a disruptive election and severe pressure on its currency should be welcome news for the Jokowi camp. Indonesia is one of the few countries in the region running a current account deficit, and it remains vulnerable to a strong dollar and monetary tightening in developed markets, as well as uncertainties created by the US-China trade war. 

Mixed reviews on PPP environment

Many of President Jokowi’s key first-term targets were focused on infrastructure development, including the plan to add 35,000 MW to the national power grid and construct thousands of kilometres of new toll roads and rail lines, as well as dozens of new airports and seaports. While clear progress has been made, it is evident that some of the headline targets will not be met before the election. 

According to government figures, the total investment required to fulfil the 2015-19 infrastructure pipeline was estimated at $359.2bn, of which 41.3% was envisioned to come from the state budget, 22.2% from state-owned enterprises (SOEs) and 36.5% from private participation. 
However, a Bloomberg report at the beginning of the year indicated that the government was relying even more heavily on private investment than initially planned, with infrastructure funding pledges at that time totalling $15bn from the state budget, $45bn from SOEs and $110bn from private investors.

The Jokowi administration introduced the non-state budget infrastructure funding scheme (PINA) and the Committee for Acceleration of Prioritised Infrastructure Delivery (KPPIP) to streamline processes and channel more private investment into the country’s 245 priority projects. While its efforts have resulted in more public–private partnerships (PPPs) being prepared to international standards, the results of our survey suggest further work is needed to improve the bankability of projects and enhance their appeal to international investors.  

When asked how successful Indonesia has been in strengthening PPPs, 43% opted for successful or very successful, while 29% had a negative view and 23% remained neutral. 

Protectionism emerges as main external concern

Looking beyond domestic policy, our latest survey uncovered a notable shift among CEOs on the topic of the external factors most likely to impact the Indonesian economy in the short to medium term. In our previous survey, fluctuations in Chinese demand was the dominant preoccupation, with 38% choosing this option and 23% opting for trade protectionism. Fast forward 11 months and concerns are far more varied, with trade protectionism now seen as the foremost risk by a relative majority of executives (30%), followed by rising oil prices (25%). Multiple Fed rate hikes and fluctuations in Chinese demand were tied as the next most common worry (23%).

As the world’s fourth-most-populous country and a G20 economy, Indonesia is somewhat cushioned from the worst effects of the trade war by its large internal market, with consumption accounting for over 50% of GDP. However, CEOs are no doubt alarmed by the rising costs of imports needed to fuel Indonesia’s dynamic domestic economy as the currency remains weak and fragile. The disruption to global trade flows caused by the spiralling US-China dispute adds further uncertainty to the mix. Indeed, Indonesia itself has shown up on the radar of the protectionist Trump administration, which ordered a review into the country’s Generalised Scheme of Preferences status in April, threatening the tariff exemptions that have helped establish the US as Indonesia’s second-largest export market.

Indonesia has responded to external risks by implementing a range of conventional and unconvetional measures designed to reduce reliance on imports, stabilise the currency and stimulate domestic economic activity. These include the imposition of higher import tariffs on a range of products manufactured locally, and the introduction of regulations mandating the use of domestic palm oil in diesel fuel. Early indications suggest the measures might be having some effect, with the country defying expectations to unexpectedly post a trade surplus in September.

Leveraging human resources to meet market needs

While short-term measures are certainly needed in turbulent times, Indonesia also needs to look at long-term structural adjustments if it is fulfill the needs and expectations of its large, youthful population. With oil and gas revenues in decline, the country urgently needs new, high-value growth engines that generate jobs and exports. In this area, too, the Jokowi administration has made strides, unveiling its Making Indonesia 4.0 strategy this year to cultivate the development of value-added manufacturing in specific sectors, and also nurturing the growth of creative industries such as film, fashion, music and design.

However, the roots of long-term development lie in the leveraging of human resources, an area President Jokowi acknowledges requires urgent attention if the country is to escape the middle-income trap. The challenge is stark: a mere 17% of the 127m Indonesians in employment have finished high school, while less than 10% graduated from university.

When we asked CEOs to pinpoint the skills most needed amongst the domestic workforce, 32% chose leadership, 21% opted for computer technology, 20% cited engineering and 16% plumped for research and development. If President Jokowi does indeed return for a second term in office, finding a way to address the mismatch between the needs of high-value industries and the capabilities of the labour force will be one of his greatest challenges. 

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Asia Indonesia Economy

Patrick Cooke, Asia Regional Editor

Patrick Cooke
Asia Regional Editor
Follow Patrick on Twitter LinkedIn