2008 Year in Review

Indonesia

Economic News

22 Jul 2010
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The year 2008 turned out to be a tale of two halves for Indonesia. The first half saw the country riding a wave of optimism and investment as exports of coal and palm, which the country has in abundance, were fetching record prices. But in the latter half of the year, Indonesia was adversely impacted as global commodity prices fell dramatically followed by a sharp decrease in global appetite for raw materials and funds available for investment.



According to BKPM, the Indonesian Investment Coordinating Board, Foreign Direct Investment (FDI) reached $12.5bn in the first 10 months of the year, a 40% jump from the same period a year prior. Much of this increase can be credited to the reforms made in 2007, when a new investment law came into effect, easing restrictions and improving the business environment.



With a population of 250m, and many sectors in the country underserviced or underdeveloped, investors have been seeking to make inroads into South East Asia's largest and one of its more rapidly growing markets.



On the telecommunications front, Qatar's Q-Tel agreed to pay $1.35bn for an additional 30% stake in mobile operator Indosat in June. In the banking industry, Malaysia's Maybank bought a controlling stake in Bank International Indonesia (BII) for $2.3bn, while Limitless, the real estate arm of Dubai World, has announced plans for a $1.7bn mixed-use development in Jakarta.



2008 saw an additional initiative that should make the country a more attractive base for business operations, with the announcement in early September of a reduction in the corporate tax rate. When it comes into effect in 2009, top earning corporations will be taxed at 28%, dropping to 25% in 2010, putting Indonesia more on par with regional competitors.



Nonetheless, Indonesia, ranked 129th out of 181 countries in the World Bank's most recent survey on the "Ease of Doing Business", and as such, still has a number of issues to address to increase its overall competitiveness, with observers citing corruption, bureaucracy and legal uncertainty as some of the deterring factors.



The country is set to hold general elections in 2009, and some argue that this has led the government to delay major reforms, such as instituting a more flexible labour law, which would be welcomed by investors but would prove unpopular with voters.



While the labour law remains unchanged, an announcement was made in early August that should improve the quality of the Indonesian workforce in the long-term. 2009's national budget calls for a boost in education expenditure to 20%, which will result in overall funding rising from $16bn in 2008 to $24bn.



Furthermore, the government has announced that it will take a Keynesian approach in an attempt to minimise the effects of a recession next year, and that spending on infrastructure will be boosted not only to ensure much needed projects go ahead, but to create a multiplier affect for the domestic economy as a whole.



With much to finance and only so much in the public coffers, the government significantly reduced its spending burden in May of this year by lowering its subsidies on petrol and raising the retail price at the pump by 29%. Many observers applauded the move, pointing out that the government subsidies amounted in excess of $20bn when global oil prices were at their peak.



Although the government and outside observers have lowered their GDP growth projections, the country is taking comfort in two areas. The first is that the country's macro-fundamentals are solid, and the repeat of the 97/98 financial crisis is unlikely. At the time Indonesia saw a rapid spiral down into debt and veered off the investment map. Having learned valuable lessons from its mistakes in the past, the country can boast responsible monetary policy and fiscal flexibility as well as a debt-to-GDP ratio and an account balance that ranks amongst the best in Asia.



Another source of confidence is that compared to many of its regional competitors, the country's economy is less dependent on exports and FDI, and as such, is better insulated from the global slowdown. Moreover, it has achieved four successive years of growth at a pace of 6%, while managing inflation and keeping the currency in-check. In this regard, the government has taken measures earlier this month to restrict foreign currency transactions and minimise capital outflows to foreign markets in an effort to prevent further damage to the already sliding rupiah.

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