Growth in Indonesia’s manufacturing sector continues to outstrip the rest of the economy, with gains in most industries well above those of the national average. Some regions away from Java posted even higher rates of expansion, though there are lingering concerns some of this growth is underpinned by a reliance on commodities imports – one that fuels the current account deficit.
According to data issued by the Industry Ministry in early August, Indonesia’s manufacturing sector is out-performing the general economy, with non-hydrocarbons industries ramping up production by 5.5% year-on-year (y-o-y) for the first half of 2014. This is above the overall expansion of GDP for the first six months, which grew by 5.2% y-o-y.
Among the strongest performers were the food, beverage and tobacco segment, which recorded growth of 9.3% while growth in other industrial products surged 15.7%.
Regional push to broaden manufacturing base
Industrial growth was also spread across a number of regions. According to a report issued by the local statistics office on August 9, North Sumatra posted manufacturing growth of 6.4% in the second quarter, fuelled by a strong performance in the wood and forestry products segment, which increased by 9.9%.
This success, though offset by a downturn in some other segments in North Sumatra such as rubber and chemicals, will be welcomed by the government, which is seeking to broaden the manufacturing base by decreasing the focus on Java and decentralising industrial production. Some 70% of Indonesia’s estates are located on Java, which continues to attract the strongest flow of investments.
With rising land and labour costs in West Java and in particular around Jakarta, there have been concerns that Indonesia was losing some of its competitive edge in attracting manufacturing investments.
To maintain its position as a leading industrial producer in South-east Asia, the government announced in late July it would establish 36 new industrial hubs over the coming 20 years on islands other than Java. The government is aiming to lift the ratio of manufacturers operating outside of Java to 40% by 2025, from its present level of 27%.
The initial stage of this programme is to be completed by the end of this year, with the launching of two industrial estates in Morowali, in Central Sulawesi and Kuala Tanjung in North Sumatra, along with two special economic zones in Palu, Central Sulawesi and Bitung, North Sulawesi.
Import input levels a concern
While manufacturing is expanding, there are concerns that growth is in part feeding into the country’s current account deficit, with many industries relying on imports to feed their activities. Last year, Indonesia’s current account deficit hit a record high of $29bn, equivalent to 3.3% of GDP. While still low by international standards, Jakarta wants to see this rate lowered to a more reasonable level, targeting a deficit of $26bn or below for this year.
According to Hendri Saparini, the executive director of the Centre of Reform on Economics Indonesia, there should be a stronger focus on sectors that maximise local input, reducing high import costs and thus boosting direct flows into the economy.
“Most of the manufacturing sector still relies on industries with a high percentage of imported content,” Saparini told the Jakarta Post. Among the sectors Saparini cited as needing high overseas inputs were the automotive and pharmaceutical industries, with the latter importing up to 85% of its needs, compared to the food sector, which was mainly self sufficient for its production requirements.
Dian Ayu Yustina, an economist with Bank Danamon, agreed, adding that cutting manufacturing industries’ thirst for imports was a key measure to addressing Indonesia’s external imbalances. “Structural policies must come forth to address the infrastructure problems, productivity and support the manufacturing sector to reduce reliance on commodity exports,” she wrote in an investor note.
The government itself has some concerns over the manufacturing sector as high local demand could feed into inflation as well as the current account deficit.
“I noticed that we are already in a position where [the government] must be careful over the pressure in the current account due to the strong growth of imports,” Finance Minister Chatib Basri commented at the start of August, when asked about the latest PMI report.
This suggests that the state may take further measures to cool the economy, after having already raided import duties and cut spending. If so, there could be an easing of growth in the manufacturing industries in the latter part of this year.