Emerging Markets Weekly Blog Post: 29/2/2016

Having devoted a lot of attention to Nigeria, Venezuela and Kazakhstan in recent posts, this week I will devote the entire post to Indonesia. How is Indonesia’s commodity-based economy holding up compared to these other resource-dependent nations? Should we believe that Jokowi is really likely to deliver on his election year promises of 7% GDP growth and increasing prosperity for all?


Indonesia got off to an early start in the emerging markets slowdown stakes. While countries such as Brazil and Nigeria did not enter an economic funk until the end of 2013, Indonesia was showing signs of strain as early as 2011. From a height of Rp 8,500 to the dollar in 2011, the currency Declined steadily to Rp 10,000 and beyond. It may no longer be declining, having found its bottom around Rp 13,500 to the US dollar, but that it is still 50% below its long-term range, showing a significant worsening of its terms of trade.

This is because 60% of Indonesia’s export dollars still come from raw commodities such as coal, palm oil, rubber, cocoa, gold and tin. In this respect, the Indonesian economy still bears a worrying similarity to the plantation culture of the Dutch East Indies, its colonial predecessor. Yes, manufacturing and services play a larger role now, but the dependence on what can be grown on trees or dug out of the ground has never been broken. This has made the nation very vulnerable to swings in commodity prices. In 2011 Indonesia was getting $150 a tonne for its coal, but it is only getting $50 a tonne today.

It is true that Indonesia grew at 4.7% in 2015, which is still much better than many other emerging markets; for example, Brazil had its worst year since 1930 in 2015, and Russia, buffeted by war and sanctions, shrank even more. Yet there are good reasons to believe that these headline figures flatter Indonesia. One of the contributors to Indonesia’s growth was a trade surplus, but this was achieved by restricting imports on hundreds of different items.

January 2015 saw a ban on beef and offal imports (damn those pesky foreign offal importers), in June they banned the import of used clothing (because they might contain HIV!) as well as warships, July saw a ban on oranges and lemons, and August 2015 was the month they banned corn imports. There were more than 300 import bans in all, prompting a huge amount of grumbling from Indonesia’s trade partners. Jokowi then removed the trade minister, Rachmat Gobel, who publicly burst into tears at the news. Yet Indonesia’s reputation as a protectionist nation had already been revived, and with good cause. The only reason Indonesia was able to maintain a trade surplus was by slashing imports even faster than exports, which had collapsed by double digit figures in all sectors. Worst of all was mineral ores, which were down by an incredible 85% due to an SBY-era ban on unprocessed ores. A collapse in trade is hardly a good omen whatever way you look at it.

If the Indonesian economy is not being kept afloat by commodities, what is supporting it then? One area of strength has been domestic consumption, which was fairly robust throughout 2015. Yet as Indonesia has entered 2016, there are signs of strain. During the boom years of 2004-2011, sales of cars and motorbikes exploded, creating truly epic traffic jams in most large Indonesian cities.  But Astra, a huge Indonesian conglomerate, has recently reported that sales are down by over 10% on 2015 figures, and profits were down a whopping 23%. Astra has put this down to a pervasive weakness in the domestic economy.


The most obvious answer to Indonesia’s problems is to attract foreign investment during the commodities downturn. Yet Indonesia’s well-earned reputation for corruption and red tape constitute a formidable barrier to investment. Shell, the petroleum company, recently stated that it needed 1,500 different permits to operate 80 petrol stations in Indonesia. That is congruent with what I experienced at TBI Kelapa Gading. That school needed 23 different permits from the government, including the infamous lightning-rod permit, despite being the shortest building on the block. Hilariously enough, they didn’t pay a cent of business tax from 2006-2011, but they did make ‘payments’ for 23 different permits. In other words, the Indonesian state was receiving no money for roads, bridges and schools but a small cabal of venal officials were doing nicely out of it all. No wonder the country has such appalling infrastructure and such a reputation for graft. Unless more is done to make business more transparent, most investors are going to stay clear.



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