Indonesia is on a sustainable growth path despite some structural and policy-related domestic challenges, Dr. Boediono, Vice President of the Republic of Indonesia, said in an opening address to the Economist Indonesia Summit 2013 held in Jakarta on February 28. However, challenges remain regarding investment regulations, tax collection and ASEAN economic integration, he mentioned.
By Arno Maierbrugger, Jakarta
“Our country went through the 2008 crisis basically unscathed and has learned from this experience,” Boediono said. The Indonesian is forecast to grow 6.5 per cent in 2013, up from 6.3 per cent in 2012, according to the Economist.
“Today, our economy is strongly anchored on political and macro-economic pillars and blessed with diverse natural resources,” he added.
The 240-million-people nation, the largest economy in Southeast Asia, today has a domestic consumption rate of 60 per cent, the Vice President mentioned. In the domestic retail sector, for example, many companies grew in double-digit figures annually over the past years.
“All this is supported by a burgeoning middle class and a young population. Unemployment has decreased over the last years and is now stable at about 6 per cent,” Boediono added.
“We expect that consumption and investment will sustain on the current level at least over the the next 2 to 3 years. There are concrete plans for investment in the pipeline,” he said.
As reported, some of the most notable investment commitments in Indonesia are Taiwanese electronic manufacturer Foxconn’s $10-billion plan to invest into new factories in the country over the next five years. South Korea’s Samsung has also said it is contemplating building a factory in Indonesia. The government aims to boost foreign direct investment by at least 23 per cent to $40 billion in 2013. One of the largest investments lately has been made by French cosmetics firm L’Oreal.
However, there have been regulatory problems with oil firms Total and Chevron as of recent.
“Challenges remain, but the evolution of power has produced a vibrant economy,” the Vice president said. “Issues of regulatory and legal nature in business and investment need to be addressed,” he said.
“Out advantage is that Indonesia’s politics have been stable, our fledging democracy has delivered smooth changes in government, but it remains of course a work in progress. Policy making has become more complex, we have to address multiple objectives such as ever increasing demand for social security as well as labour conditions.”
One of the most pressing problems the Indonesian government intends to resolve is undertaxing. Currently, the tax ratio of GDP is around 12 per cent, one of the lowest rates in Asia.
“Of 117 million people in the workforce, only about one-fifth have tax ID numbers, and only a fraction of them actually pay tax. There is room for improving and expanding the tax base. I know that there is public discourse about imposing new taxes, but there is a strong sense in the government with that we must move forward with this issue so not to jeopardise the economic improvement in the country. In fact, this has to go in hand with improvement in quality of public spending,” Boediono said, adding that the government is also “working on political solutions” to reduce subsidies in certain sectors.
Another challenge faced by Indonesia was the current account heading up against a record deficit of 2.4 per cent of GDP in 2012 due structural problem in exports and commodity markets.
“We believe that is will bounce back soon,” the Vice President said.
On the positive side, the country’s budget deficit was 1.2 per cent of GDP in 2012 and is projected to be 1.63 per cent in 2013, the lowest in Asia. Public debt is 25 per cent and falling.
“Indonesia is confident about the future, and we have a good feeling of stable economic growth of 6 per cent annually with steady decline of unemployment. The policy reform agenda is leading to gradual, but sustainable reforms. 2014 will bring fresh impetus that will further push reforms, and I am optimistic that Indonesia will move on,”
However, with regards to the ASEAN Economic Community, Boediono showed caution.
“Indonesia is playing a major role in ASEAN, economically and politically. But this does not mean that our influence in the region is the biggest,” he said.
“Regarding the ASEAN Economic Community, I see that the ASEAN countries we are currently mainly working on their our own economies - this needs to change.”
For comprehensive country and sector analyses of investment opportunities, high-profile interviews and rankings register for Inside Investor Intelligence!