Business is Cooling on Indonesia

Global economic weakness is hitting Indonesia as major international organizations downgraded their growth forecasts. The archipelago needs more foreign capital to maintain economic pace.

October 2019 came with bad news for Indonesia. The Asian Development Bank (ADB), the International Monetary Fund (IMF) and the World Bank all downgraded their growth forecasts for the Indonesian economy. The IMF expects growth of only 5% for 2019 (forecast of April 2019: 5.2%) and only 5.1 percent for 2020 (5.2%). The reason for this cut was the slowdown in the global economy, whose prospects the IMF devalued by 0.3 percentage points for 2019 and 0.2 percentage points for 2020.

Even though the Indonesian industry is only marginally integrated into the global supply chain, the country is not immune from international demand trends, especially not from the consequences of the US-China trade dispute. China is by far the most important sales market for Indonesia. Any economic slowdown there directly impacts the Indonesian trade balance.

In an international comparison, Indonesia’s economic development has been extraordinarily robust with an average growth of more than 5% per year for the past 20 years. However, structural weaknesses have not yet been overcome. The domestic industry is weak and has been losing shares of economic output in that same two decades – domestic consumption continues to prop up economic growth. In addition, too few foreign investments are raised. The legislation, particularly in the regions, is anti-investment. Many economic sectors are still not accessible to foreign companies.

However, business representatives see the re-election of President Joko Widodo in April 2019 as a positive. The incumbent is considered a guarantor for an at least moderate progress on the business side. As this is his last term, without the pressure of a possible re-election, Widodo can decide more freely than in his previous five years.

Investments: foreign inflows decline
Indonesia's lack of attractiveness for investors is a big problem. In all likelihood, foreign direct investment (FDI) will fall in 2019 for the second year in a row. In terms of economic output, almost all ASEAN countries attract more FDI than the archipelago. But the problem is recognized. President Widodo has announced a more investment-friendly legislation. According to reports, the Negative Investment List (DNI), which defines industries that are closed to foreign companies, will be liberalized before the end of 2019.

There is already progress. In the international business rankings – namely Ease of Doing Business, Global Competitiveness, and Corruption Perceptions indices – Indonesia has improved significantly in the past five years, though the trend has recently stagnated. In any case, these rankings serves to show the efforts Indonesia is making and whether the country is successful in those efforts.

Consumption: market for imported consumer goods is small
Consumption has traditionally contributed more than 50% to the Indonesian GDP, making it an indispensable driver of economic growth. It is growing in step with overall economic growth. Consumers have been optimistic about the past 20 years in terms of economic prosperity. About half of Indonesians did not consciously experience any economic crisis during their own lifetime.

The demand for imported consumer goods is nevertheless comparatively low. According to the Indonesian Ministry of Commerce, less than 10% of all imports are consumer goods, of which one third is food and drinks. Especially for substitutable product groups, the trade barriers are higher than that of capital goods for products that Indonesia cannot produce by itself.

Foreign trade: import demand is falling
Indonesia's recorded US$8.7 billion in trade deficit in 2018, which has alarmed policymakers. Restricting imports should now help to achieve a positive balance again. In the first three quarters of 2019, imports fell by 9.1% compared to the same period of the previous year (excluding oil and gas, which recorded a 5.5% decrease). Thus, the deficit was reduced by almost half compared to the previous year of $1.9 billion.

According to Destatis, German exports to Indonesia declined by 8.1% from January to August 2019 to $1.8 billion. At present, a free trade agreement is being negotiated between Indonesia and the European Union, which could significantly facilitate reciprocal trade. A threat to its successful completion, however, is the dispute over Indonesian palm oil shipments to Europe, as well as the dispute over Indonesia’s recent nickel ore export ban.

GTAI is the foreign trade and inward investment agency of the Federal Republic of Germany. The organization advises foreign companies looking to expand their business activities in the German market. It provides information on foreign trade to German companies that seek to enter into foreign markets.