Indonesia Faces Economic Pressure
Sep. 14, 2015
The global economic slowdown is hurting Asia's emerging economies. As China's economy loses steam - and investors brace for a rate hike in the US - there are concerns about the withdrawal of foreign capital that some countries rely upon to fuel growth.
One nation that is already feeling the impact is Indonesia, Southeast Asia's largest economy. As a huge exporter of natural resources, it is extremely vulnerable when commodity prices take a dive. Its largest trade partner is China, where demand is falling, and on top of those factors, foreign investors have started moving their funds elsewhere. Because Indonesia has a current account deficit, the outflow of capital will have a significant impact.
Indonesia runs on people power with its 250 million consumers the lifeblood of its economy. But many of the goods they buy are imported, and with export revenue falling, the country is living beyond its means – what economists call a current account deficit. It is a financial position that has left Indonesia in difficulty during a time of global turmoil. The value of the rupiah has depreciated 40% in the past three years, pushing up prices and dampening spending.
Domestic consumption makes up about half of Indonesia's economy, and shopping centers have thrived during the last decade’s growth period. While the malls still draw large crowds, retailers say people aren't buying as much as they used to. “It's not like last year. Sales are declining this year because the economy is slowing down,” says one shop owner who complains sales are down by half.
Falling retail sales hurt growth, as evidenced by Indonesia’s economic measures. In 2012, GDP was expanding at a healthy rate of 6%, but in the last two quarters, growth has slumped to 4.7%.
President Joko Widodo says fundamental reforms are needed to make Indonesia more resilient to outside shocks. “We are transforming the economic fundamentals for the sake of the economy. The development paradigm has to be changed from consumption to production,” he explains. Widodo wants to change the export model from what it is today, where Indonesia earns most of its export revenue selling raw minerals. Widodo’s government wants his country to make value-added goods and export those instead.
In a controversial strategy to achieve those aims, the government imposed a ban last year on the export of raw mineral ores. It wants to force companies to process and refine raw minerals domestically. As one example, nickel ore, the main resource for stainless steel, can be refined into ferronickel, a mix of nickel and iron. Exporting ferronickel would bring Indonesia more than four times the revenue.
But Indonesia needs more smelters to process raw materials for export in an advanced state. State-owned PT Antam is one of the mining companies under pressure to build them, but its managers say plant upgrades and construction come at a cost. “Export ban itself is good for the Indonesian government,” observes PT Antam president Tedy Badrujaman. “But to build a smelter is not easy. Big money for the investment cost,” he says. Local companies say they can’t do it on their own, so the government is urging foreign investors to help.
In Bantaeng, South Sulawesi, construction is underway on a smelter at a portside area that is being developed into an integrated iron and steel industrial estate where companies process raw materials and ship direct. Managers at the industrial park want three more smelters up and running by 2018. The smelter is a joint project between a Chinese company and a local partner. While China is a key player in the new industrial park, building refineries can take years and in the meantime, exporters lose revenue and workers lose jobs.
Small and mid-sized mine operators are most affected by the government’s value-add export policy. In Kolaka, also in South Sulawesi, the ban on raw mineral exports forced all 14 mining companies operating in the area to shut down, laying off 5,000 workers. A long and painful wait is in store for many Indonesians waiting for their government’s plans for a stronger economy to bear fruit.
NEWSROOM TOKYO’s business anchor Yuko Fukushima joined anchors Aki Shibuya and Sho Beppu in the studio to discuss the challenges confronting Indonesia.
Beppu: Joko Widodo said in his speech that he wants to shift the economy away from consumption, to production. What does that mean in practical terms?
Fukushima: Indonesia is a resource-rich country. For years it has relied largely on exports and domestic consumption to drive growth. But the government knows these resources might eventually run out, or lose value. That's why it wants to ramp up production capabilities. And it plans to do this by boosting the manufacturing sector, so Indonesia can process its own resources and add value to exports.
Shibuya: But it seems the government's ban on ore exports is hurting the economy, rather than helping it grow.
Fukushima: One economist I talked to said the government should have implemented the policy earlier, when the economy was in good shape and the price of energy was high. But now growth is slowing, mineral prices are sliding, and Indonesia's top trade partner, China, is losing momentum. So companies are less enthusiastic about building smelters than the government is. It is going to take some time for the policy to bear fruit, and the government knows that. That's why it has eased the ban on some types of mineral ores, such as copper. If companies that mine these ores can build smelters by 2017, they can still export the raw minerals until then.
Beppu: What about the rest of Asia? Are other countries equally at risk?
Fukushima: Many emerging Asian economies have also been the victims of weakening currencies. But economists say the countries that are most vulnerable are those with current account deficits: that's Indonesia and India. They'll be more dependent on capital inflows to fill the gap left by outflows. Also, because the price of oil is declining, net exporters of commodities such as Malaysia will also feel the pain. But most economists agree the fallout won't be as severe as it was in the 1997 Asian crisis. They say this time around, countries are better prepared and more resilient.