Indonesia's Economy: Changing Tides In The World's Largest Archipelago

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Includes: EIDO, IDX, IF
by: Cornell Business Review

Interview by Timothy Higgins of Wijaya Sumono, former Jakarta-based Consultant for The Boston Consulting Group and 2013 graduate of the Johnson School of Management.

How have declining commodity prices impacted the Indonesian economy, in both the public and private sector?

Declining commodity prices have had a direct negative impact on the Indonesian economy, adversely affecting both the private and the public sectors. Nearly 60% of Indonesia's exports are commodities, which include coal, palm oil, rubber, coffee, cocoa - to name a few. Coal prices in particular have dropped by some 50% over the past four years ever since China, the world's largest consumer and importer of coal, actively took steps to reduce coal consumption.

Evidence of severe losses in coal mining across Indonesia's public and private sectors is prevalent, and many mine sites have been abandoned. Similar stories are also heard in other commodity sectors. Take natural rubber for instance. Due to the global economic slowdown, which led to a decline in both the auto and subsequently tire industries, the price of natural rubber has fallen from over $5 per kg in 2011 to $1.4 per kg (according to the price of rubber futures at Singapore Commodity Exchange).

Local farmers have since cut down on tapping rubber trees, either to curb losses or to look for better opportunities elsewhere. Production outputs of crumb rubber factories (natural rubber processing plants) subsequently took a deep hit in recent years. In 2015, the Director General of Indonesia's tax office resigned from his post, having missed its 2015 tax revenue budget by around USD 18 billion, from the original target of approximately USD 94 billion.

Have these declines resulted in a boost to consumer spending from greater purchasing power?

It's unclear whether lower commodity prices have positively impacted consumer spending, but if anything, the opposite seems to be true. Due to a slowing economy, and hence reduced incomes, consumers have subsequently cut back on spending. The majority of SMEs across virtually all sectors that I have encountered have lamented poor business. One good indicator of healthy domestic consumption is auto tire sales, which have declined by 20 to 30% y-o-y in 2015 (according to the Jakarta Post) - indicating a slowdown in demand for motor vehicles.

The only sector bucking the trend seems to be the recently booming tech industry. Venture capital and private equity firms see huge upside potential in Indonesian markets thanks to the country's large and growing population (the fourth most populous in the world), and several billion-dollar companies have recently been created in the tech space, thanks to large injections of foreign capital.

How have foreign and domestic companies reacted to regional geopolitical issues like conflict in the South China Sea and clashes over fishing rights?

Conflicts in the South China Sea haven't had a strong direct impact on Indonesia, since it does not dispute over territory to the same extent that China does with Brunei, Malaysia, the Philippines and Vietnam. However, China has contributed to rising tensions with Southeast Asian countries over fishing rights in the region. The waters around the Indonesian archipelago supply approximately 10% of the total global catch, and Indonesia has aggressively strengthened its maritime sovereignty rights, starting with the appointment of Indonesia's incumbent Minister of Maritime and Fisheries, Susi Pudjiastuti.

Minister Susi has been very vocal and aggressive in cracking down on illegal poaching in Indonesian waters. Since 2014, Indonesia has sunk 174 foreign boats caught fishing illegally in Indonesian territories. On Tuesday (April 5th, 2016), Indonesia blew up 23 foreign boats - 10 Malaysian and 13 Vietnamese, to send a clear message on its tough stance over its maritime sovereignty.

Which industries have been most affected by slowing demand in China? Have other importers in the region (Japan, Korea) become stronger trading partners as a result?

Many industries have been impacted by slowing demand, and the majority of commodity sectors have been adversely affected. While I don't have data regarding changes in Indonesia's trading volume with respect to specific countries, I believe it has stayed relatively constant. Regional slowdown in consumption has had a serious impact on the local economy in other ways than just exports, however.

One recent example is from February this year, when Panasonic and Toshiba announced the closure of their TV and lighting plants respectively in Indonesia, leading to almost 2500 layoffs against the backdrop of a series of business closures across the country.

Is there a pervading consensus on the Trans-Pacific Partnership among the Indonesian business community, and if so, what is it?

The Jokowi administration has repeatedly asserted its interests for Indonesia to take a more active role on the international stage. President Jokowi had stated that he will sign the TPP agreement during his meeting with President Obama last year. However, I do not think there is any consensus among the business community on what form that role should take, nor was there much discussion that went on which involved the public.

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