S&P Awaiting Results from Indonesia’s Economic Policy Reforms

Although Indonesian President Joko Widodo, who assumed office in October 2014, made a good decision by drastically reducing costly public fuel subsidies at the start of January 2015 (a move which was relatively easy amid low global petroleum prices), Standard & Poor’s is waiting for concrete results. One important matter is that Indonesia needs to attract more investment to boost the income level (and which subsequently can lead to a credit rating upgrade).

To boost investment realization, Indonesia needs to improve its investment climate. The country is currently still plagued by severe bureaucracy, corruption, weak coordination between various government ministries/ agencies, weak (soft and hard) infrastructure, and weak legal certainty. These are all issues that make investors think at least twice before deciding to engage in expensive and long-term commitments in Indonesia. Although President Widodo is eager to improve Indonesia’s investment climate - for example by launching the integrated one-stop service center (Pelayanan Terpadu Satu Pintu, abbreviated PTSP) at the Indonesia Investment Coordinating Board (BKPM), and by significantly raising funds in the State Budget for investment in the country’s infrastructure (possible due to the scrapping of gasoline subsidies) - the investment climate cannot be made conducive overnight. Instead, it will be a lengthy and complicated process and therefore Standard & Poor’s will wait for concrete results first before upgrading Indonesia’s credit rating. Particularly as the country is still at the stage where it lacks domestic savings, and is relying more on external capital.

As such, despite having recorded a record high inflow of investment in 2014, it is important to note that investment realization growth in Indonesia still comes from a low base. Last year, foreign and domestic direct investment realization in Indonesia totalled IDR 463.1 trillion (about USD $37 billion), up 16.2 percent from the preceding year. Regarding 2015, BKPM Head Franky Sibarani targets a 14 percent (y/y) growth to IDR 519.5 trillion of total direct investment in 2015. This target involves domestic direct investment of IDR 175.8 trillion and foreign direct investment (FDI) of IDR 343.7 trillion.

Foreign & Domestic Investment in Indonesia (in IDR trillion)

	2014
	Q1	Q2	Q3	Q4
Domestic Direct Investment	34.6	38.2	41.6	41.7
Foreign Direct Investment	72.0	78.0	78.3	78.7
Total Investment	106.6	116.2	119.9	120.4

 

	2011				2012				2013
	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Domestic Direct Investment	14.1	18.9	19.0	24.0	19.7	20.8	25.2	27.5	27.5	33.1	33.5	34.1
Foreign Direct Investment	39.5	43.1	46.5	46.2	51.5	56.1	56.6	65.5	65.5	66.7	67.0	71.2
Total Investment	53.6	62.0	65.5	70.2	71.2	76.9	81.8	83.3	93.0	99.8	100.5	105.3

^{Source: Indonesia Investment Coordinating Board (BKPM)}

Continued higher investment realization in Indonesia is one important pillar to achieve accelerated economic growth (the other pillar being domestic consumption which accounts for about 55 percent of total economic growth) in Indonesia. By the end of his (first?) term in 2019, President Widodo hopes to see the country’s GDP growth rise to 7 percent (y/y). Since 2011, Indonesia has been experiencing a period of slowing economic growth amid international turmoil (resulting in low commodity prices hence weak export performance) and internal rebalancing or restructuring of the economy (such as the higher interest rate environment and the ban on exports of mineral ore that was implemented in January 2014).

Meanwhile, Standard & Poor’s expects that Indonesian companies will face challenges in 2015 caused by significant rupiah depreciation and sluggish domestic demand amid relatively slow economic growth and challenging market conditions (for example looming higher US interest rates are expected to result in capital outflows from emerging markets including Indonesia).

Although about 80 percent of the 30 companies it monitors in Indonesia are given a stable outlook by Standard & Poor’s, the institution said that thinning buffers amid tough market conditions form a concern. Moreover, the institution detects overcapacity in several domestic industries (including the tire manufacturing industry and retail) which makes it tough for companies to grow revenues in 2015. It also expects tough revenue growth for companies active in media, broadcasting and consumer products amid weaker domestic purchasing power. Slowing revenue growth implies that these companies have limited resources to invest.

This year, Standard & Poor’s expects to see a 5.5 percent (y/y) GDP growth figure in Indonesia.

As about 50 percent of Indonesia’s total corporate debt is foreign debt, rupiah depreciation is a concern as it exacerbates companies’ debt burden. However, Standard & Poor’s said that the majority of Indonesian companies have a well-scattered debt maturity profile which can guide them through the tougher market conditions in 2015.

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia

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