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On the sidelines of the 24th World Economic Forum (WEF) on East Asia, Indonesia’s Chief Economic Minister Sofyan Djalil said that - despite global challenges - the government maintains its economic growth target of 5.7 percent (y/y) in 2015. However, he added that it will require great effort to achieve this target. One key strategy to achieve the target is to attract foreign investment through several policies including tax incentives and by easing the country’s bureaucratic hurdles for investment permits.
The WEF, held in Jakarta’s Shangri-La Hotel between 19 and 21 April 2015, is an important opportunity for Indonesian policymakers to communicate with foreign stakeholders as the event is visited by more than 700 business and political leaders, including representatives from various multinational companies, from 40 countries. Indonesian President Joko Widodo also called for more foreign investment in Indonesia when he addressed attendees on Monday (20/04). While acknowledging the challenges that Indonesia is facing (both internally and externally), Widodo emphasized that Indonesia is a promising country for foreign investors because with a population of 250 million people (including a rapidly expanding middle class segment) the country forms a great market.
As the 2000s commodities boom has ended, Widodo said that Indonesia needs to transform its economy, a process that entails some growing pains. The economy’s reliance on commodity exports should be reduced while a modern industrial sector should become the backbone of the economy. But in order to finance this transformation, the country is in need of foreign investment, not only for the development of a modern manufacturing industry and human capital, but also for infrastructure development. The current lack of quality and quantity of Indonesia’s infrastructure resulted in high logistics costs hence reducing competitiveness of Indonesian businesses.
Although Widodo did not provide a detailed plan regarding the incentives that Indonesia would like to offer to attract foreign investment, the country has already made efforts to combat severe bureaucracy. At the start of the year Indonesia launched its one-stop integrated service for investment permits at the Indonesia Investment Coordinating Board (BKPM) in an effort to simplify permitting procedures. Indonesia, Southeast Asia’s largest economy, is characterized by the existence of severe red tape. According to the World Bank’s latest ease of doing business survey, the country ranked 114 from a total of 189 countries.
Another transformation that Widodo mentioned is the importance for Indonesia to change from a consumption-driven economy (domestic consumption accounts for about 55 percent of the country’s total economic growth) to a production-based one.
Kishore Mahbubani, Dean of the Lee Kuan Yew School of Public Policy at the National University of Singapore, stated that Indonesia is fortunate to have “inner resilience” meaning that the strong domestic market allowed the country to weather the global recession in the late 2000s. This is a great strength of the country but Mahbubani also emphasized that Indonesia needs to be more open to the world in order to foster further growth.
Another theme that was discussed was the impact of higher US interest rates (expected later this year) on emerging economies as monetary tightening in the world’s largest economy is expected to result in capital outflows from these emerging countries. Voices were heard saying that structural reforms across Southeast Asia are required to inject confidence into the region’s financial markets, or, the necessity to harmonize regulations across Southeast Asia to make the region more business-friendly.
Speakers at the WEF also warned that rising nationalism across the Asian continent can backfire by causing economic growth to slow down. Indonesia, for example, has implemented protectionist policies in the natural resources sector through its 2009 Mining Law. Moreover, rising economic nationalism hinders economic integration between the countries. At the end of 2015, the ASEAN Economic Community (AEC) will commence, intended to create regional economic integration in trade, finance and the movement of labour among ASEAN member countries.
While the Indonesian government has set an ambitious target of 5.7 percent (y/y) GDP growth in 2015, most institutions are less optimistic. For example, the World Bank estimates that Indonesia’s economic growth will be confined to 5.2 percent (y/y) this year as Indonesia’s export performance remains weak and domestic interest rate environment remains relatively high.
24th World Economic Forum on East Asia 2015