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Economic Challenge for President Jokowi

On Friday, January 2, 2015, President Jokowi inaugurate the opening of the first trading day in stock market in 2015, at the Stock Exchange Building, Jakarta. Although in the last few years, the opening of the stock market at the beginning of a year is regularly attended by the President of Republic Indonesia, but the presence of Jokowi was special because we all knew that, related to the tragedy of Air Asia, he had to go from Papua - Jakarta - Pangkalan Bun – Surabaya, and back to Jakarta again in a matter of days, and that's not including fulfilling the state duties such as receiving George Soros at the Palace, held a meeting with the ministers related to fuel prices, and appointed several new military high officials. However, he still had time to came to the Stock Exchange and also present on time (before the market opened at 09.00 AM), while before that (in the same morning) he visited the market of Tanah Abang first! To ‘blusukan’ as usual, and also to open the trading activities at the market.

Frankly, as an investor who spent more time to relax and almost did nothing in the last year, I am feel ashamed to Mr. President who seems like never run out of his stamina in running all of his duties as the leader of the nation. Whether the traders in traditional markets or in the stock market, and also the victims of Banjarnegara landslides and Air Asia accident, all received direct attention from the RI-1 without exception! So, I hereby declare, God bless you Mr. President! We wish you long life and a good health and keep giving inspiration for all Indonesian people, to continue to work hard based on capacity of each of us, in order to make a better Indonesia.

Anyway, now we are to the core of this article. Throughout the year 2014, as you know, the Jakarta Composite Index (JCI) increased significantly, ie 22.3%. Based on the statistics in the last trading day in 2014, the two sectors of the main drivers of the increase in JCI are the property and construction with 55.8% of rise, and financial services (banking, insurance, and financing) of 35.4%. Significant increase in the property and construction sectors, particularly construction, one of which was driven by investor’ optimism that the new government under President Jokowi will focus on infrastructure development, so the construction companies will receive some benefit. And because the infrastructure development is said to be focused on the maritime sector, then the stocks of shipping, ports, and fisheries exposed to positive sentiment and rose. If everything goes well, Indonesia will become 'axis of maritime world' within the next few years. Further explanation about the prospects for construction and marine sectors can be read here, and here.

However, like I’ve said, just because President Jokowi was ready to build the marine infrastructure as soon as possible, then it does not mean that we will instantly have ports, shipyards etc. in a matter of days, so that it will give a positive impact on the national economy as a whole. The construction of ports etc., somehow will require a long time, not including the need to confront the challenges and obstacles that will surely arise by themselves.

And unfortunately, if we return to look at the national economy at this time, then Indonesian economy is actually in a not-too-good shape. On January 2, the Central Statistics Agency (Badan Pusat Statistik/BPS) released the data of import-export balance for the period of January – November 2014, and the data shows a deficit (imports were greater than exports) of US$ 2.1 billion. The continuous deficits since 2012 also pressed the growth of the national economy to the level of 5.0% only in the third quarter of 2014 (year on year), or the lowest level in the last five years. The inflation data also did not seem good, which was 8.4% for the whole year of 2014, or far above the target of Bank Indonesia (BI) of 4.5%. Thus, although there are some people who claim that the weakening of Rupiah to the position of Rp12,474 per US Dollar was due to the strengthening of the US Dollar itself, because not only the Rupiah, but almost all other currencies also weakened, but we also have to see the fact that Indonesia's economic fundamentals, as already mentioned above, are not too good.

In my opinion, this condition is a consequence of the weakening of commodity prices, especially coal, crude palm oil (CPO), and rubber that have occurred since 2012 until today (we've discussed it here), because these commodities are the mainstay of Indonesian exports. The last position of the coal price is around US$ 65 per ton, and the CPO RM2,284 per ton, both are still very far below their peak prices of US$ 110 per ton for coal, and RM3,900 per tonne of CPO (for rubber prices, it is difficult to find the data, but it were certainly dropped too). And you know what? Even in conditions where the earnings of coal mining and oil palm plantation companies in Indonesia Stock Exchange fell steadily in the last 3 years, both coal and CPO are still the main export products of Indonesia (excluding oil and gas) with the export values that are almost exactly the same, ie US$ 19.4 billion respectively for the period of January – November 2014. While the export of electrical equipments and machineries, which occupies the third position as the largest non-oil exports of Indonesia, worth only US$ 8.9 billion (the export of rubber, with a value of US$ 6.6 billion, occupied the fourth position). For comparison, during the year of 2011 where the commodity prices were high, Indonesia exported coal, palm oil, and rubber worth US$ 27.4, 21.7, and 14.3 billion respectively, which makes the three commodities as the mainstay of Indonesia's non-oil exports.

The problem is, outside the oil and gas, coal, palm oil, and rubber, Indonesian exports are still dominated by natural resources, such as cocoa, copper, nickel ore, and tin, where the value of export of those commodities is also heavily dependent on international price fluctuations. At the current condition where commodity prices are all down without exception, the fundamentals of our economy at this time is even worse than a year's ago. In August 2013 when JCI was in one of its lowest level, ie 3,900 to 4,000, the Rupiah is still at the level of Rp10,700 - 11,000 per USD, the economic growth recorded at 5.8%, and the inflation was 8.8% (although inflation was already high, but bear in mind that the BI Rate in August 2013 was only 6.50% and not 7.75% as it is now). Although Warren Buffett often ignoring the macroeconomic data and focus more on the fundamentals of the company, but this matter is still bothering me as an investor, because it means that there is a fairly wide gap between the current position of JCI with the economic facts on the ground. To be honest, you have to admit that the increases in stock prices of construction, shipbuilding to fisheries throughout 2014, on average, were more driven by 'future prospects' than their real fundamental, were not it?

The condition that Indonesian economy is dependent on fluctuations in commodity prices in the international market, reminds me with the similar story of Qatar. If you read about the macro economy (in Wikipedia or others), you would know that Qatar is the most prosperous country in the world, with a GDP per capita of US$ 146 thousand in 2013, or higher than any other country, and that’s because they have one of the largest reserves of natural gas in the world, where oil and natural gas sector accounts for more than 60% of GDP in Qatar. Because the population in Qatar is about 2 million only, their GDP per capita became very large. This condition is also similar to the state of Brunei Darussalam, which is also one of the countries with the highest GDP per capita in the world, because they had abundand stocks of oil and natural gas for exports, while on the other side the population is less than a half million only.

However, both the Government of Qatar and Brunei have been aware since the beginning that they can not completely rely on oil and gas exports, or their economic growth will easily be tossed around by the fluctuation of the price of oil and gas itself in the international market. That's why, since 1983, the Government of Brunei established the Brunei Investment Agency (BIA), which is an agency under the Ministry of Finance of Brunei which specifically tasked to reinvest the surplus funds generated from oil and gas exports, so that funds are not wasted but turned into assets that generate additional revenue for the state and also the Brunei economy as a whole. BIA put the investment in a variety of assets, such as Dolchester Collection, Beverly Hills Hotel, Grand Hyatt Singapore Hotel, Paterson Securities (in Australia), Bahagia Investment Corp. (in Malaysia), and so on.

While in Qatar, the local government established the Qatar Investment Authority (QIA) in 2005, with the aim that is also equal to BIA: To reinvest the surplus funds generated from oil and gas exports. Although QIA is still a relatively new company compared to BIA, but QIA is more aggressive in investing in which they buy shares, either a minority or a majority, of the most prominent companies in the world, such as Barclays, Fisker, the Volkswagen Group, Harrods Group, Sainsbury's, Miramax Films, Credit Suisse, Royal Dutch Shell, to the Paris Saint Germain football club. QIA recently also invested US$ 5 billion to build a petrochemical facility in Malaysia, and placed US$ 10 billion for investment in various sectors in China (in cooperation with CITIC Group as the fund manager).

Then what about Indonesia?

Although Indonesia has vast and abundant reserves of natural resources ranging from oil and gas, gold, nickel, coal, crude palm oil, and rubber, but most of the natural resources controlled by the private sector, both foreign and domestic, and not the Government, and this is different with the Government of Brunei and Qatar that have full control over almost all of their oil and gas reserves. As a result when commodity prices are rising, the benefit only received by certain parties such as coal companies instead of the people as a whole. That's why even though our economy is growing significantly in recent years, but it was very uneven, where some rich people in urban areas become richer, but the poor people in the villages remain poor.

The problem is, if these corporations prefer to withdraw the funds out from their surplus of coal exports etc (as did Banpu through ITMG), then the country would received nothing. But when commodity prices turned down, our economy remains affected. The Indonesian government is not without control to the country’s natural resources, because they still controlling the oil and gas through Pertamina and SKK Migas, coal through Bukit Asam (PTBA), and oil palm and rubber plantations through PT Perkebunan Nusantara (PTPN). But well, how significant the authority of Pertamina over the oil reserves in Indonesia? And SKK Migas, what are they doing? Including PTBA, try me, can they take over the Kaltim Prima Coal (KPC) from the hand of Bumi Resources (BUMI)?

However, the not-so-good performance that shown by state-owned enterprises in the field of natural resources above, maybe it's because of lack of support from the Government as well, where the House of Representatives only asking the payment of dividend each year, or ask the commissioner seat to receive the US$ 100,000 annual salary whereas his work only to come once a year for a general shareholder meeting. At the end, both the governments of Qatar and Brunei, they can have complete control over its natural resources, because of the firmness of the Emir and the Sultan in saying, 'all of these natural resources are belong to our people, and not certain individuals or corporations!'. In managing its oil and gas, the Brunei Government is actually not alone but in collaboration with Shell, and the Government of Qatar also must cooperate with ExxonMobil, Total, Mitsui and Marubeni. However, as the host, the Government of Brunei and Qatar are both in position of majority shareholder of the oil company that was established, so that they have control over such global oil companies, and not the otherwise.

Then how about the Indonesian government?

Under the leadership of President Jokowi, if you watch his firmness in leading the military, police, and all elements of Government that involved in the process of search and evacuation of Air Asia QZ8501 until eventually some dead bodies could be evacuated in a relatively short time, as well as how the Government could so easily pull out fuel subsidies and execute other state decisions without the need for asking any approval from the corrupt Parliament, then there is a great hope that Indonesia is now have an effective government, which could firmly tell certain individuals and corporations, both foreign and domestic, that, 'the earth, water, and natural resources contained therein are controlled by the state, and greatly used for the prosperity of the people!'. I hope that, although of course it requires hard work and a long time, but one day the Government of Indonesia will have enough control over natural resources reserves in our own country, whether it be through state-owned enterprises or agencies that are specifically set up to manage the natural resources.

Then, after making sure that the results of our natural resources did not transported anywhere but returned to the land of Indonesia, the Government will set up a special body, possibly with the name of Indonesia's Investment Authorities or the like, which is tasked to invest the surplus of natural resources (or of anything), to productive assets. In this way, although of course, would require a long time, then one day Indonesia's economic growth will no longer depend on the fluctuations in commodity prices, because we also have an alternative income in the form of dividends or profit sharing of investments that have been previously placed, where the income goes directly to the state treasury and can be allocated to the state budget.


However, if the Government experiencing difficulties in taking over the assets of natural resources scattered throughout the archipelago (because, of course, it is not THAT easy), then they at least can make some formulas or rules that allow the Government to obtain more shares of the natural resources produced by the companies. For example, beyond the taxes paid by the company, the Government has received royalties from coal, export duty from CPO, as well as royalties from the gold mine owned by Freeport and Newmont. If the Government is able to negotiate with the corporations, then the value of the royalty and export duty could be raised at a certain percentage, say by adjusting with the price of commodities in the international market (so if coal prices rise, the royalties go up, and also the otherwise).

The funds raised are then placed into a single pool, say with the name of Indonesia Natural Resources Fund, to then be used for nothing but investment, in this case the investment in the country to build the port infrastructure, power plants etc. Moreover, beyond the funds managed by the state, the Government can issue regulations which requiring corporations to use their large profit (from natural resources) to be invested here rather than taken away out of the country.

Because, as we all know, the economic growth is driven by four components: consumption, investment, government spending, and exports, and pressed by a single component: imports. So to boost the economic growth, beyond encouraging the exports and reduce the imports, the investment can also encouraged to. Both the Government and private sector may invest in the country or also invest abroad, as long as the funds are belonged to the government or local companies (thus, the profit resulted from the investment will still return to Indonesia). When commodity prices are rising, the Indonesian exports will also increase by itslef, but our point is that the surplus of funds that could be used for later investment, both by the government and private sectors, is increasing too. And when the commodity prices are falling, the decline in the value of exports will be compensated by an increase in investment, using the ‘saving’ from the periods when commodity prices were high.

In this way, by saving the excess funds when we are in the period of harvesting, and use it later when the difficult period came (for consumption, and government expenditure in the form of subsidies, etc.), then the Indonesian economy will grow stably without the need to rely on fluctuations in commodity prices in the international market.


Dear Mr. President,

As ordinary people, we certainly do not have any power to realize the above ideas. And frankly we feel ashamed because through this writings, it seems that we just tried to give you and your Government an order to do this and that, while I know that you’ve been very busy. We also know exactly that what has been said above is much easier to be said than to be actually done.

However, as said above, your hard work during this time has inspired us to also do the same, to contribute in a positive way, even if only in very small and insignificant form of contributions, to the development of the country.

And in our capacity as writers and investors, we can only provide these writings. There is no intent and purpose of this writings unless we wanted Indonesia to become a developed country, where one day when we travel abroad and asked by the locals about where we came from, we can proudly say, 'from beloved Indonesia '.

Frankly, before you became the President, we were not too optimistic with the Government, and that's why we were apathetic to care only for ourselves but never care about the country. But your actions so far has made such high optimism for all of us, that make us feel so excited to also take part in the construction of the beloved archipelago. So with this we say, you're not alone, Mr. President! Coz’ we are all behind you.

May God bless you, Mr. Jokowi, and also all of your family.

Jakarta, January 3, 2015
Teguh Hidayat

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