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Indonesia Economic Growth: Not as Bad as It Looks

On 5 November, the Indonesian Central Statistics Agency (Badan Pusat Statistik/BPS), released the rate of economic/GDP growth for the third quarter of 2015, which is 4.73% y-o-y. The rate, though still below the expectations of the Ministry of Finance and Bank Indonesia of 4.8 – 4.9%, but it’s better than the second quarter, which was only 4.67%. And if we take a look at the components of the economy itself, we will obtain some interesting facts.

The first, as you know, the formula of GDP (gross domestic product) is Consumption + Investment + Government Spending + Exports - Imports. And in Indonesia, household consumption is still the largest component of GDP, but the percentage is slightly down from 55.3% in the third quarter of 2014, to became 55.0% in the third quarter of 2015. Meanwhile, the investment component rose from 31.8 to 32.8%, as well as the component of government spending rose from 9.5 to 9.8%. Along with the low price of two Indonesian export commodities, namely coal and crude palm oil (CPO), the export component is still down from 22.5 to 20.7%, but whether because of the impairment of Rupiah or another, the import component fell deeper from 23.2 to 19.9%, and it helped the economic growth rate to rise (because in the formula of GDP calculation, imports are the negative components).

So it appears that the composition of our economy in this year has slightly shifted from household consumption into investment and government spending, and it is quite clear that this was the impact of the transfer of government subsidies, from subsidies of fuel, electricity etc, to infrastructure spending. On the other hand, the level of consumption in Indonesia is actually still grew 4.96%, or higher than the total economic growth of 4.73%, but the growth of government spending has been greater, which is 6.56%. From here it appears that the revoke of subsidies did not reduce the level of consumption (prices are rising but still under control), while the plan of infrastructure spending has begun to be executed, so that the level of government spending grew significantly. However, the investment only grew 4.62%, or lower than the total economic growth, indicating that the private sectors are still hesitate to expand/invest because they think that the economy is still in slowdown. But if later they could see that the level of consumption in the country was still growing significantly, they should be aggressive again. At the end, the slowdown in the country since 2011, actually is more because of the low commodity prices which led to the drop in the value of exports, and not because there is a particular problem in the country.

What is also interesting, although export growth remained negative (dropped 0.69%), but imports fell 6.11% aka much more, so that the rate of economic growth is not hampered. This explains why the central bank, ie Bank Indonesia (BI), was like doing nothing despite the Rupiah continues to impaired in the last months, and only intervened after the Rupiah exchange rate was nearly pass through the psychological level of Rp15,000 per USD, some time ago. Because to keep the positive trade balance, the value of the Rupiah must be at a certain level (not necessarily strengthen). BI itself had declared that fundamentally, the Rupiah exchange rate should be at the level of Rp13,700 per USD. And when this article was written, the rate was indeed at the level of Rp13,700's per USD.

Secondly, based on the business sector, in the last year the mining sector was still experiencing negative growth, precisely minus 5.64%. However, it’s the only sector that has negative growth. While some sectors that has grew above the average economic growth of 4.73%, are the sector of information and telecommunication (IT) 10.83%, financial services and insurance 10.35%, education services 8:25%, corporate services 7.61%, construction 6.82%, and health services 6.49%. From this, it appears that the slowdown or decline in the sector of natural resources/commodities has been offset by the growth in the sectors of service, but the industry/manufacturing still only grew a little (3%). If later the mining sector reached a point where it’s not declining further, while the service sectors are still growing, and manufacturing sectors in the end also grow because it has been supported by the infrastructure, then, well, we may witness a record where the economic growth of the nation successfully reached 7% or more, on year on year basis.

And third, since Indonesia's independence in 1945, one of the biggest problems in the national economy is that the economy is still highly concentrated in Java, and until today the conditions are still the same, which from GDP amounting to almost Rp3,000 trillion (about USD 270 billion) in the third quarter of 2015, 58.3% of which comes from the Island of Java. Actually, since the 2000s, the economy outside Java, especially Sumatera and Kalimantan (Borneo), also grew rapidly due to booming of coal and CPO. But since 2011, in line with the decline in the price of the two commodities, the economic growth in these two islands dropped. Even for Kalimantan, the rate was negative (minus 0.41%) in the third quarter 2015.

Map of distribution of economy in Indonesia. Figures in percent. Source: Badan Pusat Statistik

However, in the last year, the government built much infrastructure (power plants, ports, hospitals, dams), whether it has been ready to operate or are still under construction, in Bali and Nusa Tenggara, and it stimulated the economy in the region to grow significantly, ie 11.75%. Similarly, Sulawesi, where there was built railway lines, nickel smelters, oil refineries, until the networks of fiber optic, and the results the island’s economy grew 8.2%. Actually, the government not only build this and that in Bali, Nusa Tenggara, and Sulawesi alone, but it built everything in all large islands throughout Indonesia, including in Java, and the fact that the economy of Java still grew 5.39% (so in the period of ‘crisis’, in the last year, the most affected area is Kalimantan, where the economic growth was negative). But the point is, if this trend of equitable development continues, then in the long term all regions in Indonesia, not only Java, will enjoy sustainable economic growth. Because the development of infrastructure in a region will not only stimulate the economic growth in the region when the infrastructure is built, but also after the construction is finished and ready to operate. So this is different from the economic growth which driven by booming of commodities such as several years ago, whereby when the boom period was over, the economy will be immediately dropped.

In conclusion, I do not know with you guys, but I saw that the economic development in the country is not as bad as it looks, but only slightly slowed down to square off in order to take off. In fact, if I may be honest, it's amazing that the Indonesian economy, which already the largest in Southeast Asia, can still grww 4.73% or higher than some of its neighbors such as Malaysia 4.70%, Thailand 2.90%, or Singapore 1.40%, and only lower to the Philippines 5.60%, but remember that the GDP of the Philippines is also only a third of Indonesia's (so that the economy of Manny Pacquiao’s country is easier to grow than Indonesia), whereas until today the value of Indonesia's exports are still dropped! Because of the decline in prices of coal and CPO.

Well, in the case I remember when some time ago I told an entrepreneur friend that I someday want to move to Singapore, because as a country that (apparently) more advanced in economy, it seems that the opportunities of investment in there are more attractive than in here in Jakarta. But he said, ‘Who says that invest in Singapore is delight? Try yourself to buy the shares of SingTel or DBS, I would be amazed if you can generate a profit of 25% in five years. Compare it to if you buy the shares of Telkom or Bank BRI in here, where you might pocket a profit of almost 100% in the same period. So, still say that Singapore is more attractive than Indonesia?’ Well, he is right indeed, is not he? :)

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