IO, Jakarta –2018 was not a good year for Indonesia’s economic condition. There are clear indicators: a trade balance deficit at USD 8.57 billion, worst within the past 4 years. Next, a current transaction deficit (current account deficit) at 2.98%. Meanwhile, actual economic growth throughout 2018 was only 5.15%, while economic growth under State Budget 2018’s assumption was 5.4%. In the Indonesian bond market, the 10-year State Bonds (surat utang negara – “SUN”) series had a yield of 7.98%, higher than the yield of the same instrument in the Philippines at 6.9%. Macro-economics is not the only thing that crashed. There was also less foreign investment coming in to Indonesia in 2018. According to Investment Coordination Agency (Badan Koordinasi Penanaman Modal – “BKPM”)’s data, realized foreign investments (penanaman modal asing – “PMA”) in 2018 was Rp 392.7 trillion, down 8.8%. Compare that with the realization of PMA in 2017 at Rp 430.5 trillion. If this is the portrait of our economy in 2018, I shudder to think about how the economy will be in 2019, with its various parameters.
Trade Balance Deficit
According to Senior Economist Kwik Kian Gie, the cause of Indonesia’s trade balance deficit is actually because Indonesia is never able to make competitive goods. “Indonesia has everything, but it can never make goods that can compete with similar foreign goods – whether textiles, shoes, or anything,” he said.
The more advanced a country is, the more goods they leave behind to be taken over by less advanced countries. Let’s take the example of sophisticated electronic goods, like the cellphone. It is initially produced by America (Motorola). But later, Samsung from Korea and Huawei from China started to take over. These two Asian companies now have the biggest cellphone market share in the world, and Huawei was the first company to launch the use of 5G technology.
Indonesia can only buy as a consumer and cannot produce. Indonesia gains most of its foreign cash from mined natural goods such as coal, petroleum, etc. We don’t even extract these ourselves, but we hire foreign contractors to mine for us and split the profit from the sales with them. Ironically, in this distribution, Indonesia as the actual owner of the goods actually receives a very small portion. Indonesia’s depressed exports is caused by its lack of competitiveness, as its HR tends to talk too much. Only very few of us work hard researching for better use of our assets in laboratories. Let alone researching, our educational level is also extremely low. We can actually handle this issue if only economy isn’t that strongly related to politics. With the current quality of our human resources and democratic condition, it will be very hard.
Meanwhile, Economist Fuad Bawazier concludes that our exports are weak because Indonesia’s biggest export has always been manufactured products. Exports from the manufacturing industry used to contribute to about 30% of our Gross Domestic Product (GDP), but now it’s only under 20% of our GDP. This means that manufacturing businesses crash, factories are closed, and firings are rampant.
Economist Anwar Nasution stated that the low condition of exports means that the Government must do something to improve its export manufacturing industry. For example, furniture companies exporting to Europe, textile companies, and other manufacturers should be encouraged. “Indonesians go to umrah and hajj pilgrimages all the time, and they wear clothing made in China. Why can’t we produce these goods internally? Why don’t we use these umrah and hajj products into our source for foreign cash? In fact, we should be able to export such umrah and hajj clothing products and others. How come Anthony Salim can open noodle factories in Saudi Arabia, Morocco, and other Islamic countries? Just by labeling his products as halal (satisfying strict religious requirements for edibility and potability), Anthony Salim can get even these Arabs to love his noodle products so much. Why can’t our Muslim entrepreneurs do the same?” Anwar said.
Bhima Yudhistira, Institute for Development of Economics and Finance (“INDEF”)’s Economic Observer, said there are several causes of trade balance deficit. First, imports increase significantly because of deficit petroleum and natural gas balance. In 2018, rising crude oil prices and fluctuating Rupiah exchange rates caused the price of imports to increase. Furthermore, domestic petroleum lifting continues to decrease, forcing us to import. This is a chronic illness. Second, there is a lot of raw material and machinery imports relating to infrastructure projects. Third, vastly increased e-commerce transactions, especially from e-commerce unicorn companies, encourage imports of consumer goods. Consumer goods imports increased 22% in a year. This is unnatural, especially because 93% of goods sold through e-commerce are imported. Our domestic e-commerce actually promotes our imports! Fourth, a fantastic spike of food imports, especially rice and sugar. Our rice imports in 2018 was 2.2 million ton, and our sugar imports in 2018 at 4.45 million tons makes us the highest sugar importer in the world.
“In terms of exports, trade wars are being waged worldwide. However, it is too late for us to seek new markets and we are too dependent on the United States and China. When these two countries wage trade wars, the impact on Indonesia is that our raw material commodity exports in 2018 went down. We are quite weak in negotiating, and the trade obstacles in our export destination countries really hurt our export performance,” Bhima said.
Current Transaction Deficit
Bhima Yudhistira further stated that having a current transaction deficit of nearly 3% is one of the worst cases possible. Our goods trade balance has a slight deficit, but it is not too big in comparison with our service trade balance deficit. Service trade balance deficit continues to increase, because our tourism sector is unreliable. The growth of the number of trips made by foreign tourists to Indonesia in 2018 decreased slightly. In terms of service, we are still 90% dependent on foreign ships, which means that our foreign reserves are leaking out from here as well. Our primary income is mostly obtained from the repatriation of capital from the foreign companies investing in Indonesia that take out the yield of their investments out of Indonesia. This is why our primary income is so depleted.
Kwik Kian Gie concludes that our current transaction deficit is beyond a healthy level. Our current transaction deficit is comprised of goods and service transaction deficits, but our service transaction never goes into a surplus, not even once, for many years.
Anwar Nasution said that we need to handle current transaction deficit must be resolved in order to improve our exports. Currently, our exports only depend on raw materials and natural products, such as coal, palm coconut, and rubber. “Why don’t we encourage our santri (Islamic boarding school scholars) to produce baju koko, head veils, etc. to the Middle East? The santri would get personal income, and we as a nation would also earn,” he said.
Economic Growth Fails to Reach the Target
The economic growth target set by the Government will not be achieved. According to Fuad Bawazier and other expert economists, even the 5.17% economic growth rate announced by the Government is doubtful. This is a reasonable doubt, because economic growth is parallel with consumption growth. “Consumption growth is only 4.4%, how is the Government able to say 5.17%? This is why we suspect that the Government’s accounting is based on both production and consumption rates. This means that our production level is high but we cannot sell anything – that is a big risk,” Fuad said
Economic growth target is difficult to achieve, because only the same people would invest in Indonesia. Our country is simply, absolutely unattractive. Kwik Kian Gie stated that Jokowi’s Government has failed to attract investment. Furthermore, the economy is “growing” if its GDP, or the sale of all the goods and services in Indonesia, grows. If an investor brings money in to Indonesia to mine coal out of the soil, this is GDP. However, who is going to actually own the coal?
Furthermore, there is a lot of infrastructure construction in Indonesia in the past few years. This will result in long-term economic impact. “This is what I criticize frequently: we have Trans Java toll road, Trans Papua highway, Trans Sumatra highway, I really don’t understand why they are built all at once. Infrastructure is extremely important, yes, but we must know “when” to build, “where” to build, and ultimately, “why” we build it. There have been comprehensive studies, and they are mounted by the National Development Planning Agency (Badan Perencanaan Pembangunan Nasional – “Bappenas”) to boot, but how come these study results are simply shunted aside?” he asked.
Economic growth is based on exports – the selling of anything our people produce to foreign countries. It may be anything from toothpicks to furniture, anything we can export. “Look at the goods in Tanah Abang market. Everything is made in China, while our own people could have made them too: baju koko, head veils, and many others,” Anwar Nasution said.
Bhima Yudhistira explained that it would be hard to achieve the economic growth rate targeted by the Government, because we still depend on consumption as the primary contributor to our economic growth, while exports and investments that should be the drivers of economic growth are weak. He believes that this is due to unsuitable policies, because none of the 16 policy packets the Government issued made any difference.
This is worsened by the fact that our online permit procedures are non-comprehensive. They are only available at the central level. Furthermore, the Online Single Submission (OSS) or online integrated service system worsened the chances of incoming investments, because many investors ended up getting confused due to the new permit system. They require so much adjustment, which limits the growth of investment in Indonesia. Indirectly, this causes our consumption to become lower as well, which slows economic growth. Another factor that we should not neglect is the projection that deindustrialization will continue in 2019, while currently our manufacturing industry is below 20% of the highest position it once held in 2001 at 29%. To put it simply, our manufacturing has worsened.
Bhima further notes that the economy does not grow much, even though the Government has massively constructed infrastructure. Economic growth is not linear with the amount of infrastructure constructed, because firstly, infrastructure construction uses imported raw materials, especially for electricity generation. Even the Government admits that building infrastructures use up a lot of imported materials. This is because, among others, the terms and conditions for our loan concession from China forces us to take more imported construction necessities from China. Secondly, the multiplier effect is reduced because infrastructure construction is dominated by State-owned Enterprises and their subsidiaries, reducing the room available for private contractors. Thirdly, infrastructure projects during the Jokowi Government are capital-intensive projects, with more sophisticated technology and lower absorption of labor than infrastructure construction in previous eras, say the Soeharto era. This means that Indonesia’s economic growth in Jokowi’s era does not rise linear to infrastructure construction.
Even further than Bhima, Fuad Bawazier stated more harshly that infrastructure construction in Jokowi’s era is actually bankrupting Indonesia’s economy. The income of Palembang LRT is Rp 1 billion a year, operations cost Rp 10 billion a year, meaning that there is a subsidy of Rp 9 billion. “So, when are we going to break even, when we even have to rely on subsidies to continue operations?” Fuad said.
Fuad further notes that construction in Jokowi’s era is lawless, not calculated properly. Construction is only performed for image-building. This kind of construction is a burden to State-owned companies. “Jokowi’s infrastructure is more a curse than a blessing. Only the people who secure the project get the benefits,” he said.
Investor’s Distrust
Bhima said that foreign investment is mostly down because of a lack of confidence. Foreign investors note that our economic structure is fragile, vulnerable to volatility. Especially since in 2018, our Rupiah exchange rate has weakened so much that investors find it better to get into short-term investments. Otherwise, foreign investor’s investments are obstructed by changeable policies. For example, Online Single Submission (OSS) for investments is initially regulated under the Coordinating Ministry of the Economy, but now it is handed over to the BKPM. Meanwhile, there are so many permits required for investments, even though there is just one integrated space to administer for them. This confuses investors. “You can call it “one-door” permit policy, but there’s a thousand windows within this one door. Our permit procedures are ineffective. This is one of our chronic diseases that cause investors to delay entry in the end. Yes, there is also reluctance as we are entering presidential elections, but that is not the primary reason. Trade wars affect investments too, but the biggest reason is because we are simply not competitive enough. Our domestic economic structure is unstable, and there are no benefits felt from our policies,” Bhima said.
Kwik Kian Gie stated that foreign investments are down. This means that foreigners with money really calculate their investments very carefully. They thoroughly consider where to invest. In view of our condition, what profit and benefit would they get by investing in certain fields in Indonesia? Indonesia is very attractive for mining investors. Indonesia is also attractive for banking investments, as well for industries with famous brands that our people would definitely buy, such as KFC, Coca Cola, Unilever products. Even if economic growth seems to occur, who does it benefit? After all, Unilever products are also included in our GDP.
Anwar Nasution explained that investors in general do not trust our Government. Any investment made should generate job opportunities – we should invite investors to produce their goods in Indonesia, but without taking in any workers from them. “The Government stated that foreign investments are down because of global (trade) wars, what does that have to with Indonesia? It would only affect exports to China, like our coal exports there are down,” he said.
High Yield of Government Bonds
Kwik Kian Gie concludes that the Government just want to build, then takes in loans when they don’t have enough money. When the bonds no longer sell, they increase the interest rate or yield gradually until they find buyers. “How come there was even a USD bond with a return or yield of 10.5%, while America’s bonds only generate a yield of only 0.5%? At the time, Sri Mulyani as the Minister of Finance in SBY Government issued USD bonds at a 10.5% yield – that’s funny,” he said.
Then why did the Government issue bonds? Because they can no longer get credit from banking institutions. Banks always calculate the risk level of all credits. Banks cannot impose too high interest rates, so that the Government must sell its bonds to all the people in the world. To make these bonds attractive to them, the Government raise the interest or yield.
Another indication to watch is our inflation rate. Inflation actually does not depend on yield, but on the need for the goods imported using USD. However, USD value continues to rise and Rupiah value continues to decline.
Anwar Nasution said that our bonds market is saturated with our high-yield SUNs. Nowadays, who buys bonds on the Indonesian Stock Exchange? Foreigners. We do not have insurance companies or retirement fund companies that are strong enough to absorb these bonds. Banking should provide short-term credit to the business world instead of for long-term projects like toll roads. Yet the fact remains that all State-owned Enterprises borrow from foreign banks to fund infrastructure construction. This is dangerous. During the New Order, all Government borrowing was controlled by one person, Professor Widjojo Nitisastro, the former Chairman of Bappenas. “Now all ministers and State-owned Enterprises can get loans as they please, there is no coordination. This might push our country into collapse. We borrow money in USD but earn money in Rupiah, the dollar gets more expensive every day. This is extremely dangerous,” he said.
Inflation is related to yield in that if the yield is higher, bond interest also becomes higher. The higher bond interest rates are, the more we need to earn to pay back investors. But Indonesia’s economy is obviously dependent on foreign countries, and our imports are bigger than exports. The Government must work harder. Manufacturing exports must be improved – the product can be anything Indonesia builds or creates. What matters is that we need to push our exports back to surplus levels.
According to Bhima Yudhistira, our SUN has relatively higher interest, even though we might have the same rating as another country. The Philippines, for example, generates lower yield even though its inflation rate is higher than Indonesia’s. This means that there is a risk attached to investing in us, either because the management of our State Budget is still bad, or because the Government deliberately raises yield or the coupons being sold at the market to attract foreign funds and strengthen our Rupiah. This is a short-term strategy for strengthening the Rupiah, but it is dangerous for long-term conditions, because foreign monies that should have been entered as foreign investments now enters the portfolio, whose value tends to be volatile.
Structural Solutions
Kwik Kian Gie admits that all lines of our economy are in a deficit. Indonesia’s economy currently only depends on natural wealth instead of manmade products, especially those that are extracted from the soil or the sea. We cannot even produce items that require the simplest of human production arts, such as salt. “With 2/3 of the Indonesian territory being sea water, how come we need to import salt? Pak Jokowi’s actions are simply crazy, like how come the Social Insurance Administration Organization (Badan Penyelenggara Jaminan Sosial – “BPJS”) be in deficit, and many of our hospitals get on the brink of bankruptcy because they don’t get paid,” he said.
The Government must be tough, dare to be strict, and understand the issues. Furthermore, we need to return to the original Constitution of 1945 when determining our laws and policies. The original Constitution of 1945 was created by the most intelligent men in Indonesia before its independence: H. Agus Salim, Soekarno, Sjahrir, Hatta, etc. This will generate quality economic growth that our own people in general improve, not growth that is generated by a few people and that benefit only these few people as well. Who generated this 5.1% growth? Because even though we generate many goods and services in Indonesia, only a few people actually benefit from them. Even our economic growth is mostly not enjoyed by Indonesian citizens, but by foreign investors.
“Many companies in Indonesia obtain the permit to mine coal, but most of them do not mine the coals by themselves. As soon as they get their permits, they sub-contract the mining proper to foreign contractors using a profit-sharing system. This is a hidden thing, because the ones that seem to benefit and progress are investors from Indonesia. In reality, our economic growth does not benefit our people in general. Especially since Rupiah value has been slipping down madly from 1970 until now. In terms of total drop of value from 1970, Thailand’s currency slips down 18%, Philippine’s currency dropped at 700%, but Indonesia’s currency crashes at 4,000%. I will remind you that back in 1970, USD 1.00 was equal to Rp 690.00,” he said.
Bhima Yudhistira admitted that our economic structure has become weaker and more fragile as time goes. Any slightest global volatility would cause a crisis among us. That means that our problems are already acute, and we need a better, structurally stronger long-term strategies instead of just patching things up.
There are three things that the Government can do right now: First, there must be a total reform of economic policies. We need to support local products instead of imported products. Second, total evaluation of all infrastructure project, especially those that are part of loan concessions from China. Third, further infrastructure construction should be labor-intensive instead of capital-intensive, meaning that infrastructure that directly involves the people and generate more direct benefits to the people should be prioritized. The Government must also protect domestic products, especially those sold through e-commerce. We don’t want a flood of imports to beat up the products of our micro, small, and medium businesses. We don’t want our businesses to lose out on the profits and benefits generated by digital economy.
(Dessy Aipipidely, Ekawati)
(Infographics)
Jokowi’s Macro-economic Report Card 2018
2018 Foreign Reserves: A Drop of 7.3%
| Year | Amount |
| December 2018 | USD 120.7 billion |
| December 2017 | USD 130.2 billion |
Source: Bank Indonesia
2018 Trade Balance Deficit: Highest in History
| Year | Amount |
| 2018 (End Jokowi I) | Deficit USD 8.7 billion |
| 2014 (End SBY II) | Deficit USD 2.2 billion |
| First recorded deficit (1975) | Deficit USD 391 million |
Source: BPS
2018 Current Balance Deficit: Barely Safe at 3% of Gross Domestic Product (GDP)
| Year | Amount | Percentage to GDP |
| 2018 | USD 31.1 billion | 2.98% |
| 2017 | USD 17.2 billion | 1.7% |
Source: IO research
Rupiah Exchange Rate Weakened 6.9%
| Year | Exchange Rate |
| December 2018 | Rp 14,481.00 |
| December 2017 | Rp 13,548.00 |
Source: Bank Indonesia
Foreign Investment
2017 at Rp 430.5 trillion
2018 at Rp 392.7 trillion
Down 8.8%.
Source: BKPM
Economic Growth
2017 5.07%
2018 5.17%