Franky Sibarani, the head of the official Investment Board, which promotes investment and issues licenses to investors, told the WSJ the reason that the Indonesian government revoked the huge number of investment permits was due to investors making no progress realizing their plans.

According to Sibarani many investors had failed to realize their investment plans due to difficulties such as clearing land, obtaining permits from local governments, and receiving approvals on plans to minimize the environmental impacts from their investments, the WSJ reports.

“It took a long a time to get permits from local governments, making (investors) frustrated,” Sibarani said, adding that the government would welcome these investors again should they seek to apply for licenses in the future.

Indonesian President Joko “Jokowi” Widodo plans to travel next week to Japan and China in hopes of gaining billions of dollars of investment to help fund an infrastructure building boom.

The Bank Indonesia (BI) surprised everyone when it eased monetary policy at its February meeting. Moving into line with global trends, it cut the policy interest rate by 25 basis points to 7.5 per cent, even though analysts had predicted no change. While the change is surprising, it has a sound rationale but is not without risk.

Recent developments are supportive of a more benign inflation picture. BI follows a forward-looking inflation targeting policy regime. Headline inflation is declining more quickly than expected with the February rate at 6.3 per cent. It seems the feedthrough of the November fuel price hikes were largely one-off and the strong dollar has not shaped inflation.

Future price pressures appear limited. Low retail fuel prices, weak global price pressures and a slowing economy point to declining inflation. But month-to-month inflation may become more volatile. Global oil prices and exchange rate developments feed directly into retail prices through the new automatic price adjustment mechanism.

External financing conditions remain important for monetary policy. Due to the government’s infrastructure plans, the current account deficit is likely to persist. And capital inflows will be critical for financing it. In the world of quantitative easing (QE), relying on capital inflows was not a problem (with exceptions such as the May 2013 ‘taper tantrum’). But in late 2014, the view was that 2015 might be a different story: a strong US economy and Federal Reserve guidance suggested the beginning of a rising US rate cycle.

But Indonesian yields continue to look very attractive if global risk remains benign. The European Central Bank has stepped up its monetary easing, the Bank of Japan is continuing its QE and US growth is moderating and this has tempered the expected pace of interest rate increases. These developments have revived the emerging-market financing environment. The immediate task — financing the external current account — looks less challenging than a few months ago, mitigating pressure on Indonesia’s monetary policy.

The central bank’s focus is back on inflation and less on the external balance at least for now. In addition to the better external environment, BI judges that external financing is now less problematic. The current account deficit reflects the pickup in public infrastructure investment rather than less productive imports. And behaviour in the foreign exchange market has improved, permitting a gradual exchange rate adjustment which has served to absorb the pressure of the global rise of the US dollar.

At the same time, growth has become a more prominent policy consideration. TheJokowi government is looking for growth to rise to 5.7 per cent in 2015 from 5 per cent in 2014. But indicators point to slow growth. BI signalled concerns about slowing credit growth when it guided banks to target stronger credit growth for 2015 and loosened the definition of the loan-to-deposit ratio.

But the course chosen by BI is not without risks.

BI must overcome the Indonesian public’s ‘fear of floating’ — the concern about a weakening nominal value of the rupiah. Targeting inflation and recognising the growth situation could result in a weaker rupiah. Public discourse will have to shift focus from the rupiah–USD rate to the effective exchange rate. The real effective exchange rate is critical — over the second half of 2014 the rupiah was appreciating in real terms and this did not help address the large external current account deficit. Indonesia’s relatively high inflation means that a systematically weaker nominal exchange rate is needed just to maintain Indonesia’s external competitiveness.

Budget related risks could also change the interest rate environment. The 2015 budget financing requirement is larger than 2014. In some scenarios this may see the need for higher interest rates. The planned fiscal deficit is 1.9 per cent of GDP. Beyond that, the government is placing additional equity of about 0.5 per cent of GDP into state owned enterprises. But the greater risk is if spending proceeds in line with plans without the expected growth in revenues. The emergence of a larger financing gap could trigger higher interest rates.

Indonesia’s external finance situation and external obligations remain risks. US rate rises may make the external environment more difficult for emerging markets, especially those with current account deficits. But even if the external financing environment remains benign, Indonesia’s external obligations will continue to increase due to its sizeable portfolio and other capital inflows. While the scale of the resulting obligations remains manageable, they are increasing at a fast pace and, in the medium term, could pose challenges for external debt management.

David Nellor is an Adjunct Professor in the Lee Kuan Yew School of Public Policy, National University of Singapore.

Courtesy of East Asia Forum

.

East Asia Forum is a platform for analysis and research on politics, economics, business, law, security, international relations and society relevant to public policy, centered on the Asia Pacific region.  For more information, please visit http://www.eastasiaforum.org/

Indonesian President Joko “Jokowi” Widodo. Photo courtesy of Flickr/Ahmad Syauki CC-By-2.0

No more ‘business-as-usual’ is the Jokowi government’s message in the 2015 budget. Fuel subsidies have been cut, infrastructure spending is to be ramped up, and revenues are projected to rise dramatically. These three steps deliver a 1.9 per cent fiscal deficit, down from 2.2 per cent in 2014. This leaves space for a fiscal response in case the global economy turns less friendly. The success of this bold strategy depends on whether the dash for immediate results risks delaying or possibly even sacrificing medium-term gains.

The first step, eliminating fuel subsidies and adopting a floating price for energy products, was implemented in 2014 and has been the government’s major economic policy success. Low global oil prices have helped public acceptance and provide an opportunity for non-contentious and formula-driven adjustments to retail prices, which could serve to create a credible and sustainable system of floating prices.

The second step is to use the fiscal space created by reduced subsidies to tackle the infrastructure gap that is standing in the way of higher growth. The budget envisages a large and multi-pronged attack on the infrastructure deficit; national, regional and local governments as well as state-owned enterprises will be investing. At the national level, direct infrastructure spending is targeted to almost double, reaching 2.2 per cent of GDP. Transfers to the regions and villages are increased by 16 per cent. And state-owned enterprises balance sheets will be strengthened by reducing dividend payments to government as well as a significant equity injection amounting to about 0.5 per cent of GDP.

The third step is to increase revenue collection to ensure sustainable public finances and to finance the medium-term investment agenda. The subsidy reduction was essential and created immediate fiscal space but it alone is not enough. Low oil prices increase the revenue challenge because they mean that oil and gas sector revenues will be much lower than anticipated late last year.

An almost one-third increase in domestic tax receipts is the budget assignment. Additional administrative ‘effort’ rather than defined policy measures is to drive the revenue growth. A tax revenue increase of this magnitude from additional effort in a single year is unprecedented. This ambitious revenue target is made even more difficult due to low oil prices, weak commodity prices, and a slowing economy.

This budget strategy is high risk.

The success of the government’s growth strategy will ultimately be built on the foundation of a more attractive investment environment. Quality infrastructure and the tax system are both important factors shaping the investment environment.

The infrastructure-spending ramp up needs to meet national priorities and standards. At the national level, meeting the target spending levels and doing so in priority areas will be a challenge considering the capacity for delivering spending over the last few years. It is unclear by how much transfers to other levels of government will translate into meeting high priority infrastructure needs. Moreover, the selective capital injections into SOEs will need to be integrated with national priorities.

Trying to meet the ambitious 2015 revenue target within the year is likely to mean drawing largely on the existing narrow tax base. This effort could hurt the investment environment because it risks imposing a greater burden on compliant taxpayers rather than looking to meaningfully broaden the base. The government could lose its first year chasing ‘revenue quick wins’ to reach the budget target, while sacrificing the opportunity to build the foundation for a systematic and sustainable revenue increase that is essential for meeting medium term infrastructure plans.

The way forward is twofold. First, for the 2015 budget, the Indonesian government should implement spending plans in a phased manner that targets spending priorities. The government should proceed with each phase of spending as revenue realisation becomes clearer. This approach will minimise the cost to government priorities in the event that there are late-year revenue shortfalls.

Second, the long-term success of the administration will depend much on its ability to mobilise public revenue. For 2015, with a plausible and prioritised spending plan, a dramatically higher revenue ratio is neither necessary nor appropriate especially in a slowing economy. But, time is of the essence. The challenge of transforming the tax system and generating revenues is large. Focus needs to turn to adopting a systematic plan that builds revenue steadily over time, strengthens the investment climate, and builds the public’s trust and confidence in the tax system.

The budget is a bold strategy to change the direction of the economy. But, the rush for results is a risky strategy because it could delay essential reform and harm the government’s credibility if the budget’s ambitious targets are not met.

David Nellor is an Adjunct Professor in the Lee Kuan Yew School of Public Policy, National University of Singapore.

Courtesy of East Asia Forum

.

East Asia Forum is a platform for analysis and research on politics, economics, business, law, security, international relations and society relevant to public policy, centered on the Asia Pacific region.  For more information, please visit http://www.eastasiaforum.org/

Indonesian President Joko “Jokowi” Widodo. Photo courtesy of Flickr/Ahmad Syauki CC-By-2.0

A greater sense of optimism prevails in Indonesia about the economy in 2015 than a year ago, even though the reality is now more challenging. Growth is slowing, business costs are on the rise, and key economic vulnerabilities persist. In simple terms, the new government of President Joko Widodo (Jokowi) has been dealt a difficult hand of cards. At the same time, a revival of investor confidence is in prospect if the government can pursue a constructive reform path and there are positive signals in this regard. These competing factors — significant challenges on the ground versus the success of government in reviving investor confidence — will shape the Indonesian economy in 2015.

The economic reality on the ground is challenging. Prospects of capital flow volatility and flagging demand from China paint a picture of a difficult 2015 external environment, albeit offset in part by lower global oil prices. The external current account deficit sits stubbornly at around 3 per cent of GDP despite the growth slowdown and means continued reliance on portfolio-related flows. The rate of credit growth is trending down, falling by a half since end 2014, and financial stability is closely watched.

The environment for policy reform has its own challenges. The government lacks a parliamentary majority and, at least to date, the opposition has shown little indication that it will support the government’s program. Welcome moves by the government to centralise policy making and make it more evidence-based will help avoid the interest group capture of policy that has characterised recent years. Yet there remain strong interests opposing trade and investment reforms that are essential for the emergence of a more competitive Indonesian economy.

Reviving investor confidence by implementing a constructive reform agenda is thus essential. The drivers of the economic slowdown remain in place and some needed policy actions may well intensify the slowdown. Reducing subsidies hits private demand and has resulted in electricity and diesel prices rising by nearly 40 per cent in 2014. A further challenge for business activity is a cumulative increase in minimum wages of over 50 per cent in the last few years. Labour market issues more broadly are a major policy challenge but one that has not yet featured in the government’s agenda.

The antidote to a growth slowdown is the timely rebalancing of the economy toward more productive investment. This means higher public and foreign investment: without the latter, risks to the external position will mount as growth picks up. Investment decisions and prospects for a quick turnaround in growth will thus be driven by the strength of reform actions in shining a bright light at the end of the challenging reform tunnel.

The government is off to a good start and can do much irrespective of parliamentary support. The increase in fuel prices prompted by the huge budget cost of subsidies is the highest profile action. This move provides a two or three year window for fiscal reform that needs to find a bridge between rapidly rising spending and stagnating revenues. The government’s priority on the investment climate is a sensible strategic move. This has the potential to address the cost of doing business in a profound way while not requiring parliamentary involvement. Actions on licensing and permit issue along with clarity and transparency (even if not abolition) on the plethora of non-tariff measures and regulations that were introduced in recent years would represent significant progress.

The government’s narrative of high quality and inclusive growth links closely to the essential structural reform agenda. We will not see major new infrastructure on the ground for some time but a meaningful start on key energy, transport, and port investments that can support a larger manufacturing sector would send a strong signal. Urban infrastructure is one of the more potent vehicles to improve the well-being of the urban poor. Essential tax reform will need to be tackled with base broadening in mind rather than a quick fix if it is to secure a brighter investment climate as well as promote social justice and equity.

The government’s policy narrative is still taking shape but the signs are encouraging. On his return from APEC, President Widodo said he took three lessons from his visit to China: the role of a unified vision, to plan infrastructure for the long term, and to focus on getting infrastructure and factories on the ground rather than worrying if that resulted from foreign investment. If the administration adopts this modus operandi to shape policy and frames it in a consistent macroeconomic framework then indeed the prospects are bright despite the magnitude of the challenges facing the new government.

Courtesy of East Asia Forum

.

East Asia Forum is a platform for analysis and research on politics, economics, business, law, security, international relations and society relevant to public policy, centered on the Asia Pacific region.  For more information, please visit http://www.eastasiaforum.org/

This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License.

The Templeton Emerging Markets Group in Jakarta, posing in traditional Indonesian clothing called batik. Photo courtesy Franklin Templeton.

Southeast Asia represents one of the fastest-growing regions in the world today, and is one that we are excited about as investors. The Templeton Emerging Markets Group held our semiannual analyst conference in Jakarta in September, and one of the key reasons for choosing that location was to observe and discuss the changes and challenges on the ground with the new regime of President Joko Widodo. I’ve invited my colleague Tek Khoan Ong to pen some thoughts on the outlook and investment opportunities in Indonesia today.

Tek Khoan Ong, CFA®
Senior Executive Vice President, Managing Director
Templeton Emerging Markets Group

As investors in Indonesia, we think there is much to be excited about. Indonesia has a large and young population that is fast-urbanizing and, hence, fueling growth in income and consumption. It has the world’s 4th largest population of more than 240 million (5^th largest considering the European Union as a whole, as of 2013), more than 40% of which are younger than 25 years old.¹ Indonesia’s resource-rich economy is the 16th largest in the world, and it could become the 7th largest by 2030, if the economy’s GDP growth trend of 5-6% per annum continues.² Indonesia’s urban population of 110 million alone is expected to increase to over 200 million by 2030³ and consumer spending is increasing rapidly among the estimated 45 million middle-income Indonesians.⁴ It means by 2030, Indonesia’s economic strength could even overtake the economies of all EU countries, including Germany and the United Kingdom.

As the largest nation in Southeast Asia by population, we believe Indonesia’s growing prosperity will benefit the region as a whole.

High Hopes for The People’s President

Voted in as the “people’s president” based on his humble background and his strong track record as mayor of Solo and governor of Jakarta, there are high expectations that President Joko Widodo (or “Jokowi” as he is popularly known) will be able to replicate his successes in those cities nationwide. We believe he has his heart and intentions in the right place and has a good core team to help him, but there will likely be speed bumps along the way. Regarded as a political outsider, Jokowi faces a number of challenges, which include dealing with his own party, the Indonesian Democratic Party-Struggle (PDI-P), and a fragmented Parliament.  A case in point is the selection of his Cabinet; a practical combination and one of the stronger governance teams in years—but with some members not his first choice. Then there are issues of corruption and a slowing economy with a twin (fiscal and current account) deficit. But Jokowi’s biggest challenge is probably meeting the expectations of the Indonesian people.

Fuel subsidies, one legacy of former President Suharto, have been a subject of hot debate within the new regime. Fuel subsidies total about US$20-25 billion a year, or roughly 20% of Indonesia’s budget, compared with just about 10% for infrastructure and 5% for health care.⁵ The fuel subsidy, when introduced, was meant to benefit the poor, but it has also benefited the rich so it is a blunt tool. In our view, reducing fuel subsidies should help Indonesia reduce its fiscal deficit and better allocate funds for much-needed reforms in infrastructure, health care and education. There had been previous fuel price hikes in fiscal years, 2005/2006 and 2008/2009, as well as most recently in 2013. Such price hikes have been accompanied by monthly cash subsidies to the poorest households for 2-9 months. In our view, any political fallout from such a reduction or removal should be temporary, especially given the president’s popularity and his ability to engage the masses.

Corruption and Bureaucratic Inefficiency: More Work to Be Done

Indonesia has made inroads in addressing corruption with the establishment of the anti-corruption commission, officially named Komisi Pemberantasan Korupsi (KPK). Established by law in 2002, the KPK is modeled after Hong Kong’s Independent Commission Against Corruption (ICAC). KPK has prosecuted hundreds of cases with an excellent success rate, including successful cases against the chief justice of an Indonesian constitutional court, and the police inspector-general. Prominent businessmen, ministers and even former President Susilo Bambang Yudhoyono’s son have not been immune to investigation. We think much still needs to be done, as law enforcement is weak and coupled with regional autonomy, widespread corruption continues. We believe President Jokowi will need to continue to support and strengthen the efforts of the KPK. Recognizing that reducing corruption will require a change in mindset, President Jokowi is introducing a mental revolution in the education system, whereby the emphasis from a young age and in primary school will be on character building.

Addressing bureaucratic inefficiencies will need to take several forms, in our view. These include hiring capable people and putting in place a merit-based performance appraisal system, including better accountability and key performance indicators, as well as impromptu visits from senior officials, more online systems to improve transparency and fairness, and budget allocation based on targeted priorities.

The Investment Outlook

The Indonesian stock market has been performing quite well this year on the heels of strong performance in 2013, some of which has been tied to reform optimism with the new regime. President Jokowi is a change from all past presidents since Indonesia gained independence in 1945. Hence, we think some degree of optimism is justified, although as mentioned earlier, it will not be without hurdles. Given the performance of the market, it is indeed more expensive today than a year or two ago. However, we do not believe Indonesia’s market is overvalued yet, provided the macroeconomic environment remains stable.

We are finding potential investment opportunities in many sectors that benefit from existing demographics and expected reforms. These includes banks, which lend to both fast-growing corporates and provide mortgages, credit cards and other retail banking products to consumers, and companies in the consumer, resources and infrastructure-related sectors.

We also think there is room for equity investing to grow its domestic base. Indonesia historically has had high interest rates and inflation rates. As such, many Indonesians prefer to leave their savings in cash and deposits given the high returns, or invest them in properties as an inflation hedge. The fact that many Indonesian investors lost money in the stock market during the Asian crisis in 1997-1998 did not help the perception of the equity asset class. While equities may come with volatility, we think this is an attractive asset class over a mid- to long-period of time. For instance, over the past 10 years, the Jakarta Composite index (JCI) has delivered an annual return in US dollar terms of just under 20% per annum.⁶ We believe that with more investment education, a younger investing community, and a lower and more stable interest rate and inflation environment, there will eventually be more interest in equities, and in Indonesia, among the global investment community at large.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

The comments, opinions and analyses expressed by the individuals herein are personal views and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The information provided in this material is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding any country, region market or investment.

Data from third party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited such data. FTI accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments opinions and analyses in the material is at the sole discretion of the user.  Products, services and information may not be available in all jurisdictions and are offered by FTI affiliates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction.

What Are the Risks?

All investments involve risks, including possible loss of principal. Foreign securities involve special risks, including currency fluctuations and economic and political uncertainties. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets.

Indonesian President Joko “Jokowi” Widodo. Photo courtesy Jokowi’s Official Twitter page.

Indonesia’s new leader, President Joko “Jokowi” Widodo, in his maiden speech at the Asia-Pacific Economic Cooperation’s (APEC) CEO Summit in Beijing made one thing clear to the audience in his 13-minute English speech: “This is your opportunity” to invest in the nation.

Jokowi said that Indonesia spends around $27 billion annually to keep fuel prices low and that the nation looks to channel the fuel subsidy from consumption to productive activity.

The savings from the subsidy cuts would be used to build infrastructure, such as much needed ports and railways.

“In five years, we want to build 24 seaports and deep seaports,” on the islands of Sumatra, Kalimantan, Java, Sulawesi, Maluku, and Papua, Jokowi said.

Jokowi also outlined plans to expand Indonesia’s railway network and develop mass-transportation networks in six major cities, including Jakarta, Bandung, and Surabaya.

Jokowi also outlined projects to build power plants to help develop Indonesia’s manufacturing and industrial sectors

Jokowi added that savings would be used to improve livelihoods for rural residents and would give farmers, fishermen, and small and micro enterprises access to capital and better equipment.

“We want to build the dams — 25 dams in five years — from our fuel subsidy, to maintain the water supply to the farming area,” he said. “Some subsidy we want to channel to the fishermen, to give them good engine, to give them refrigerator. We want to increase the income of the fishermen.”

“This is your opportunity, because you know our national budget is limited,” he said.

Jokowi also recognized that Indonesia has ranked low on the ease of doing business surveys and reassured the audience that measures would be taken to improve doing business in the nation.

“A lot of investors, when they come to me, almost all of them, they always complain about land acquisition,” he said. “I will push my ministers, my governors, my mayors, to help clearing this problem.”

Last Thursday, The Jakarta Globe reported that The Indonesian government is planning to offer up 43 infrastructure projects valued at $52 billion to private investors in 2015 under public-private partnership (PPP) schemes.

Such projects include airports, monorail, toll roads, ports, rail, and water infrastructure, according to the Jakarta Globe.

Bastari Panji Indra, a director at the National Development Planning Ministry, said that the government will offer 10 major airport projects as well as 6 port projects to private investors, according to the report.

“Apart from airports, there is also a monorail project, coal transportation by train, water supply and six ports,” Bastari said.

Bastari also said that the government is planning to build an express railway linking the Halim Perdanakusuma Airport in East Jakarta to the Soekarno-Hatta International Airport in Tangerang, Banten.

Bastari also announced a light rail transit system in Bandung, West Java, and new rail networks for South Sumatra.

Source: The Jakarta Globe

Widodo has been under mounting pressure to cut the nation’s budget deficit, despite the fact that he does not assume the role of the President of Southeast Asia’s largest country until Monday.

Reuters reports the adviser said that Widodo is looking to hike the cost of both gasoline and diesel by 3,000 rupiah ($0.25) per liter by November.

“The plan is Nov. 1 … but it’s safe to say they are likely to do it within the first two weeks of taking office,” the adviser told Reuters, who requested anonymity due to the fact that he wasn’t authorized to speak to the media.

The adviser added that Widodo could still decide to “change his mind” on the fuel price hike at the last minute, according to Reuters.

Widodo plans to provide the poorest families with 300,000 rupiah per quarter through the first quarter of 2016, in an effort to offset the higher cost of fuel, and that Widodo will weigh hiking fuel prices again during the fourth quarter of 2015, the adviser told Reuters.

The Indonesian government is expecting to save around 156 trillion rupiah ($12.76 billion) next year in fuel subsidy costs, the adviser told Reuters.

The money the government saves would be used to boost spending on infrastructure, agriculture, education, and health projects, Reuters reported, citing several advisers.

Source: Reuters