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CastleAsia
specializes in market entry strategies and solutions. With more than 25
years of experience in Indonesia, CastleAsia is the leader in analyzing
the risk and rewards of the Indonesian market and advising companies
on their best possible options.
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Corporate Briefing
by
James Castle
CastleAsia
USINDO FORUM, Wednesday, January 24,
2007
Washington, DC.
Mr. Castle, a veteran business consultant in
Jakarta and member of the USINDO Board of Advisors, began his briefing by
observing that Indonesia "actually is in a pretty good place" insofar as
business conditions are concerned. Specifically with regard to the
U.S., he continued that there are "so many important interactions between
the United States and Indonesia." Nonetheless, "things can go wrong
when there are differing priorities and perceptions" and business relations
and politics in Indonesia cannot be separated as in most countries.
His assessment of the
Indonesian economy in January 2006 was at the "outer edge of the rosy
spectacle" because there was high inflation, widespread hardship was
expected from fuel price increases and subsidy cuts, consumer confidence
plummeted, reforms were going slowly, and the government’s infrastructure
investment campaign failed to produce results. Today, there is high
confidence in the economic trends:
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GDP growth in 2006 turned out to be a
respectable 5.5% and is forecast to increase in 2007 to 6.2% (above the
ASEAN norm).
Inflation was 6.6% in 2006 and is expected
to decline to 5.8% this year.
Real interest rates are declining from
9.0% to a projected 7.5%.
Foreign exchange reserves are increasing.
The trade balance is up 37% from $28
billion in 2005 to $38 billion at the end of 2006.
The Rupiah is stable against the U.S.
dollar, mainly because the dollar is weakening.
The Jakarta Stock Exchange (JSE) is up
sharply for the year.
Cash crop demand and prices increased and
are expected to remain high.
On the somewhat unfavorable
side, government spending is expected to increase 10.5% in 2007, as compared
to 13.6% last year, because of increased vigilance and financial controls on
disbursements resulting from the anti-corruption campaign. The minimum
wage is expected to increase 10% in 2007 but labor market rigidities
continue and no relief is in sight. Consumer confidence, having
recovered in the second half of 2006, dropped in December because of the
government’s "botched handling" of the rice supply and to prohibit needed
imports to reduce prices for poorer consumers. There is also an
extended drought in some areas that will depress rice supply and increase
the need for imports.
Castle’s conclusion is that
government policies should be attuned to what is best for the consumer, as
these are what will benefit business as well. This rubric applies to
the rice situation as well as other forms of protectionism which are
outmoded and counter-productive in economic terms. Despite these
disabilities only an "unknown circumstance" such as a massive avian flu
outbreak could knock Indonesian growth off track. Even an economic
slowdown in the U.S. would not affect Indonesia significantly because the
Indonesian economy increasingly depends on intra-Asian trade and investment.
On the political side, Castle
observed that President Susilo Bambang Yudhoyono is still way ahead in the
polls and there is no viable alternative candidate, even Vice President
Kalla according to the Jakarta elite "gossip mill," although one could
emerge. Local elections in 2006-07, and especially the Jakarta
elections later this year, are beginning to have a profound effect on the
character of politics.
Castle spoke at some length
on the impact of regional autonomy which in his view portends an "historic"
redistribution of wealth from the center (Jakarta and the central
government) to the provinces. As one indicator, 75% of bank deposits
and credit were centered in Jakarta, meaning 10% of the population
controlled 75% of the wealth. Jakarta is now responsible for only 45%
of deposits and credit, thus signifying a shift of resources to the regions
for investment and trade.
Overall, Indonesians under devolusi stand to keep more of the wealth they generate and the
political consequences of this shift will be seen more and more by the
Jakarta elite. In this regard, great enthusiasm has been shown in
local elections for changes in the political party system and old-line
personalities. The regions "are playing catch-up" on development which
will propel national growth in the future.
Castle concluded his formal talk with
comments on legislative reform which in his view merited a failing grade,
although damaging actions have been avoided. The government has turned
in a middling performance on regulatory reform and efforts to stimulate
infrastructure investment are still not bearing fruit. The "core"
reformers in the government’s economic team are pursuing a conservative
strategy and have targeted certain sectors for improvement, such as the Tax
Authority. Higher quality officials are moving into responsible
positions in key economic agencies, whether in advisory or formal roles, but
civil service and other regulations still impede change.
Judicial reform, Castle observed, is
hard to do and is still suffering from the Soeharto period which "hollowed
out" state institutions to serve the government’s ends and personal
interests.
Discussion
During the
question-and-answer period, Castle predicted that there will be "more
intense jockeying" among political factions in and outside Golkar. The
2009 elections, as in 2004, are likely to be in two stages: parliamentary (DPR)
elections early in the year and a separate presidential election later.
As political intrigue heats up, it is therefore important that the SBY
administration take real action this year on reforms affecting the business
sector and civil service. Castle speculated that the DPR might produce
tax law changes and a new investment law this year, but not labor law
improvements.
On the relationship between
economic growth and employment, Castle said that there is no direct
correlation between the growth level and job creation. While 5.5% GDP
growth creates "enough stimulus" to increase per capital income slowly,
hard-core unemployment remains at about 10%. The key to employment
generation seems to be in regional growth, while "globalization" impacts are
small in affecting the broad Indonesian economy outside Jakarta. That
said, there is still potential for social tension over employment concerns
and it will be important for local governments to improve their delivery of
services and leadership in economic development.
The regulatory structure to
mobilize investment in infrastructure development is inadequate. Until
there are improvements, we will not see much U.S. interest or real
investment in this sector. The "new Asian powers," however, will play
a greater role as they are "more comfortable" with "relationship investing"
rather than with "contractual investing." This "Asian style" of
investing will take the lead in areas that U.S. investors won’t, as it has
differing expectations and faces lower hurdles. U.S. investment will
continue to focus on mining, oil and gas, and financial services with the
caveat that regulatory and legal issues are retarding new participation in
the first two sectors.
Military reform is moving
faster than civil service transformation. Strong armed forces (TNI)
leadership is promoting reform and the Police are doing better under
National Police commander General Sutanto. There are improved popular
perceptions of Police performance.
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PT
Jasa Cita, Wisma Standard Chartered Bank, Floor 15A, Jl. Jend.
Sudirman Kav. 33A, Jakarta 10220, Indonesia.
Phone (62-21) 572 7321 Fax. (62-21) 572 7329 Email:
castle@castleasia.com