Indonesia’s Economy Heads into Turbulence

Indonesian President Joko Widodo is starting to face jarring setbacks on the economic front, starting with a 20,000-member labor rally slated for Feb. 6 in front of the Presidential Palace and the Supreme Court to protest layoffs and urge the government to revoke its recently introduced formula for setting minimum wages.

However, there seems little satisfaction for the labor unions, given mass layoffs by companies including Japanese electronics giants PT Panasonic Lighting and PT Toshiba Indonesia, which adds pressure on the government to swiftly implement stimulus packages to help fight the ongoing economic slowdown. 2015 saw the slowest growth since 2009 in the depth of the global financial crisis.

Jokowi, as the President is known, clearly recognizes that Indonesia’s future is no longer tied to the commodities that have powered growth for the past half century and that manufacturing, built on a young and populous work force, will have to take over. But it is late in the game, and some of the multinationals that have joined the Indonesian economy are already flagging as world growth slows and as the region’s powerhouse – China – starts to lose its magic.

The president in the past five months has announced eight separate economic packages to try to revive domestic activity, including spending on public infrastructure. The president is also pushing regulatory reform including cutting back on the so-called “negative list” of off-limit industries closed to foreign investment.

But, hamstrung by the global slowdown, Panasonic Lighting, with its facilities in Cikarang, West Java province and Pasuruan, East Java province, and PT Toshiba Indonesia, also in Cikarang have announced layoff plans, according to the Confederation of Indonesian Worker Unions (KSPI), one of Indonesia’s influential labor umbrella organizations.

In addition to the two Japanese companies, the confederation said two South Korean electronics companies also shut down operations in January, laying off 1,700 workers.

That was in addition to US car manufacturer Ford’s announcement that it will cease operations in Indonesia from the second half of this year, a decision that came as a shock as it had only began selling the new Ford Everest since the first half of 2015.

"Today we are announcing the difficult business decision to withdraw our operations from Indonesia in the second half of this year. This includes closing Ford dealerships and official imports," Ford Indonesia managing director Bagus Susanto said in a press release at end of January.

Ford Indonesia said they will maintain service and uphold guarantees for all existing vehicles in the country.

However, lack of interest from investors still haunts the country despite Jokowi’s announcement of economic deregulation policies aimed to boost investment.

“The government is trying to remove obstacles so as to increase industry competitiveness through de-bureaucratization and [increasing] certainty for businesses,” Jokowi said, adding that the government would focus on three areas: boosting industry competitiveness, accelerating infrastructure projects and increasing investment in the property sector.

Jokowi said he also planned to review 89 regulations to avoid the duplication of business licensing procedures.

“We also drafted 17 government regulations and presidential regulations, two presidential instructions, 63 ministerial regulations and five other regulations,” the President was quoted as saying by local media end of last year.

A floundering economy and initial missteps have bogged down Joko Widodo’s first year in office, denting confidence in the man once hailed as the country’s new hope. The economy grew only at 4.7 per cent in the second quarter, the slowest pace in six years.

Other massive project plans seem to be haunted by lack of coordination and trust by the government. There is no better example of the bureaucratic mess that dogs the country than the planned high-speed railway from Jakarta to Bandung that the Chinese won last year, taking it out from under the noses of the Japanese. A week after he personally broke ground, construction has been on hold over administrative issues, including a lack of a permit from the Ministry of Transport.

The director of railways at the Ministry of Transport, Herman Dwiatmoko, said to obtain a construction permit, PT Kereta Cepat Indonesia China (KCIC), the holding company that builds the Rp70 trillion (US$5.1 billion) line, must have a business license for public railway infrastructure.

“The construction permit cannot be obtained unless they own a business license,” he told journalists.

Herman said PT KCIC must prepare paperwork including a letter of application, technical drawings, field data, a timetable, technical specifications and an analysis of the environmental impact.

Herman said a number of documents submitted by PT KCIC have not been evaluated because they are written in Chinese and English, instead of Indonesian.

Environmental analysts also warned that areas designated for the railway line are prone to earthquakes and that the government should carefully consider the impact in an event of a disaster.

Transportation Minister Ignasisus Jonan, however, sought to reassure lenders, saying that his ministry is taking extra precautions since the Chinese loan has a tenure of 50 years and the government wants all assets to be in good condition when they are eventually handed over to the government.

The line will span 42 kilometers from Jakarta to Bandung and is expected to be completed by 2019, at the time when Jokowi is expected to be seeking re-election.

The train is expected to run 350 kilometers per hour, taking 36 minutes to get from Jakarta to Bandung with four stops along the way.

Jokowi was sworn in as Indonesia’s president on October 20, 2014, amid high expectations for reform and change, but controversial decisions during his first months in office left many disappointed although a cabinet change in August and stronger actions since that time have allayed some fears.

Nonetheless, he is hampered by having come to power when the Indonesian economy was experiencing a slowdown because of sluggish external demand for commodities. In contrast, his predecessor Susilo Bambang Yudhoyono oversaw an economy boosted by a commodity boom, driven by China’s strong growth.