National Economy Still Vulnerable to External Turmoil

KOMPAS/WISNU WIDIANTORO

Chairman of the Indonesian Hotels and Restaurants Association (PHRI) Hariyadi B. Sukamdani; Chairman of the Association of Indonesian Food and Beverage Producers (Gapmmi) Andhi S. Lukman; President Director of PT Kalbe Farma, Vidjongtius; Citi Indonesia Economist Helmi Arman; Lecturer of University of Indonesia Faisal Basri; Deputy Chief Editor of Kompas daily Ninuk Mardiana Pambudy; Bank Indonesia (BI) Senior Deputy Governor Mirza Adityaswara; Director of BI Economic and Monetary Policy Department, Reza Anglingkusumo and Chief Editor of Kompas daily Budiman Tanuredjo attend the Kompas daily discussion with the theme "Anticipating and Facing Volatile Economic Condition" at the daily’s editorial office, Jakarta, Wednesday (6/6/2018).

JAKARTA, KOMPAS – The Indonesian economy, at least in the short-medium term, remains vulnerable to external turmoil as the national economic structure still relies heavily on foreign financing. Therefore, promoting export-oriented industries will become an effective solution to solve the problem.

The Kompas daily held a panel discussion on the economy in Jakarta on Wednesday titled "Anticipating and Facing Volatile Economic Condition". The discussion was led by Faisal Basri, a University of Indonesia lecturer.

The speakers in the discussion included Bank Indonesia (BI) senior deputy governor Mirza Adityaswara, Indonesian Food and Beverage Producers Association (Gapmmi) chairman Adhi S. Lukman, PT Kalbe Farma president director Vidjongtius, Indonesian Hotel and Restaurant Association (PHRI) chairman Hariyadi B. Sukamdani and Citi Indonesia economist Helmi Arman.

Indonesia is the world\'s largest archipelagic country and has the fourth-largest population, making it necessary for it to carry out massive development. For this, Indonesia needs a lot of funds.

The problem is that the country has limited domestic funding sources. Local fund sources mainly comprise taxes, pension funds, banking funds, insurance funds and funds from other financial institutions. As a consequence, Indonesia relies on foreign funding sources to finance development.

Based on BI data, Indonesia\'s foreign debt reached US$357.5 billion at the end of January 2018, with an annual growth of 10.3 percent. The debt consists of government and central bank debts of $183.4 billion and private debts of $174.2 billion. About 40 percent of government bonds (SBN) are held by foreign investors.

As a consequence, the government, state-owned companies and private companies need to pay off foreign debts every year. This requires a large amount of US dollars to pay interest and installments on principal.

The next problem is that Indonesia has a foreign exchange deficit. This can be seen from the country’s current account, which has been in deficit since 2012. The deficit is covered only by foreign portfolio investments, which can leave the country at any time. When the supply of US dollars in the local foreign exchange market decreases, the central bank has to use its foreign exchange reserves.

"It is undeniable that the huge demand for foreign financing makes the national economy vulnerable to changes in global monetary policy," Mirza said. The US interest rate policy, for example, determines the availability of foreign financing for Indonesia. Therefore, structural reform is a necessity to improve the condition of the Indonesian economy. Structural reform requires support from both the central and regional governments.

"Structural reform cannot be separated from political reform. This is very important if we want to fix the country’s economic structure," Mirza added.

New model

Meanwhile, Helmi said Indonesia should a seek new economic growth model, because the old model, which relied on financing sources from abroad, required Indonesia to pay foreign debts, which continued to increase.

"With the increase in foreign portfolio investments, the obligation to pay interest and dividends will also be greater. In the medium term, if this structural problem is not addressed, the rupiah will continue to weaken. BI’s task is limited to stabilizing the rupiah," said Helmi.

The weakness of the structure of the foreign exchange market in Indonesia, according to Helmi, is due to structural weakness in the real sector. The condition is not sustainable. As a result, corporate demand for foreign currency can be fulfilled mostly by the inflow of foreign portfolio investment. In turn, investors will withdraw dividends from the country in the form of US dollars.

"In the next five years, there will be a shortage of foreign exchange if we want to push up domestic demand by 5 percent. This shortage cannot be met only by revenues from tourism and the basic metals industry. We need direct investment, which is export oriented," said Helmi.

In fact, Indonesia has a number of sectors that have the potential to generate foreign exchange, including tourism and the manufacturing industry.

Hariyadi said Indonesia\'s tourism lagged behind that of Thailand, Malaysia and Singapore. In fact, the potential is much greater. He acknowledged that the government had made a number of breakthroughs. However, the classic problems, such as weak infrastructure and a lack of tourism promotion, still hamper the programs.

Meanwhile, the manufacturing industry, which has the potential to bring in foreign exchange through exports, is still largely dependent on imported raw materials. However, exports are difficult to promote because they are not competitive. This has occurred because the trade and industry strategy is not conducive enough. The same condition also occurs in the food and beverage industry and the pharmaceutical industry. The industries still mostly rely on imported raw materials because domestic sources of the required raw materials are limited.

Adhi added that a number of government policies, such as sectoral regulations, continued to burden business players. In order to further promote the country’s exports, the government needs to prepare its strategy more aggressively. "The government’s role in opening export markets is quite important. It needs persistence. It cannot be done by the industry alone," said Vidjongtius.

(LAS)