Strengthening Economic Resilience Must be First Step

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Indonesia faces a number of economic challenges, such as uncertainty in the global economy. To cope with these, the country needs to strengthen the resilience of its domestic economy.

JAKARTA, KOMPAS — Resilience is needed to cope with a slowdown in the global economy that is expected to continue this year. Economic resilience should be strengthened to resolve problems that may affect Indonesia.

Indonesia currently faces a number of problems, such as a current account deficit and exports that still rely heavily on raw commodities. The country must become more attractive for investment. The president and vice president elected through the general election on Wednesday should be able to resolve the problems.

In its report released in April, the International Monetary Fund (IMF) estimates that the global economy will grow by 3.3 percent this year, while the World Bank forecast global economic growth of only 2.9 percent in 2019. The estimates were revised from 3.5 percent projected by the IMF in January 2019 and 3 percent by the World Bank in 2018.

The chief economist of state-owned Bank Mandiri, Andry Asmoro, said Indonesia had to improve its competitiveness to attract investment. Based on data from the Investment Coordinating Board (BKPM), realized investment reached Rp 721.3 trillion (about US$50.80 billion at the current exchange rate) in 2018. The amount accounted for 94.3 percent of the government’s investment target of Rp 765 trillion in the year.

The 2018 Global Competitiveness Report published by the World Economic Forum (WEF) ranks Indonesia 45th of 140 countries. According to Andry, Indonesia must push the manufacturing industries and improve human resources to meet the needs of the industrial sector.

"The growth of the world economy will slow down and this has been predicted since last year. The government must indeed prepare strategic measures, among others by synchronizing the investment policies of the central and local government," Andry said.

According to Andry, the government has implemented a number of good initiatives. However, investors still have the same complaint, namely the lack of coordination between central and regional government policies. "Increasing competitiveness is now far more important than ever so that Indonesia will be more stable in withstanding the volatility of the global economy," he said.

The chief economist at Bank Central Asia (BCA), David Sumual, said improving the ease of doing business through a simplification of bureaucracy and consistency of policies should be the priority of the president-elect. As the global pressure would be more difficult to control and predict, internal reform was the key in facing the situation. "We cannot depend on global demand and supply. Investment must be increased. The key is a good bureaucracy and consistent policy," he said.

In the 2019 Ease of Doing Business issued by the World Bank, Indonesia ranks 73rd of 190 countries with a score of 67.96.

David said the country should no longer rely on the manufacturing industry to support the economy. The trends in several countries was a shift to the service industry, because many types of work in the manufacturing industry have been replaced by automation. Therefore, a creative economy is more important and should be further developed, and one way to do this is through investment in human resources.

Stability

Febrio Nathan Kacaribu, a lecturer at the Faculty of Economics and Business of University of Indonesia, said the ease of doing business was a crucial indicator, which needed to be improved by the new government of the president-elect. "Indonesia\'s economic growth will still depend on investment. To maintain economic stability, annual investment growth must be above 7 percent, "he said.

According to Febrio, although global economic growth is projected to decline, the economic growth forecast in ASEAN countries remains near 5 percent. With the relatively high GDP growth estimate, foreign capital continues to flow into countries of the region, including Indonesia.

In 2018, Indonesia\'s gross domestic product (GDP) grew by 5.17 percent. This year, it is targeted to grow 5.3 percent. If the capital inflows continue, Indonesia\'s foreign exchange reserves could reach US$130 billion by August 2019.

Such conditions would give Bank Indonesia some room to start lowering its benchmark interest rate in order to encourage domestic consumption. At the end of March 2019, BI\'s benchmark interest rate was 6 percent, while exchange reserves amounted to $124.539 billion.

PT Bank Danamon Indonesia Tbk economist Dian Ayu Yustina said a shift in the orientation of the national economy from one based on commodities to one based on manufacturing should be a priority in the next five years.

The development of the manufacturing sector could add value to domestic industries and help replace imported intermediate goods or materials. In boosting the activity of the manufacturing sector, the government institutions in charge of trade and industry had to work together, Dian added. Coordination was needed to attract export-oriented investment and boost exports to new markets.

Therefore, the first step to be taken was to map the manufacturing sector in more detail. "The new government must accelerate the integration between the infrastructure that has been built and the industrial areas. Good and mature planning will become an attraction for investors, because it can improve business certainty," he said.

Domestic economy

The executive director of the Center of Reform on Economics (Core) Indonesia, Mohammad Faisal, believes the strategy of strengthening the domestic economy must be prioritized, given the uncertain global economic situation.

The national economy is quite large, making Indonesia more resistant to global pressure. "As our economy is large and even bigger than that of Singapore, it should not depend on the global [economy]," Faisal said.

Strengthening the domestic economy could be achieved by increasing investment competitiveness, especially in the manufacturing sector. Incentives for this should not only come from the fiscal side but also take the form of a more integrated policy mix.

Samuel Aset Manajemen economist Lana Soelistianingsih said the $540.2 million trade surplus in March 2019 had to be maintained by maximizing the use of industrial raw materials and auxiliary materials produced by local companies.

In addition, in keeping a surplus in the trade balance, the government should not only focus on the policy to reduce imports. On the other hand, export policies need a breakthrough to grow sustainably. In the context of foreign investment, according to Lana, the government has only focused on efforts to facilitate and make investors feel comfortable in Indonesia. In fact, the most important thing to attract foreign investment is the transfer of knowledge and technology. "The government needs a blueprint that forces foreign investors to transfer knowledge. As the host, we must also play on our own yard," she said. (DIM/JUD/KRN/IDR)

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