JAKARTA (TheInsiderStories) – Indonesia is still optimistic that it will be able to attract more investment in the last half year of 2019, after the rising political tensions of  simultaneous legislative and presidential elections on April 17, 2019. Another issue is Indonesia’ economy also faced with ongoing trade war between the country’ two biggest trading partners, China and the United States (US).

The Indonesian government needs to find the right solution to address external and internal issues which have dragged down the Rupiah exchange rate to the lowest level since the 1998 financial crisis. Let us look at Indonesia’s macroeconomic indicators below

The Joko Widodo’ government mention that Indonesia’ economy only grow 5.17 percent in 2019 State Budget. Is lower than that of the 2018 State Budget of 5.4 percent.

As compared to the G20 countries, Indonesia’ economic growth is the highest percentage at 5 percent. China and India still record economic growth above Indonesia, namely China 6.4 percent and India around 7.1 percent.

Meanwhile, inflation is expected to reach 3.5 percent +/- 1 percent and the Rupiah exchange rate is assumed to reach an average of Rp14,500 per US dollar, or far higher than that in the 2018 State Budget of Rp13,500 over the Greenback.

Economist at PT Bank Permata Tbk (IDX: BNLI), Josua Pardede said, during the four years of Widodo – Jusuf Kalla’ administration, the government has been serious about maintaining inflation. One breakthrough project was building is region connectivity through infrastructure. It made easier the flow of goods to be transferred from Java to other regions, including to eastern Indonesia

The country is expected to experience a deficit of 1.84 percent against its gross domestic product (GDP) in 2019, with estimated revenues of Rp2,142 trillion (US$149.79 billion) and expenditure of Rp2,439 trillion, up from Rp2.204 trillion in 2018. Tax revenue is expected to reach Rp1,781 trillion compared to Rp1,609 trillion in the previous year

Indonesia’ foreign exchange reserves on a fairly high level of $124.5 billion at the end of March 2019 or an increase compared to the position of foreign exchange reserves at the end of 2019 of $123.3 billion. This position of foreign exchange reserves is equivalent to 7 months import financing and government foreign of debt payments.

At the different place, Thomas Trikasih Lembong, head of the National Investment Coordinating Board, has expressed optimism that investment would rebound after the April elections, owing to high market expectation on stability and continuity. The agency has set a target of investment at Rp792.3 trillion in 2019, higher than Rp721.3 trillion in 2018. The target has covered 55 percent of foreign investment and 45 percent of domestic investment.

In 2018, the realization of investment in Indonesia reached Rp712.3 trillion, accounting for 94.3 percent of the target of Rp765 trillion in the medium-term national development plan.

He noted, in the fiscal year 2018, the country failed to achieve the target, because the investment only reached 94.3 percent of the target. Compared to the previous year, the investment in 2018 rose 4.1 percent, with domestic investment amounting to Rp328.6 trillion and foreign investment amounting to Rp392.7 trillion, said Lembong

The investment mostly went to West Java, Jakarta, Central Java, Banten, and East Java. The domestic investment represented a 25.3 percent increase compared to the previous year. However, the foreign investment in 2018 fell 8.8 percent compared to a year earlier.

The five largest foreign investors in Indonesia are Singapore ($9.2 billion or 31.4 percent of the total FDI), Japan ($4.9 billion, 16.7 percent), China ($2.4 billion, 8.2 percent), Hong Kong ($2.0 billion, 6.8 percent), and Malaysia ($1.8 billion, 6.2 percent).

Investors`confidence has shown that Indonesia is still considered a potential country for manufacturing and production for both the domestic and export markets.

US – China Trade War

Furthermore, the ongoing trade war between US and China, which has stemmed from President Donald Trump’ protectionist policies, has begun to take its toll on emerging economies and Indonesia has not been exempt. For every 1 percent decline in China’ economy, Indonesia’ economic growth is hampered by 0.11 percent, while the same decline in the US economy will negatively impact Indonesia’ economic growth by 0.05 percent .

Since July 2018, the two countries have imposed import duty increases on goods worth $16 billion and $34 billion, respectively. Furthermore, in September 2018, Trump slapped another 10 percent increased in import duties on Chinese products worth $200 billion USD which will be increased to 25 percent in January 2019. The move was retaliated by China by increasing its import duty on US products worth $60 billion.

To make matters worse, China is not the only target of Trump’ hawkish trade policy. Similar steps were also taken by the US administration against its other major trading partners, including Indonesia, to curb its growing trade deficit.

Turkey, Argentine, and South Africa are among those countries, which have fallen victim to Trump’s protectionism. The three countries have suffered currency depreciation and capital outflows which have compelled their central banks to drastically raise their benchmark rates.

For this reason, Indonesia’ Finance ministry warned that the country’ GDP growth may fall even further to 5.15 percent, if global economic uncertainty continues well into 2019 and thus could hinder Indonesia’s economic growth trajectory. This risk has been somewhat stemmed by Bank Indonesia’ (BI) hawkish stance in order to prevent further Rupiah depreciation and capital outflows.

The Indonesian government expects BI to increase its benchmark rate again in 2019 to keep pace with the increase in the Federal Reserves funds rate (FFR). As an increase in the Fed’ funding rate will cause capital outflows from the country, this move will cause bank interest rates to rise which could inhibit loan growth and lead to a spike in non-performing loans that will eventually hamper economic growth.

On the internal side, Indonesia’ economy is plagued by twin deficits, like trade and current account deficits. In 2017, the country’ current account deficit reached $17.3 billion (-1.7 percent of GDP). This deficit, fortunately, can be compensated for by foreign capital inflows reaching $29.2 billion. Thus, the country still recorded a balance of payment surplus of $11.84 billion USD.

Trade Balance (US$ Billion)

  2014

2015

2016

2017

2018

Eksport

176,29

150,3

144,43

168,72

180,06

Import

178,18

142,70

135,50

156,88

188,63

Surplus/Deficit

-1,89

7,6

8,93

11,84

-8,57

Data Compiled from Various Sources

The situation was rather different in 2018 following the increase in the Fed funding rate, investors now prefer to place their money in the US financial market as it is considered to be more attractive and stable than those of emerging economies. This can be seen from the foreign capital inflows in Semester I of 2018 which only reached $6.5 billion.

Additionally, the current account deficit in the first semester of 2018 soared to $13.7 billion, thus Indonesia’ balance of payments suffered a deficit of $8.2 billion. Another internal challenge facing Indonesia’ economy is the trade deficit. As of August 2018, Indonesia recorded a trade deficit of $4.09 billion.

Indonesia’ growing deficit is due to the country’s mounting import levels over the last decade. Indonesia’s imports during January to August 2018 grew 24.52 percent to $124.18 billion from $99.73 billion in the previous year. Oil and gas account for the majority of Indonesia’s imports with other significant imports being machinery and mechanical planes, automotive, organic chemical material, iron, steel and plastic.

The Indonesian government recently imposed an increase in income tax of up to 10 percent on 1,147 imported consumer goods, including cosmetics, furniture, clothing, electronics, automotives, and food products, in a bid to curb imports. This was stipulated in Finance Minister Regulation Number 110 Year 2018.

In addition, the Indonesian government has also halted a number of infrastructure projects, including those deemed of national strategic importance, such as 35 GW power projects, which relied heavily on imported machinery.

Overall, Indonesia’ economic prospects in 2019 are rather a mixed bag. In the short term, economic growth is expected to be modest given the Rupiah depreciation, capital outflows, the widening of the trade and current account deficits as well as the impact of the looming presidential elections.

Investors usually adopt a wait-and-see approach ahead of Indonesia’ presidential elections. For this reason, the Indonesian government will continue to rely on domestic investment and household spending to drive the country’s economy in 2019.

In the longer term, however, Indonesia’ current economic situation may well be the right time for investors to invest in the country, especially in its financial instruments. Indonesian stocks and securities are highly undervalued amid the Rupiah depreciation and thus present a very interesting opportunity for investment.

by Ami Pramitasari, Analyst of TIS Intelligence Team