Policy Review: Time to Prioritize Manufacturing Sector

President Director of Bank Mandiri Kartika Wiroatmodjo (left) delivers speech at recent Mandiri Investment Forum

JAKARTA (TheInsiderStories) – It is not difficult to see that our manufacturing sector has yet to find its way to a top priority policy of the Joko Widodo government. Just look at the agenda of the President. How many times has the President officiated at a new manufacturing or industrial facility over the past year or so?

It is fair to say that the President’s agenda is more focused on officiating infrastructure projects than on manufacturing or industry. This could send a wrong signal, that the manufacturing or industrial sector is yet to become a ‘top of mind’ or priority of the President.  

Indeed, the government has headed in the right direction by intensively developing infrastructure, a base that will provide a strong foundation for the country’s economy over the long-run. Sustained infrastructure support will help the whole economy to move forward; efficient infrastructure will improve the mobility of goods and people.

However, the infrastructure has to be supported by manufacturing sector, in particular by export-oriented manufacturing. Infrastructure and manufacturing sectors have to go hand-in-hand. Boosting the manufacturing sector can help drive the country’s economy, which has been recording growth below the government’s target over in recent years.

In term of contribution to the growth, the manufacturing sector contributed 0.91 per cent to total economic growth of 5.07 per cent in 2017, Statistics Indonesia data shows. The other contributors are the construction sector, contributing 0.67 per cent, trade 0.59 per cent, agriculture 0.49 per cent and others 2.41 per cent. It is clear that manufacturing remains the biggest economic growth source.

However, the contribution of manufacturing or processing industries has declined over the past few years, falling from 1.01 percent in 2014, to 0.94 percent in 2015, and 0.92 per cent in 2016.

In term of growth, the manufacturing sector recorded growth between 4 to 5 per cent in the past two years. On a quarterly base, the manufacturing sector recorded growth of 4.46 per cent in the fourth quarter of 2017, compared to 4.85 per cent in the third, 3.5 per cent in second and 4.28 per cent in first quarter.

In 2016, the manufacturing sector also showed a similar growth trend, growing by 4.68 per cent the first quarter, 4.62 per cent in the second, 4.47 per cent in the third and 3.28 per cent in the fourth quarter.

Of the manufacturing sector, food and beverages showed significant growth in the fourth quarter of 2017, to 13.76 per cent, compared to 7.53 per cent for the same quarter in 2016. Basic metal industry also picked up to record growth of 7.05 per cent in the fourth quarter, after recording negative growth of 0.2 per cent in the fourth quarter of 2016, driven by the development of smelters.

Based on Statistics Indonesia data, Indonesia’s processing industry exports reached US$125 billion, representing 76 per cent of Indonesia’s total exports for the year. The manufacturing sector came to the rescue, as prices of commodity products were still relatively modest in the first half last year.

The manufacturing sector clearly shows sign of recovery, as shown by full-year data. However, Indonesia still has more room to accelerate manufacturing sector growth. Economists and industry players also believe that manufacturing can be further stimulated with more affirmative policies.

President Director of PT Bank Mandiri Tbk (IDX: BMRI) Kartika Wiroatmodjo said that Indonesia can further expand its growth if the government boosts the manufacturing sector by providing more incentives. Banks, he said, are ready to support the sector by providing more credit to manufacturing. Bank credit was dominated by infrastructure last year.

Industry players have said that one of problems encountered by the manufacturing sector trying to expand in Indonesia is the lack of support of utilities and infrastructure. In some cases, companies want to set up a new factory, power generation was insufficient.

In other cases, manufacturers face higher gas prices, which makes them less competitive compared to their peers in other Southeast Asian countries.

PT Unilever Tbk (IDX: UNVR) CFO Paul Polman says the government needs to support manufacturers’ plan to expand, including by providing required infrastructure and tax incentives. He cited the case of the company’s plan to develop an oleochemical plant in Sei Mangke, in North Sumatra. At the same time the reality is that there is no efficient transportation from Sei Mangke to Kuala Tanjung, the nearest port.

The government, together with industry players, needs to sit down together to address hurdles being encountered and find a way out. By boosting the manufacturing sector, Indonesia will have a better chance to accelerate growth.

Email: roffien@theinsiderstories.com