Market Report

Industrial evolution

by Sarina Lesmina / Mar 13, 2019

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Amid increasing regional backlash against China’s Belt and Road Initiative, the Indonesian government is attracting investment through a unique government-endorsed B2B model. It is set up as win-win situation and differs from typical government-to-government (G2G) project financing. In this scheme, the state does not offer investment, guarantee or incur sovereign-level debts, and will only get involved in facilitation (for example, licensing process, advisory, issues with regional governments). Hence, the setup is like B2B but with the government’s non-monetary assistance. This relieves the burden on government and state-owned-enterprise financials.

Rising FDI from China
While Japan has been a long-term source of foreign direct investment into the archipelago, China is quickly catching up. From a base of virtually zero, it began accelerating its investment in Indonesia in 2015 and is now the fourth-largest source of overseas funds. China’s investment could even be understated, as some transactions may have come via Singapore through special-purpose vehicles. Currently, Indonesia only makes up about 3% of China’s FDI, albeit from a low base of 0.4% in 2012.

Breaking away from just commodities
While President Jokowi’s infra push over the past five years has opened up opportunities in previously inaccessible markets, the readiness of the supply chain is critical as Indonesia needs to reduce its reliance on imports and increase competitiveness. The government has stated five non-commodity priority sectors (auto, textile, electronics, chemicals and food and beverage) to expand exports and create jobs, which we believe will steer the nation towards sustainable long-term growth.

Shifting focus to soft infra
Better road networks have allowed manufacturers to set up bases in low-wage provinces. However, this has not ensured competiveness as labour laws remain strict, with high severance payouts. While amending the laws would be ideal, as in the rest of the world, it is difficult. Instead, the government plans to improve labour quality and support soft infra through better fiscal incentives and reducing counter-productive policies.

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