Budi Mulya: Investment opportunity in Indonesia - looking toward a
better future
Keynote speech by Mr Budi Mulya, Deputy Governor of Bank Indonesia, at the New York
Society of Security Analysts (NYSSA) seminar, New York, 15 April 2010.
* * *
Let us start by expressing our gratefulness to the God almighty. I'm very proud and honor to
be here today and have all the opportunity to share with you. For that reason, let me deliver
my sincere gratitude to my fellows NYSSA, speakers, my colleagues in Indonesian Embassy
and Bank Indonesia Representative Office, as well as to you all of being here today and
make this happen.
Distinguished guest, ladies and gentlemen
Indonesia is a rich country and proven to earn a strategic position and potentials across the
region and the world. Shares borders with Malaysia, Papua New Guinea, East Timor,
Singapore, Malaysia, Philippines, and Australia, Indonesia is a big archipelago with
17,508 islands scattered over the length of 741,050 sq mi or almost at the same distance
between California to Maine. Indonesia's size, tropical climate and archipelagic geography
offer rich and extensive natural resources and support the world's second highest level of
biodiversity right after Brazil. Indonesia also records as the world's fourth most
populous country as well as a huge consumption base as the population reaches around
231 million people by 2009 and is expected to grow to almost 300 million by 2050. Almost
45 percent from almost 114 million workforces are in agriculture sector, with the remaining
employed in the expanding manufacturing industry, mining, and services.
Indonesia is also the largest economy in Southeast Asia and a member of the G-20. In 2009,
Indonesia's nominal GDP reach almost US$515 billion with nominal per capita GDP was
US$2,590, and per capita GDP PPP was US$4,150. All together, the tertiary sector is the
economy largest and accounts for about 45% of GDP proving the strong character of a
domestic driven economy. Major industries include petroleum and natural gas, textiles,
apparel, and mining while major agricultural products include palm oil, rice, tea, coffee,
spices, and rubber. Indonesia is also an open economy with a sizable trade surplus in 2009,
consisting of export revenues of almost US$120 billion and import expenditure of about
US$84 billion with Japan, United States, Singapore, and China as our main trading partners.
Nonetheless the story is not always wonderful. After enjoying a period of high economic
growth, the 1997-98 financial crises brought out structural consequences in the domestic
financial system and governance, damping investment, and private sector development. As a
result, the average annual growth 4-5% since the 1997-98 crises is not sufficient to
significantly increase per capita income, accommodate the increasing number of new
entrants in the labor market, and reduce poverty. Similarly, the current investment share of
about 25% of GDP is still too far to achieve the pre-crisis growth average of 7-8% when
investment shares were more than 30%.
On that account, creating new jobs by encouraging investment is very essential for us. This
is a daunting challenge, given the many structural impediments concerning the macro
fundamentals, governance and institutions, and infrastructure in the economy. All of these
lessons emphasize us the urgent need for an improvement in the overall investment climate.
Measures have been taken and significant progress has been achieved in the last five years.
World Investment Prospect
The recent 2009-2011, UNCTAD, for instance, reported
Indonesia ranks number 9 of 15 countries as the most prospective investment destination by
foreign investors. A number of key factors of Indonesia's attractiveness for investments
include growth prospects and market size, access to natural resources, and relatively
competitive labor costs.
Distinguished guest, ladies and gentlemen
Today, Indonesia has emerged a very different country compared with a decade ago. It has
embarked upon a far-reaching institutional transformation and has become one of the
region's most vibrant democracies. The first stage of this transformation, from 1998 to 2003,
was a period of political and economic change, characterized by democratization and
decentralization of government. Indonesia's almost 500 provincial, district and city
governments now undertake nearly 40 percent of public spending. Despite obstacles it
brought, decentralization contributed to the consoling of regional conflicts and promotes
political stability as well as offers an emerging more vibrant spatial geographic distribution of
economic development throughout the country. The second stage, from 2004 was a period of
democratic institutions consolidation as well as returning to political and macroeconomic
stability, most notable in Indonesia's first direct presidential elections and in its debt levels
falling to below 35% of GDP1.
Among others, the Government has taken steps to address different aspects of the
investment climate through policy reform packages covering key areas of concern of private
investors, such as taxes, customs, investment frameworks, and the financial sector. On the
institutional transformation, the Government is working to set up the institutional framework,
coordinating mechanisms and enhancing governance. On the provincial side, a number of
sub-national governments have undertaken major reforms of their public sector systems,
introducing among others performance-based budgeting and one-stop public services. The
legal arrangement is also directed to improve investment climate, both directly by
promulgating Investment Law No. 25 of 2007 and indirectly by imposing open capital account
through promulgating Law No. 24 of 1999. The later is set up to improve the financial
infrastructure to support capital inflows, both for direct investment and portfolios.
To enhance macroeconomic stability, government and so does the monetary authority works
hand in hand and commits to enhance fiscal and monetary discipline as well as
strengthening the financial architectures. Learning from the failure of 1997-1998 crises, our
policies were focused on enhancing policy transmission, improving financial market efficiency
through prudential practices and financial market deepening. To this point forward, the
Government was improving their capacity on fiscal budgeting, to be more specific, the
adoption of active debt and cash management. They are also fully committed to improve
fiscal sustainability by reducing debt to GDP ratio. Steps were also taken in the area of
monetary policy framework. Since 1999, Bank Indonesia was mandated to achieve single
objective of price stability, both in terms of inflation and the exchange rate and at the same
time was given independency on our policy conduct. In 2005, Bank Indonesia has fully
adopted Inflation Targeting Framework marked by the introduction of BI Rate as the policy
rate to increase the policy effectiveness in achieving the inflation target set by the
Government. In 2008, further enhancement has been done in the area of monetary policy
implementation by the introduction of overnight interbank rate as our operational target to
improve the effectiveness of the monetary policy.
Institutional reform in the financial sector has been done by improving the soundness and
efficiency of the financial market through the combination of imposing prudential practices
and enhancing market deepening. Financial sector reforms are crucial to raising Indonesia's
growth rate and enhancing the economy's resilience. In banking industry, reform is
conducted by strengthening bank's capital, introducing risk management practices and
governance, and not to mention improving supervisory capabilities. These were done by
adopting Basel core principles and promoting mergers and acquisitions. The same reforms
have conducted in the capital market, debt market, as well as non-bank financial institution.
One of the most important breakthroughs can be observed in the development of the debt
market following the issuance of marketable government bond in 2002, which is not only
useful to deepen the financial market but also significantly reduced the need for foreign
financing and thus increase the economic resiliency.
Distinguished guest, ladies and gentlemen
Strong commitment to reforms has yielded a progressive and more resilient fundamental
performance, especially in the last five years. Indonesia resumed higher levels of growth and
has re-emerged as a confident middle-income country as well as increasing regional and
global standing as the world's strongest economic performers close to those of India and
China. Indonesia's economic growth accelerated to a 10-year high and proven to be robust
during the wake of the 2008-2009 global economic crisis. Real GDP has been growing at
5 to 6 percent annually since 2002 and, in 2009 per-capita real GDP exceeded the level
reached in 1997, immediately prior to the Asian crisis. The legacy of Government's prudent
fiscal management and a strategy of fiscal consolidation have contributed to the significant
reduction in government debt levels, which are estimated to fall to 31.5% by end-2009.
Investment share to GDP is improving though is still below pre-crisis levels. In 2009,
Indonesia's was 23% of GDP, or significantly improves from 19 percent of GDP in 2002
signaling a structural improvement on the business climate. Increasing efficiency on the
institutional framework as well as strong fiscal and monetary discipline has also been able to
reduce inflation markedly and so does the exchange rate. In the financial sector, the banking
sector, which account for about 80% of the financial industry's assets, is in sound shape and
is relatively unexposed to developments in troubled financial markets elsewhere. Indonesia
has a well-developed and well-regulated banking sector and has made major advances over
the past five years in establishing a sound legal and administrative framework for the
modernization of public financial management in line with good international practice.
On the last April 2nd, 2010, OECD upgrades Country Risk Classification (CRC) ranks of
Indonesia from the previous level of 5 to 4. Indonesia was the only country of the
161 countries, given the CRC upgrade in the latest OECD committee meeting session on
April 2010. The main factor supporting the upgrades is Indonesian impressive
macroeconomic indicators as the economy is one of the most resilient amid the global
financial crises and Indonesia is one of the few countries that experienced positive economic
growth in 2009. Improvement in macroeconomic performance and economic stability is the
result of a combination of good and forward looking economic policy, ongoing structural
reforms, as well as good debt management. Prior to this upgrade, on March 12, 2010,
Standard and Poor's also upgraded Indonesia long-term foreign currency rating to BB (from
BB-) and long-term local currency rating stays at BB+. Outlook for both are "positive". The
upgrade was also observe in the rank of global competitiveness as publicized by the World
Economic Forum. On the 2009-2010 Global Competitiveness Index, Indonesia rank was
increasing to 54 from previously 72 in 2003. The upgrade would certainly put Indonesia in a
better position before its creditors in negotiating, particularly export credit creditors.
During the 2008-2009 worldwide contraction, Indonesian economy still enjoyed a positive
growth of 6.0% in 2008 and 4.5% in 2009 and held by high and inclusive growth of domestic
demand, particularly consumption. Indonesia is less exposed to external shocks than other
economies in the region as its trade share to GDP is relatively small at about 50 percent of
GDP. Inflation is moderated and achieved year-on-year increases of only 3.4% in March
2010 held by adequate supply responses and rupiah exchange rate appreciation. As a result,
the unemployment rate fell back from 11% in 2005 to 7.9% in 2009. This development
supports the fall of the poverty rate that has fallen by about one percentage point per year
since 2003 and reached 15 percent in 2009. On the external balance, balance of payments is
strong and achieved a current account surplus of US$10.5 billion and capital account surplus
of US$2.3 billion in 2009. This has contributed to a sizeable accumulation of official
international reserves, which to date approached US$71.8 billion in March 2010, providing
Indonesia with a cushion against external shocks. Strong fundamentals have been proven as
the key cushion to the adverse impact of global economic downturn and quickly revive
market risk appetite toward Indonesian asset classes. The exchange rate has been
appreciated about 24% at Rp9090 per US$ by the end of March 2010 from its weakest level
of Rp12,020 per US$ in February 2009 on the back of net foreign capital inflows. Constraint
on liquidity following the recent global credit squeezing has been recovered as the
counterparty risk revived quickly and the market spreads narrowed.
Indonesia's economic outlook is favorable. Growth is projected to reach the upper level of
5.5-6.0 percent range in 2010, rise to 6.0-6.5 percent in 2011 and is expected to gradually
returning to trend growth rates approaching 7.0 percent thereafter, on the back of the upturns
in export growth following ongoing global economic recovery as well as investment
acceleration. Investment is expected to grow 9 percent in 2010 and rise even faster by
11 percent in 2011 on the back of higher public capital spending on infrastructure that driven
better private investment and lower risk premium. On the fiscal side, Indonesia has been
able, through prudent fiscal policy, to bring its public debt to GDP ratio lower. Projections
indicate that this trend is likely to continue. Inflation will continue to moderate and is likely to
be at the lower end of its target range of 5%±1% in 2010 and 2011 as the output gap is still
wide enough to response to the acceleration in demand side and supported by stable rupiah
exchange rate. In the medium term, inflation is expected to converge to its regional average
at 3.5-4.0%. On the external side, current account and capital account is expected to
continue in surplus of US$5 billion and US$ 8 billion consecutively, support the continuingly
surplus balance of payments and drive to higher international reserve. Favorable
development on the fundamental sides along with ample market liquidity will maintain
stability on the financial market especially in banking industry i.e credit will grow of 17-20%
in 2010, along with high CAR around 19% and subdued NPLs below 5%. Well maintained
macroeconomic fundamentals, strengthening external liquidity position, gradually declining
government debt ratio, supported by prudent fiscal policy and smooth implementation of
structural reforms, is expected to sustain higher economic growth in the coming years to
keep the positive momentum for further rating improvement.
Distinguished guest, ladies and gentlemen
Despite these achievements, new challenges are waiting in front of us and hence much
progress is still needed. The main constraint for Indonesia's economic development is to
translate the available resources into better outcomes. Delivering better development
outcomes now depends largely on improving government effectiveness through
strengthening accountability and capacity at all levels, as well as ensuring that much of future
growth is driven by private sector development2.
There are much to be done in the area of resource allocation, incentives system, and
transparency. Investment rates are improving, but are still below pre-crisis levels. The
Government has taken steps to address different aspects of the investment climate through
policy reform packages but several challenges remain. Institutional capture is a major
obstacle in this area, with many reforms still to be implemented effectively and evenly on the
ground. Improving the quality of Indonesia's infrastructure is another essential aspect of
strengthening Indonesia's competitiveness and we are still work on it with full commitment.
As far as recent development and prospect of the economy, challenge emerge as the global
recovery process makes is still highly uncertain and will determine the degree to which
Indonesia's growth accelerates in 2010 and beyond.
I believe that the future success will depend on improving the policy conduct and quality of
our institutions, particularly the public sector. Our top priority is to maintain stability as well as
increase the resiliency of domestic financial market from possible liquidity shock. Our policy
will always be directed consistently on achieving medium term inflation target and thus
promote macroeconomic stability.
For sustainable growth, Indonesia will have to ensure effective implementation of key
reforms to the investment climate to both permits the private sector to drive growth and to
increase public institutions capacity. On my view, access to financial services should be
enhanced through a well-functioning and deep financial market. The later is needed to
facilitate and promote longer term investment, maintain markets confidence especially on
short-term investment, and thus prevent the economy from sudden reversal. This can be
done by improving market efficiency through prudent practices of the market players,
existence of liquid market, strong liquidity risk management, and wider-range financial
instruments including hedging instruments. The presence of credible credit information
system is also needed to lessen credit risks and lowers borrowing costs. Against this
backdrop, we are committed to improve regulatory quality, the rule of law, and good
governance through accountability and enhancing institutional capacity.
Distinguished guest, ladies and gentlemen
Building on its existing economic and political fundamentals, Indonesia today has the
opportunity to create this virtuous cycle of sustainable and inclusive growth. Overall,
Indonesia has a strong willingness to improve the condition. I am very optimistic to
the direction of Indonesian economy ahead and expect you all would share the same few.
Before I end up my remarks, I would like to deliver my sincere gratitude to all distinguished
speaker Mr. John Chambers, Dr. Richard Clarida, and Mr. Russell King, who has dedicated
their valuable time to share with us today, and for that reason, let's us proceed to the
Seminar and have a fruitful discussion.
God bless you all.
Indonesia 2005-2011 - Key Macroeconomic Indicators and Projections
Actual Projection
Indicators
2005 2006 2007 2008 2009 2010 2011
Real GDP Growth (% annual, yoy) 5.7 5.5 6.3 6.0 4.5 5.6 6.0
Export (US$ bn) 87.0 103.5 118.0 139.6 119.6 140.0 151.9
Imports (US$ bn) 69.5 73.9 85.3 116.7 84.4 106.6 121.4
Current Account Balance (US$ bn) 0.3 10.9 10.5 0.1 10.5 5.1 -0.4
Budget Deficit (% of GDP) -0.5 -0.9 -1.7 -0.1 -1.6 -2.1 -1.9*
Inflation (% change, yoy) 17.11 6.60 6.59 11.68 2.78 4.80 5.50
Indonesia's external debt 2005-2009
2005 2006 2007 2008 2009
ST Debt to Total Debt Ratio 17.7% 15.6% 19.5% 19.0% 18.3%
ST Debt to Reserve Ratio 68.6% 48.5% 48.3% 57.1% 47.9%
Debt Service Ratio 17.3% 24.8% 19.4% 18.1% 22.7%
Debt to Export Ratio 124.3% 107.2% 100.3% 93.5% 121.4%
46.5% 35.9% 32.2% 30.1% 31.5%
Debt to GDP Ratio
ST MATURITY (in USD million) 23,838 20,641 27,493 29,512 31,666
TOTAL DEBT (in USD million) 1/ 134,504 132,633 141,180 155,080 172,871
RESERVE(in USD million) 34,724 42,586 56,920 51,639 66,105
1,042 (6,724) 1,817 5,962 10,356
NET DISBURSEMENT (in USD million) 2/
DSP (PRINCIPAL + INTEREST) (in USD million) 18,709 30,675 27,319 30,013 32,293
References
Badan Koordinasi Penamanan Modal (BKPM), Investment Policies Statement, June 2009.
Badan Pusat Statistik (BPS - Statistic Indonesia), several official press release and
publications.
International Monetary Fund, 2009.
World Economic Outlook,
Joint Asian Development Bank-World Bank Report, Improving the Investment Climate in
Indonesia, May 2005.
Moccero, Diego.
Improving The Business And Investment Climate In Indonesia,
Economics Department Working Paper No. 638, OECD, September 2008.
Mulya, Budi. The Need Strenghten Indonesian Financial Market, Delivered at JICA's
Seminar on "The Challenge in Developing Indonesia's Financial Market", held in Nikko Hotel,
Jakarta, 11 December 2009.
Raldi Hendro Koestoer, Promoting Regulatory Reform for Investment in Indonesia,
Office of Coordinating Ministry for Economic Affairs, Republic of Indonesia (CMEA-RI),
presented at APEC High Level Conference on Structural Reform, 8-9, September 2004,
Tokyo, Japan.
World Bank, Global Competitiveness Report, 2000 edition up to 2009-2010 editions.
World Investment Prospect 2009-2011, UNCTAD.
World Population Prospects (2008) http://esa.un.org/unpp/ United Nations.
World Bank, Investing in Indonesia's Institutions for Inclusive and Sustainable
Development, Country Partnership Strategy For Indonesia Fy2009-2012, 2008.