Interview Session with Senior Deputy Governor of Bank Indonesia

Following the series of successful events consisting of the launching of Direct Construction Facility (KLIK) Phase III and the Regional Investment Forum (RIF) on 11-12 March 2018 in Yogyakarta, BKPM had the opportunity to explore deeper insights on Indonesian economy prospects through an interview with Bank Indonesia Senior Deputy Governor Mirza Adityaswara. Mr. Adityaswara acted as one of the main speakers in RIF event presenting about Indonesia’s Recent Economic Updates, Challenges, and Prospects.

Mirza Adityaswara started his career as a Dealer at Bank Sumitomo Niaga in 1989. He currently holds a prominent role as Senior Deputy Governor of Bank Indonesia since October 2013. In 2015, his figure was also granted a mandate as one of the Board of Commissioners of the Financial Services Authority (OJK) Ex -Officio from Bank Indonesia.

How do you explain about Indonesian economy prospect in the year 2018, from the perspective of Foreign Direct Investment (FDI)?

 The global economic recovery is expected to continue in 2018. The economic growth in 2018 is projected to increase resulting from improving economic condition in advance and developing countries.

 Indonesian economy in 2018 is predicted to remain strong and continue to improve. The growth will be supported mainly by domestic demand. In the short-term, the sources of domestic demand will include government’s fiscal stimulus, the elections season, the Asian Games 2018 event, and improving public income.

 Investment, including Foreign Direct Investment (FDI), is also predicted to become the engine of growth in 2018. This is also driven by the improvement of Indonesia’s investment climate as reflected in the Indonesia’s ranking increase in Ease of Doing Business. It also encourages the strengthening of Indonesia’s external sector along with the rising of FDI, which is expected to narrowing the current account deficit in the next few years. The data shows that investment realization in Indonesia during 2011-2017 experienced an average annual increase of 18.5% (YoY). The inward investment was dominated by FDI (66.9%) and mainly to mining sector. In addition, the “investment grade” credit rating from S&P, Moody’s, and Fitch has increase investor confidence to invest in Indonesia.

 However, there are still challenges to be addressed coming from global and domestic, both in short and medium term. From global perspective, the challenges come from faster than expected monetary policy normalization in advanced economies, the ongoing geopolitical tensions, and trade protectionism. These challenges trigger uncertainty in financial markets and disrupt the prospects for international trade sustainability that will bring a negative impact on the Indonesian economy.

 From domestic, the challenges are linked to the efforts to maintaining macroeconomic stability amid rising inflation risks. In addition, Indonesia still has to improve economic competitiveness related to infrastructure, institutions, innovation, and human capital.

 Moreover, Indonesia enjoys the demographic bonus with the 4th largest population and workforce in the world which can be a resource for Indonesia to obtain high productivity workforce. However, without being equipped with good education, it will become a burden for Indonesia as less competitive human resources cannot be absorbed by the employment.

How do you see the role and contribution of Lifestyle and Tourism industries in fostering the economic growth of Indonesia?

 The development of digital and social media era currently is changing the consumption behavior, especially driven by the millennial generation. The era of e-commerce encourages more rational consumption patterns and with more concern on experience, for instance, popular holiday destinations. The millennials are believed to be the trendsetter of consumption because they are ‘the bigger spender’, especially related to leisure (i.e holiday experience, ‘hangout’) and lifestyle (i.e luxury items).

 The shift in consumption pattern has been ongoing over the last three years, driven by the development of technological access and increased purchasing power for leisure and lifestyle spending. This can be seen from the trend of purchasing clothes, food and beverages (aside from restaurants) that continued to slow down while the trend of lifestyle and leisure spending such as restaurants, hotels, transportation and communications increased by 5.6% and 5.2% respectively in 2017. This development is also influenced by Indonesia’s demographic transition, which is increasingly dominated by productive generation of young age and the development of middle class in the era of digital economy.

 Indonesia needs to seriously encourage the development of lifestyle and tourism industry, as one of solutions to deal with the current account deficit problem. In the Indonesia’s Balance of Payment especially on Balance on Services, the travel component has contributed positively and significantly with increasing trend. It is reflected from Indonesia’s balance on tourism which recorded surplus USD 2.3 billion in 2017. In addition, in 2016 the tourism sector also served as the second largest contributor of foreign exchange reserves after palm oil.

 However, development of tourism sector confronting challenges, such as:

o The lack of infrastructure facilities for connectivity as well as tourism supporting infrastructure, i.e. direct flight, comfortable public transportation, sanitation facilities and environmental hygiene.

o Technological developments and the shift in the behavior of foreign tourists towards E-Tourism, thus the role of digital infrastructure and online promotion is increasingly important.

o The low quality of human resources in the tourism sector, such as tourist guides with lack ability to speak foreign languages or the lack of western cuisine chefs.

o Support from the creative industry towards the tourism sector has not been well integrated.

How is your opinion about the role of Central Bank of Indonesia in supporting the improvement of ease of doing investment?

 Bank Indonesia possesses a strategic role in fostering economic growth. Bank Indonesia plays roles in maintaining macroeconomic stability, preserving inflation expectation, stabilizing exchange rates, mitigating risks and national vulnerabilities, as well as coordinating the central and regional governments on strategic issues. Such roles are aiming at maintaining macroeconomic stability and financial system to support a stronger, sustainable, balanced and inclusive economic growth.

 Such macroeconomic and financial system stability will be assessed thus affects investors perception to invest in Indonesia either through direct investment, capital market investments or lending.

 In addition, Bank Indonesia also supports 15 Economic Policy Packages and 1 Presidential Regulation on Acceleration on Business License by participating in the Task Force for the Acceleration and Effective Implementation of the Economic Policies. Bank Indonesia acts as the chief of the Working Group (Pokja) III in charge of the Evaluation and Impact Analysis, and responsible for evaluating the implementation of policy packages including on the ease of investing.

 Bank Indonesia also support the Government’s effort to boost foreign investment into Indonesia, both in Portfolio Investment and Direct Investment. Bank Indonesia through the Investor Relations Unit (IRU) located at the regional, central, and international level, has continuously coordinated with the relevant Ministries and Institutions to synergize the investment promotion efforts towards an integrated investor relations.

 The Investor Relations Unit at various levels is a collaboration between Bank Indonesia and related institutions in their respective working areas which aims to maintain a positive perception on the Indonesian economy and become the point of contact for investors who have interests investing in Indonesia. The integrated efforts to maintain positive perceptions on the Indonesian economy and promote regional investment are expected to increase investor confidence and encourage them to invest in Indonesia.

BKPM has just launched the Direct Construction Facility (KLIK) Program Stage 3. How do you assess this program and other BKPM’s breakthroughs, to support direct investment growth in Indonesia?

 Investment acts as an engine of economic growth, but at the same time faces a number of external and internal constraints such as the global economic slowdown, declining commodity prices and strengthening of US dollar. Likewise, domestic investment faces several internal constraints such as long and overlapping permits, infrastructure limitations, labor and productivity issues, and financing.

 For that reason, BKPM has developed various breakthroughs to bring more investment into Indonesia, one of them is by implementing the KLIK program (Kemudahan Investasi Langsung Konstruksi – Ease of Direct Investment Construction). Through KLIK program, investors can directly start the construction of the factory in parallel with the application of business permits such as Izin Mendirikan Bangunan – Building License Permit (IMB), environmental permit and other permits. Investors are able to enjoy this program in every sector, without the minimum value of investment or number of labor. The KLIK program only requires factory construction to be built in the Industrial Estate according to the Government’s preferences and the business licenses to be completed prior to the commercial operation/production stage.

 Bank Indonesia believes such program is very attractive to bring new investment in industrial areas. Since its implementation in 2016 to December 2017, there have been 115 projects with investment value worth IDR 130.62 trillion in 14 Industrial Estates. Moreover, 29% or 33 projects have commercially produced indicating that KLIK program has been implemented well and able to accelerate the licensing process of new industries.

 To support the role of investment in sustainable economic growth, the inward investment is expected to focus on export-oriented manufacturing sectors. It would be even better if investment in the manufacturing sector can support the production of high value-added goods or goods in medium-high tech classification. This is due to the increasing world demand for medium-high tech goods which reaches about two-thirds of total demand, referring to UNCTAD data. Investment in the high value-added manufacturing sector will also support the structural improvement of current account deficit as well as Indonesia’s ability to achieve high-income levels in the next few years. In order to strengthen the current account, investment policy in the service sector, especially on shipping services, also needs to be continuously optimized.

The economic growth should have been accompanied by the equity in development. In regard to this matter, how do you see the current investment policy effectiveness in realizing an equitable development, particularly between Java Island and outside Java Island, and what else should be improved?

 We view that the development planning is now improving. We appreciate the Government’s efforts that focus on infrastructure development, especially basic infrastructure development in all regions in Indonesia in the last few years.

 We believe this effort is the right step and needs to be continue since infrastructure is one of the main resource in the effort of economic acceleration and equitability.

 We also view that the current investment policy is already in the right direction. The Government has begun navigating investment to regions outside Java, despite in nominal term most of the investment realization is still concentrated in the Java Island.

 Investment in Java Island itself is currently more focused on Toll Road infrastructure such as Trans Java Toll Road. Although it is still under development, the impact has been relished as seen from the increasing investment value in both foreign and domestic in the area around the Toll Road development.

 Meanwhile, based on the research and simulation conducted by Bank Indonesia, infrastructure development by 1% in electricity and transportation (land, sea, and air) has an impact on the increase of GDP and the absorption of Indonesian workers throughout all regions. Based on the simulation, the development of sea transportation access contributes the greatest impact with the increase of national GDP by 0.43% over baseline followed by the increasing of GRDP from East Indonesia region such as Kalimantan at 0.55% and Eastern Part of Indonesia (Kawasan Indonesia Timur) by 0.54%. Furthermore, the development of electricity infrastructure and land transportation contributes the same impact on GDP (by 0.26%) followed by air transport which contributes an increase of GDP (by 0.23%).

 The government should be consistent with policies that able to accelerate the improvement of basic infrastructure quality outside Java Island because its availability becomes one of the major considerations for investors to invest outside Java Island. Likewise, bureaucracy reforms related to other investment policies is also mandatory to be consistently implemented.

Nonetheless, there are still many things to address. Yet, we are optimistic that good synergy between institutions including BKPM and Bank Indonesia will be able to bring Indonesia moving forward.