Indonesia: Tomorrow's trade powerhouse

Opinion | 19 May 2017
Indonesia

With infrastructural investment in progress, Indonesia has enormous potential to be a trade powerhouse. In this roundtable in Jakarta, hosted by BNY Mellon, the top banks in the country, investors and corporates discuss the way ahead with TFR's Katharine Morton

 

 

The Panel

Ferry Robbani, senior vice president international banking and financial institutions group, Bank Mandiri

A Hendy Bernadi, head of financial institutions, Bank Rakyat Indonesia (Bank BRI)

Mirasari Djunaidi, chief representative, country manager, BNY Mellon Jakarta Representative Office

Claudius Teddy Gunawan, deputy division head, Bank Central Asia (Bank BCA)

Tri Edi Purnomo, trade product development head, transaction banking group CIMB Niaga

Hari Satriyono, VP, deputy general manager, head of trade service, Bank Negara Indonesia (Bank BNI)

Fanny Surjadi, senior vice president, Bank Central Asia (Bank BCA)

James Bryson, director, PT HB Capital Indonesia

Adrian Short, president director, Rolls-Royce and chairman of British Chamber of Commerce Indonesia

Chris Wren, executive director, British Chamber of Commerce Indonesia

Chair - Katharine Morton, editor-in-chief, TFR

 

Katharine Morton: What's happening with Indonesia in terms of trade?

Ferry Robbani: Trade in Indonesia, from Bank Mandiri's perspective, revolves around two things. First is the normal flow, in terms of export and import of goods, where, predominantly, it's going to be dominated by resources and exports like coal, rubber, and tin. But, I would like to move away from the normal trade flows, because we project that, by 2020, the flow of trade for Indonesia will be more aligned to the infrastructure projects that we're kick-starting, starting this year.

A lot of the projects have been expedited. The predominant players in the infrastructure projects or markets are seated here at this table. Mandiri, BRI, BNI, and BCA to a certain degree. Between the state-owned banks, we have decided to allocate certain projects so there is no overlap. That's what the government, through the ministry of state-owned enterprises, has done. For Mandiri, for example, we're more focused on three things. In terms of the infrastructure projects, we're focusing on toll roads projects, building airports and seaports throughout Indonesia, and, to a lesser degree, supporting
the power sector.

Our colleagues from BRI and BNI for example - I'm sure they'll chip in - are more focused on the power sector. The trade activities of the country will revolve around these projects. We're going to import a lot of capital goods for these projects. But, on the export side, the figures for exports for Indonesia for non-oil-and-gas (because we separate non-oil-and-gas and oil-and-gas) have unfortunately, from 2011 to 2016, been on a decreasing trend. That's on the exports side, excluding oil.

As for our top trading partners, China is, of course, number one. The US, Japan, India, then Singapore come into the picture. Those are the top five partners for us. Sixty-five per cent of Indonesia's exports, a lot of which also goes through Mandiri, is going to Asian countries, so there's a lot of intra-Asian trade going on within the region.

The same can be said on the import side, also. The figure is slightly higher, about 78% of imports come from Asian countries. Why? Because in Indonesia we do a lot of trade with Singapore as the traders are located there. That's why it doesn't give the true picture of the corresponding countries, because it's always going through the traders in Singapore. That's why the percentage is so high.

In terms of the goods that we export, it always revolves around oils, minerals, electrical equipment to a certain degree, rubber and all sorts of machinery.

Fanny, can you elaborate on some of the ideas about intra-Asian trade? Is it possible for Indonesia to be diversifying more than it is already?

Fanny Surjadi: In terms of what Ferry mentioned, it's almost the same for our bank. At first, Indonesia was really quite dependent on resources exports. We got hit a couple of years ago because prices were going down, but we hope that this year we will see the price of commodities going up. We also hope it will be a very good sign for exports from Indonesia.

Besides that, we also see infrastructure [investment] going well and growth going well,
so it will have a domino effect on other consumer spending. So, we're quite positive on the trend
for trade.

For our counterparts, it's the same as many of the other banks. It's mostly intra-Asia. China, Japan, Singapore, and our government is also trying to make another impact on the currency. They have signed [an agreement] with Malaysia and Thailand about the currency impact.

Edi, what about how trade is financed in Indonesia?

Tri Edi Purnomo: I believe the LC [letter of credit] is still the most preferable instrument in terms of payments in Indonesia.

Do you see that changing at all?

Tri Edi Purnomo: Not yet. [Companies] tried to switch to open account [trade], but it's still not yet dominant although it is increasing in volume and value. We have been told about the BPO but that trend is not picking up. And, that's why exporters are still using LCs.

As for the bank payment obligation (BPO), has anybody else been considering using BPOs at all in the room? A show of hands? Nobody. So, not yet. The LC still reigns supreme.

Mirasari Djunaidi: The LC is considered the most secure instrument to handle a trade transaction. Even though it is more costly, I think security is the most important thing.

How is Rolls-Royce using trade instruments to operate in Indonesia?

Adrian Short: For the benefit of the doubt, we're everything but cars (aero engines, energy, marine, defence projects). In terms of how we operate, we have a number of customers in-market, and we tend to set-up - because many of them are state-owned enterprises - long-term service agreements for our products in market.

Looking at the export environment in Indonesia, commodities are still a huge part of the overall exporting. When we look at manufacturing - and there is a huge part of the economy exported from manufacturing - it's lower-value goods.

The opportunity for Indonesia, particularly with the increased costs associated with operating in China and in India, is to start to move up the value chain. From the perspective of Rolls-Royce, we see Indonesia as an opportunity market for higher-value and manufactured goods, particularly in a global supply chain.

One of the moves that we are very pleased about is the opening of the free trade zone. Within a global supply chain, you're quite often bringing in materials or goods for remanufacturing or working, either for new equipment or for repair and overhaul, and having that ability to import and export goods for that supply chain is important. So, Indonesia is stepping into the global supply chain in a greater way through high-level and high-value manufacturing, and we see that as key to kick-starting an increase in the exporting environment here, balancing the commodities upturns and cycles that may occur.

From some of our members' perspective, we can see the value of Indonesia both as a marketplace and as a base for future opportunities in the wider sphere. But, some of the regulatory and structural changes need to improve to allow manufacturers to benefit from that.

Hendy, would you like to pick up on that from a local perspective?

A Hendy Bernadi: If we talk about trade, we need to separate it from the system. When we talk about trade locally, there are some factors that influence [the nature of] trade itself.

It could be the product, it could be the policy or it could be the government's support or other supporting facilities. That's the thing we need to consider, because, as Ferry already mentioned, we're seeing a declining trend in exports. Fortunately, the percentage [decline] is getting lower, so that's a good sign and especially from the export side, is already showing good movement.

We can see that the government is a very important influence today, particularly for trade, because it is trying to get GDP growth above 5%. So, when that comes, the government has to optimise each factor that influences GDP: consumption, investment, government spending, and, of course, imports and exports.

Indonesia is wide and diversified, so, one of the economic [stimulus] packages issued by [the current administration] is to generate more production and trade, and not only in big cities. Sometimes there is difficulty in implementation.

Another issue we have to cope with at this moment is the attempt at trying to [spread the message] from the centre of Indonesia to the regions. Even though the infrastructure that Ferry mentioned is already quite well evolved from the west side of Indonesia to the east, when it goes outside of that, it's not supported by infrastructure, so it's quite difficult.

But, I have hope going forward because the Ministry of Economics, the Ministry of Finance and the Ministry of Trade have worked together to simplify everything, so when it comes to supporting exports right now, they already have issues on policy and regulations. I think the government is off to a good start.

I noticed that in terms of ease of doing business, Indonesia is moving up quite quickly in the World Bank rankings. Obviously, it's still challenging, but it's now 91st in 2017 as opposed to 114th in 2015.
So, progress is happening. Let's have a
look at what's happening in terms of investment. James?

James Bryson: For many, many years, we've talked quite a bit about commodities and they're an important part of exports, but exports as a percentage of GDP for Indonesia are relatively low compared to the rest of Asian countries and emerging markets. So, as Ferry mentioned earlier, when commodity prices were high, the opportunity wasn't perhaps taken to diversify the economy. President Jokowi [President Joko Widodo, popularly known as Jokowi] is working very hard, but there's a lot of work to do.

So, although commodities are important, the largest proportion of GDP for many, many years has been consumption, so that's largely what we focus on, but in a very broad way. Apart from the obvious staples and discretionary in Indonesia, which includes things like cement, which is still predominantly a bagged product rather than a bulk product, that's hopefully beginning to change as infrastructure spending picks up, but it means it's very closely correlated to domestic consumption. So, that is really, as far as we're concerned, the main story in Indonesia.

What's critical is yes, the stimulus packages that will be tools with which the economy can be diversified. There is definitely a pick-up in infrastructure spending, and, sometimes, foreign investors forget that a lot of the progress has been made in smaller ticket items, not the MRT [the mass transit railway] which everyone can see, but its dams, irrigation, regional port.

There's one thing I always have at the back of my mind when I think of the opportunity cost in Indonesia. There was an executive at [a multinational] who gave a comparison. He worked in China before he came to Indonesia, and he said that to move one sachet of [product] from west to east or east to west in China took a maximum of five days. In Indonesia, to do the same, it was 29 days. By the time it gets to the other end, given what's required, it's 45% to 60% more expensive, so there's an enormous opportunity for increased consumption to be unlocked. As I say, the administration is working very hard towards that.

As Hendy said, the coordination in ministries, given the overlap of responsibilities, makes it very difficult. We see Indonesia very much as a consumption story rather than a commodity story. It may be nice for the government to see commodity prices moving up again, but that's not a solution to a problem that's cyclical in nature. Structural changes need to be made in order to have a sustainable pickup in growth.

A lot of people outside of Indonesia forget how big it is. It's the fourth most populous country in the world, so there's plenty of consumption to be had. Claudius, how could trade be improved in Indonesia?

Claudius Teddy Gunawan: As long as there is no political turbulence, and what President Jokowi's administration has been doing is very, very quick, I would like to highlight the industrial space especially. A lot of foreign investment in Indonesia, not only from the nearest countries like Malaysia, Australia or Singapore, comes from countries such as Europe and the US. This has been into various areas in Indonesia. For example, a lot of textile industry has been moving from near Bandung to central Java,
where labour costs are cheaper. So, this would help Indonesia to promote non-commodities exports and will revitalise manufacturing sites
in Indonesia.

President Jokowi and his team have been working very hard on the ports. We used to export only from the biggest [two] ports but a lot of work is being done to the ports across the country from west to east. So, provided that these are built, and we can simplify procedures, I believe that manufacturers will be good for Indonesia and not only for exports: 250 million people is a big market right here in Indonesia.

In terms of trade cycles, we have also seen that there's been an increase in local LCs. It's funny - Indonesians like to eat chilies but we've even had to import chilies from overseas. Now, there is a big market where, if you can grow your own produce, like chilies and garlic, you can fulfil your own needs and the economy will move.

So, there's a lot of potential for import substitution to go on, even at the very small level. What about the trade finance gap between what could be financed and what is?

Hari Satriyono: I'm curious as to why the financing gap is so high, maybe at 20-30%. Trade finance business [has been] about corporate business and medium-sized businesses, not about small companies. And we know that, now, in Indonesia, there are a lot of state banks and trade business is not far from the non-cash loan facilities for corporate banking. The current focus of corporate banking has been to give facilities to infrastructure and very big companies because we enjoy a big margin from those companies.

In 2017, we're giving non-cash-loans to medium or smaller companies. The margins aren't so high, but we should [diversify] from the infrastructure sector that was very dominant in 2016 and potentially will be this year. Also, although the LC is still dominant, open account financing is increasing because, in the infrastructure sectors, the relation between the principal and the supplier is [different]. And also, from some companies like paper and also from textiles companies, they need the financing from inventory collection financing, for instance. I've heard from many customers that the trend of using LC is decreasing.

Where will Indonesia be in five years' time, in terms of its position within Asia? Is it all going to be intra-Asia trade? How do you see the big picture evolving?

Adrian Short: We talked about intra-Asia trade and that's important. But Europe is still the biggest trading partner as a bloc with Indonesia, and it's the one area where Indonesia has a trade deficit, so if we talk about intra-Asia, we ought to look at more widely.

Indonesia's blessed with two very important things. One, it's rich in resources and minerals, and two, it's rich in its population and diversity, which allows it to have a big consumer base. Both of those blessings have also been challenges because moving beyond commodities and resources, and moving beyond the domestic market are two of the things that Indonesia has to think about when it's looking at its trade position and its exports, we do, as the British Chambers of Commerce, a survey in 2016 of existing large British and European businesses that are operating currently in Indonesia and have done for some time, and so it shows a couple of very interesting things.

Firstly, when you talk about infrastructure's always being a challenge, if I look at how a business sees that, the top two challenges now for businesses are regulatory environment and bureaucracy inefficiency - red tape. Lack of infrastructure has moved from 71% of people thinking it's a problem down to 48%, so big strides are being made through the government's efforts here. So, infrastructure over the next five years, we see as [falling as a problem]. It will still be an issue, because there are 17,000 islands, it's a huge country, moving goods and services around, but certainly a declining trend.

Also, the majority of businesses asked were looking at making investments in the next two years, so it's still much considered an investment destination. And the government's attitude is very strongly in terms of action.

But, when it comes to the economic stimulus packages we have a split between whether these economic stimulus packages benefit you or not. So, 30% [from the 2016 survey] said no, 37% were neutral and 33% said yes. Good news. The packages are aimed at new investors, quite rightly. But it maybe needs a separate set, or a different tweaking of some of these stimulus packages to encourage [existing businesses] to grow.

And, so we see this as a good picture, but there's work to be done, and I think the challenge - for Indonesia - is if the domestic economy continues to grow and boom, will people or businesses take the foot off exporting? And, if commodities come back in a strong way, and GDP increases, will the government maintain its focus on diversification of the economy? If they fail to look beyond the domestic and look beyond commodities, then the structural economy of Indonesia will lose five years of momentum. So, this is the next five years where we really need to see a real export drive.

That includes substitution of imports, but also becoming part of the global supply chain.

Mirasari, what do you think the future looks like for Indonesia trade?

Mirasari Djunaidi: I'm optimistic. With a growth rate of around 5% a year, we're in an enviable position. Services are also improving and as long as we keep momentum on exports and infrastructure investment and we have a stable administration, it's a positive story.

Chris Wren: If I could just give a summary from a slightly different perspective. You talk about perceptions of Indonesia, and for a few years now, because Indonesia has not been brilliant at doing its own public relations, as everyone knows, it's the bad news that hits the papers. At the British Chamber of Commerce, we find ourselves having to go out there and sell Indonesia to British businesses. Yes, primarily, our focus is on trying to encourage British SMEs (small and medium sized enterprises) to export into Indonesia, but we all know that's the first step of the journey as well. Once they have a successful experience exporting and developing relationships, then, of course, the temptation naturally grows to actually become investors and embed that partnership even more, which is the ideal thing. For us, interest in Indonesia is at unprecedented levels.

Mirasari Djunaidi: We've heard about
what's going well, about what could be
improved, but above all, the potential of the Indonesian economy. It has been interesting to discuss such a large and diverse, yet relatively unknown country, with such an expert group.
We are mindful of the economic and particularly the infrastructure challenges, that the country faces; as James was saying, 29 days to get a sachet of product from one part of the country to another! However, the country has huge potential, and it's been good to hear about all the efforts that are going on; particularly the unravelling of red tape - a challenge the world over - with these many competing ministries that you've got in the Indonesian marketplace. The sheer challenge of dealing with that, and
no matter how impressive and how dynamic
the private sector is, has historically
depressed growth potential, but hopefully
things are changing.

The roundtable, Indonesia: Tomorrow's trade powerhouse, was hosted by BNY Mellon at the Shangri-La Hotel in Jakarta in April 2017

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