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Economic and Industrial

Development in Indonesia:
Challenges and Opportunities
Deputy Minister for Economic Affairs
Ministry of National Development Planning

Jakarta, 7 February 2017

1
Current Condition and Challenges of
the Indonesian Economy
Indonesias Potential

is projected to be the

th
4 in 2050 (World in 2050, PWC)
largest Economy in the World

Abundant natural
resources
Largest economy
16th in the world

Most populous
Top
3 Destination for
attracting investors in
Asia (the Economist)
4th country in the
world Top
5 Emerging markets with the
best middle class potential
(Euromonitor)

3
 Improving domestic economic growth
Contribution to Growth Expenditure Side (Percent) Economic Growth Production Side (YoY, Percent)

Sektor Utama 2014 2015 2016

14.00
Agriculture, Forestry, and Fisheries 4.24 3.77 3.25
Impor Barang dan Mining and Quarrying 0.43 -3.42 1.06
12.00 Jasa/Import
Manufacturing 4.64 4.33 4.29
Oil and Gas -2.12 -1.13 3.24
Ekspor Barang dan Non Oil and Gas 5.61 5.05 4.42
10.00 Jasa/Export
Construction 6.97 6.36 5.22
Trade 5.18 2.59 3.93
Perubahan Inventori/Chg Information and Communication 10.12 9.69 8.87
8.00 in Stock
Financial Services and Insurance 4.68 8.59 8.90

6.00 PMTB/GFCF

Domestic economy grew by 5,02% in 2016 supported by

4.00 Konsumsi solid stable private consumption and improvement in
Pemerintah/Government
Consumption exports.
2.00
Konsumsi LNPRT/NPISH
Consumption
Increased growth in mining, financial & insurance services
- and trade, but declining growth in manufacturing and
2011 2012 2013 2014 2015 2016 Konsumsi RT/Private agriculture.
Consumption
(2.00) Declining growth in manufacturing sector (esp. in non-oil
PDB/GDP
and gas) is due to weak demand and over-capacity
(4.00) Source: BPS
4
Improving regional economic growth

Kalimantan

Sulawesi Maluku and Papua

2.01%
4.29% (7.85%) 7.45%
(22.03%)
7.42% (2.46%)
(6.04%)

Sumatra
5.59%
(58.49%)

5.89%
Note (3.13%)
Growth Jawa
(Share)
of 2016 Bali and Nusa Tenggara Source: BPS

5
 Stable Macroeconomic Condition
Macroeconomic condition has been stable, shown by a narrower and structurally stronger Current Account Deficit (CAD),
increasing foreign reserves, low and stable inflation rate, stable Rupiah and JCI.
Source: BI, Bloomberg
Balance of Payment (USD Billion) Inflation Rate (Percent) JCI and Rupiah

16.00
Billion USD 14,200 5,600
14.00
20 140 14,000 5,400
12.00
15 120
10.00 13,800 5,200
10 100
8.00
5 80 13,600 5,000
6.00
0 60
4.00 13,400 4,800
-5 40
2.00
-10 20 13,200 4,600
0.00
-15 0
Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4 -2.00
13,000 4,400
Sep-15
Nov-15

Sep-16
Nov-16
Mar-15

Mar-16
Jan-15

Jan-16

Jan-17
Jul-15

Jul-16
May-15

May-16
2013 2014 2015 2016
12,800 4,200
1/2/2016 1/2/2017
Current Account Capital and Financial Account Headline Core
Overall Balance Reserve - RHS Volatile Administered Price Rupiah JCI
6
Ease of Doing Business in Indonesia is well-improving
Rank: Rank:
2015 2016
106 91

Country Indonesia
No. 2015 2016
Indicator (EoDB 2016) (EoDB 2017)

Ranking 106 91
1 Starting a business 167 151
Dealing with construction
2 113 116
permit
3 Registering property 123 118
4 Getting electricity 61 49
5 Paying taxes 115 104
6 Trading across boders 113 108
7 Getting credit 70 62
Protecting minority
8 69 70
investor
9 Enforcing contract 171 166
10 Resolving Insolvency 74 76
Source: Ease of Doing Business 2017
7
 Limited room for fiscal stimulus
There are some improvement in budget deficit and primary balance. However, the primary balance remain negative and budget deficit is
close to 3 percent of GDP (Upper limit of the law)
Budget tax revenue in 2017 is higher by 16,8%, compared to its 2016 realization (including tax amnesty). It needs extra effort to achieve the
target.
Tax Revenue (Rp Trillion) Primary Balance and Budget Deficit (% of GDP)

0.5
1,498.9 0
2011 2012 2013 2014 2015 2016
-0.5

16.8% -1

-1.5

1,283.6 -2

-2.5

-3
Primary Balance Budget Deficit
2016 2017
Sumber: Ministry of Finance
8
Weak private sector activities
Credit growth is the lowest since 2009, while increase in NPL reflect the higher risk.
The decreasing on lending rate is not as fast as the decreasing in the BI Rate

Credit Growth and NPL (Percent) Lending Rate (Percent)

13.0 17.5
45.0 6.0

40.0 12.5 17.0

5.0
35.0
12.0 16.5
30.0 4.0

25.0 11.5 16.0

3.0
20.0

15.0 2.0
11.0 15.5
10.0
1.0
10.5 15.0
5.0

0.0 0.0 10.0 14.5

Jul-14

May-15
Oct-15
Mar-16
Jan-12
Jun-12
Nov-12
Apr-13

Dec-14
Sep-13
Feb-14

Aug-16
Feb-12
Sep-12
Jan-08

Jul-11

Apr-13
Nov-13

Jan-15
Mar-09

Mar-16
Aug-08

Aug-15
Dec-10
Oct-09

Jun-14

Oct-16
May-10

Credit Growth NPL

Working Capital Investment Consumption - RHS
Source: OJK, BI, BLoomberg 9
2017 Economic Outlook
Indonesian Economic Outlook
Economic Outlook: Expenditure Side

Outlook of Indonesia Economic Growth 2017:

5,1 5,3%
2015 2016* 2017*
GDP 4.8% 5.0% 5,1-5,3%
Investment 5.1% 4.7% 5,6-6.0%
Private Consumption 5.0% 5.1% 5,1-5.2%
Government Consumption 5.4% 2.5% 4,8 4,9%
Exports -2.0% -3.9% 0,2 0,3%
Imports -5.8% -3.8% 0,4 0,6%

Investment is needed to support a strong economic growth

*Outlook 2016-2017 (Bappenas estimates)
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Economic Outlook: Production Side
2015 2016* 2017*
GDP 4,8% 5,0% 5,1 5,3%
Manufacturing 4,3% 4,7% 4,8 - 5,1%
Agriculture 4,0% 3,0% 3,8 - 3,9%
Transportation 6,7% 8,0% 8,2 9,0%
Mining -5,1% 0,02% 0,2 0,2%
Trade 2,5% 3,8% 4,8 5,0%
Construction 6,7% 6,9% 7,0 7,3%
Information and Communication 10,1% 9,0% 9,1 9,5%

Electricity and Gas 1,2% 5,6% 4,7 5,0%

Financial Services 8,5% 9,9% 10,2 10,7%

*Outlook 2016-2017 (Bappenas estimates)

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Indonesian Manufacturing and Petrochemical Industry:
Recent Development
 Indonesian Manufacturing Growth
Non Oil and Gas Manufacturing Growth Compotition (%)
National Growth and Non Oil-Gas
6.0
Manufacturing Growth(%)
5.0 4,42
7.46
6.98 4.0 0.55
5.58 5.61 0.21
5.05 0.48 0.03
6.38 6.17 6.03 5.02 3.0 0.49
3.82 4.98 4.42
4.70 5.45 4.88
2.0
1.69
2.66
1.0

2009 2010 2011 2012 2013 2014 2015 2016 0.0

Food Industry Metal Industry Transportation Basic Metal Non Metallic Other Non Oil and Gas
Industry Industry Mineral Manufacturing
National Growth Manufacturing Growth
Industry

Source: BPS

In 2016, Indonesian manufacturing growth is below the national economy growth for the first time since 2010.
Food industry has the biggest contribution in Indonesian manufacturing value added. This may indicate that the Indonesian manufacturing sector is still
dominated by light industries.

14
 Petrochemical Industry in Indonesia
Petrochemical Industry Contribution to Indonesian Manufacturing (%)
Manufacturing, Oil and Gas, and Chemical Growth 2009-2016 (%)
100%
14.00
90%
12.78
12.00
80%
10.00
70%
8.66
8.00 7.61 60%
6.00 5.63 50%
5.48
6.26 5.10
5.62 4.29
4.00 3.58 3.79
4.04 40%
4.49 4.52 4.33 3.24
2.00 30%
1.05
0.00 -1.13 20% 7.8 7.3 7.8
1.07 -0.33 7.5 7.6 7.8 8.1 8.7
2009 2010 2011 2012 2013 2014 2015 2016 8.7
-2.00 -2.19 10% 18.0 16.7 16.1
-2.40
-1.70 15.6 15.5 15.6 14.8 13.2 11.2
-4.00 -3.06 0%
2008 2009 2010 2011 2012 2013 2014 2015 2016
Manufacturing Coal and Oil and Gas Refinery Chemical
Coal and Oil Refinery Industry Chemical and Pharmaceutical Industry Other Manufacturing
Source: BPS

Since 2009, Indonesian chemical manufacturing growth has been above Indonesian manufacturing growth. On the contrary, Coal and Oil-Gas Refinery growth
has been below Indonesian manufacturing growth.
Chemical manufacturing contribution to the total manufacturing value added has been stable for 8 years, which is on average 8 percent, while the
contribution of Coal dan Oil-Gas Refinery is declining.

15
 Job Creation in Petrochemical Industry
Chemical Industry Coal Industry Oil Refinery Industry
120000 1200 6200
100000 1000 6000
5800
80000 800
5600
60000 600
5400
40000 400
5200
20000 200 5000
0 0 4800
2008 2009 2010 2011 2012 2013 2014 2008 2009 2010 2011 2012 2013 2014 2008 2009 2010 2011 2012 2013 2014

Pharmaceutical Industry Artificial Fibers Industry Other Chemical Product Industry

70000 14000 120000
12000
65000 100000
10000
80000
8000
60000 60000
6000
55000 4000 40000
2000 20000
50000 0 0
2008 2009 2010 2011 2012 2013 2014 2008 2009 2010 2011 2012 2013 2014 2008 2009 2010 2011 2012 2013 2014
Source: Statistik Industri Besar dan Sedang, BPS, diolah

257,000 people, or equivalent to 5 percent from total work force on large and medium industry in Indonesia, work in the petrochemical industry

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 Manufacturing Export and Import
Petrochemical Export (million USD)
3,500

3,000
29940.90
30000.0 30.0 2,500

25.0 2,000
25000.0
16 20.0 1,500

15.0 1,000
20000.0
10.0 500
15000.0 5.0
0
0.0 Inorganic Organic Pharmaceutical Fertilisers Tanning or Essential Oils Soap and Miscellaneous Plastics and
Chemicals Chemicals Products dyeing extracts and resinoids washing chemical articles thereof
10000.0 preparations products
-5.0
-10.0 Petrochemical Import (million USD)
5000.0
8,000
-15.0
- -20.0 7,000
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 6,000
2014 2015 2016
5,000
Ekspor Produk Product
Manufacturing Industri Export
(milyar (billion
USD, sb.USD,
kiri, left
y-on-y)
side, y-on-y)
4,000
Pertumbuhan Ekspor
Manufacturing Produk
Product Industri
Export (persen,
Growth sb. kanan,
(percent, y-on-y)
right side, y-on-y)
3,000
Source: BPS
2,000

1,000

0
Inorganic Organic Chemicals Pharmaceutical Fertilisers Tanning or dyeing Essential Oils and Soap and washing Miscellaneous Plastics and
Chemicals Products extracts resinoids preparations chemical products articles thereof

17
 Foreign Investment in Manufacturing
6000 100
Foreign Investment Value (million USD) (% Growth
80
2014 2015 2016
5000 Rate)
60 3.140 1.516 2.115
4000 Food Industry
(48 ) (51,7) (39,5)
40 423 428 321
3000 Textile Industry
20 (43,7) (1,3) (24,9)
2000 211 162 144
0 Leather Goods & Footwear Industry
(119) (23,3) (10,6)
1000 -20 64 47 268
Wood Industry
(61,2) (26,1) (468,8)
0 -40 707 707 2.787
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Paper and Printing Industry
(39,6) (0,1) (294,2)
2014 2015 2016 2.323 1.956 2.889
Chemical and Pharmaceutical Industry
(26,1) (15,8) (47,7)
Foreign Investment Value (million USD, left side)
544 691 737
Foreign Investment Growth (percent, right side, y-on-y) Rubber and Plastic Industry
(15,2) (27,1) (6,6)
Source: BKPM 917 1.301 1.076
Non Metallic Mineral Industry
(4,9) (41,9) (17,3)
2.472 3.065 3.897
Metal, Machinery & Electronic Industry
(25,7) (24,0) (27,1)
Medical Preci. & Optical Instru, Watches & Clock 7 7 9
Since Q4-2015, foreign investment in Indonesia has showed an increasing Industry (72,2) (5,1) (27,5)
trend in value and positive growth. Chemical and pharmaceutical industry 2.061 1.594 2.369
Motor Vehicles & Other Transport Equip. Industry
is the 2nd biggest contributor after Metal, Machinery, and Electronic (44,8) (22,7) (48,6)
152 83 75
Industries. Other Industry
(35,8) (45,1) (9,73)
13.019 11.556 16.688
Total
(17,9) (11,0) (44,4)

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Domestic Investment in Manufacturing
Domestic Investment Value (billion Rp) (% Growth Rate) 2014 2015 2016
35000 120
100 19.596 24.534 32.029
30000 Food Industry
(29,9) (25,2) (30,5)
80
25000 1.451 2.725 3.210
60 Textile Industry
20000
(-40,7) (87,7) (17,8)
40 103 5 69
15000 Leather Goods & Footwear Industry
20 (28,7) (-94,8) (1178,9)
10000 585 1.185 3.151
0 Wood Industry
(49,7) (102,6) (165,8)
5000 -20 4.094 6.529 5.258
Paper and Printing Industry
0 -40 (-40,2) (59,5) (-19,5)
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 13.314 20.712 30.054
Chemical and Pharmaceutical Industry
2014 2015 2016 (49,8) (55,6) (45,1)
Domestic Investment Value (billion Rp, left side) 2.117 3.696 3.577
Rubber and Plastic Industry
Domestic Investment Growth (percent, right side, y-on-y) (-27,1) (74,5) (3,2)
11.923 20.502 15.405
Source: BKPM Non Metallic Mineral Industry
(157,8) (71,9) (24,9)
5.293 7.938 11.569
Metal, Machinery & Electronic Industry
(-30,1) (50,0) (45,7)
3 0 5
Medical Preci. & Optical Instru, Watches & Clock Industry
(-98,7) (-100,0)
Domestic investment value has been stable over 2016. Chemical 499 1.071 1.714
and pharmaceutical industry becomes the 2nd biggest Motor Vehicles & Other Transport Equip. Industry
(-75,9) (114,6) (60,1)
contributor after the food industry. 57 147 744
Other Industry
(-8,2) (159,9) (405,0)
59.035 89.045 106,784
Total
(15,4) (50,8) (19,9)

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Manufacturing Development Policy in Indonesia
 National Development Planning in Manufacturing Sector
NATIONAL LONG TERM DEVELOPMENT PLAN NATIONAL MEDIUM TERM DEVELOPMENT PLAN (RPJMN) 2015-2019
(RPJP) 2005-2025 (Perpres 2/2015)
(UU 17/2007) OBJECTIVE
OBJECTIVE 1. Growth (2015-2019); Share (2015-2019)
Competitive industry in domestic and global market; 2. 9,000 large & medium scale industry and 20,000 small scale industry in 5 years
Small and medium scale industry development;
Development of a strong industry structure; Promoting POLICY DIRECTION AND STRATEGY RPJP 2005-2025 and RPJMN
economic growth outside Java Island. 1. Establishment of Industrial Development Region (WPPI, KPI, 14 KIP, 22 SIKIM) 2015-2019 as the basis
2. Growth of industry population (investments, downstreaming, SME)
3. Increase of competitiveness and productivity towards long term national
NATIONAL INDUSTRY DEVELOPMENT MASTERPLAN development.
(RIPIN) 2015-2035
(PP 14/2015) NATIONAL INDUSTRY POLICY (KIN) 2015-2019 President Regulation Draft
The details of industrial
OBJECTIVE
OBJECTIVE Industry growth, share of GDP, export, numbers of employed workers, ratio of local
development plan are
Industry growth, share of GDP, export, numbers of material, investment value, industrial contribution outside Java Island specified in The National
employed workers, ratio of local material, investment value,
industrial contribution outside Java Island
Industry Development
FOCUS
1. Increase of the natural resources value added
Masterplan (RIPIN) and The
STAGES 2. Increase of industrial capability through improvement in human resources and (draft) National Industry
2015-2019 Increase of the natural resources value added
2020-2024 Environmental-based competitive advantage
technology Policy (KIN), developed by
3. Developing industrial growth center all over Indonesia
2025-2035 Strong and robust manufacturing country Ministry of Industry.
STAGES
10 PRIORITY INDUSTRIES 1. Development of industrial human resources
Food, Pharmacy, Textile, Transportation, ICT, Power Plant, 2. Development of industrial facilities and infrastructure
Capital Goods, Agro-Based Upstream, Basic Metal and Non- 3. Industrial empowerment
Metallic Mineral, Based Chemical 4. Industrial region
5. Affirmative policy of small and medium-sized industry
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 Industrial Development Target
2014 POLICY DIRECTION
Target Baseline
2015 2016 2017 2018 2019 Industrial Growth:

1. Growth Target 1. Development of industrial estate outside

Java Island
RPJMN 2015-
2019 5.1 5.8 6.6 7.1 7.5 8.0 2. Addition of 9,000 new large and medium
National GDP Growth (%) scale industry and 20,000 new small scale
(5.0)1 (4.8)1 (5.3)2 (5.3)3 (6.1) (6.3)
Update industry
RPJMN 2015- 3. Increase of competitiveness and productivity
2019 4.7 6.1 6.9 7.4 8.1 8.6
Manufacturing Growth (%)
(4.6)1 (4.3)1 (4.7)2 (6.2-6.5)3 (5.7) (5.9)
Update
Industrial Estate/Special Economic Zone
RPJMN 2015- Development Outside Java Island:
Manufacturing Contribution 2019 20.7 20.8 21.0 21.1 21.3 21.6
(%) (21.6) (21.5) (21.5) (21.4) (20.3) (20.2) 1. Regional economic potential development,
Update
through acceleration and downstreaming of
2. Industrial Estate/Special Economic Zone Development Target natural resources
3 IEs 2. Acceleration of connectivity/infrastructure
Industrial Estate (IE) outside Java Island n.a n.a n.a 14 IEs
Priority4
14 IEs
development in growing regions
Population of New Large and Medium- 3. Human resource and Science-Technology
Total 9.000 units development
sized Industry
7 old + 3 10 old + 2 5 SEZ 12 old + 2 4. Development of regulation and policy
Special Economic Zone (SEZ)
For Tourism, Industry, Logistic, etc. new new Priority5 new 5. Improvement of investment and business
climates: One-door Integrated Services
Source: RPJMN 2015-2019, RKP 2016, RKP 2017 and first draft of RKP 2018 (PTSP) and fiscal & non-fiscal incentives
1 Realisation
2 RKP 2016
3 RKP 2017
4 Top 3 priority: Sei Mangke, Bantaeng, and Morowali
5 Top 5 priority: SEZ and IE Bitung, SEZ MBTK, SEZ Morotai, SEZ Sorong, and SEZ Tanjung Kelayang

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