OUTLOOK 2019
TUESDAY JANUARY 15, 2019
Peace for all: President Joko “Jokowi” Widodo (center) and his running mate Ma’ruf Amin (second left), along with presidential candidate Prabowo Subianto (second right) and his
running mate Sandiaga Uno (right) release doves during the launch of the 2019 peaceful campaigns at the National Monument (Monas) in Jakarta on Sept. 23, 2018.
Message from editor-in-chief
Surviving through election year
T
his is a year when all
political and econom-
ic bets are off. In April,
the people are to go to
the polls to vote for their presi-
dent and their lawmakers in the
legislative chambers. The simul-
taneous elections are to have a
profound influence on political
parties’ electoral strategies.
The maneuvers of the presi-
dential candidates, both incum-
bent President Joko “Jokowi”
Widodo and his challenger Prabo-
wo Subianto, would carry signifi-
cant weight for the vote count of
the parties behind them.
The new requirement that puts
the legislative threshold at 4 per-
Nezar Patria
JAKARTA
cent of the vote is presenting a re-
markable challenge for old and
new political parties. The patterns
of coalition-making have thus
been both creative and pragmat-
ic, reflecting the need to survive
in the upcoming general election.
Despite the pros and cons of the
new requirement, its implemen-
tation in the upcoming election is
expected to strengthen democrat-
ic institutions in the country.
This year is also to be a test for
the country’s economic strategy.
Would the outcome of the elec-
tion influence the prospects of the
national economy?
Would Indonesia continue its
ambitious infrastructure projects
and what have been the econom-
ic impacts of the progress so far?
Moving forward, what would In-
donesia look like under Jokowi or
Prabowo?
The uncertainties are a cause
for concern, but Indonesia would
not face the year empty-handed.
The democratic experiences of
the 20 years since the end of the
authoritarian New Order are pre-
cious capital for us as we take our
next step forward.
We are also witnessing tur-
bulence as well as dynamism on
the global stage. The trade war
between China and the United
States has continued to crescen-
do, while the Brexit drama is still
far from its conclusion.
These quandaries are hiccups
for the growth of emerging econ-
omies, leading to calls for deeper
and more instrumental South-
JP/Wendra Ajistyatama
South cooperation.
On top of everything else, Indo-
nesia must also be cautious about
natural disasters. Living on the
Pacific Ring of Fire, disaster miti-
gation must occupy the top of the
agenda.
The Jakarta Post has created
this 2019 Outlook to point our
readers toward what matters, be it
the political or economic issues at
the national or international lev-
els. As usual, we have collated per-
spectives from top columnists and
experts from various fields.
We hope you can take several
points from them into consider-
ation for your agenda for the com-
ing year.
2 OUTLOOK 2019 JANUARY 15, 2019

Into the 2019 election

Final countdown begins

I
n about three months, In-
donesians will once again
cast their votes to elect their
president and vice presi-
dent as well as members of the
House of Representatives. These
four months make up the final
stage in the long “political years”
the nation has endured since right
after the 2014 election.
One might recall that the win-
ning margin of Joko “Jokowi”
Widodo over Prabowo Subianto
in that election was slim at about
6 percent. The electorate has
been torn ever since between sup-
porters of President Jokowi and
Prabowo. In April, they will face
each other again on the heels of
such a divided electorate.
Jokowi started his presidency
in October 2014 on a rather shaky
political ground. He was not the
strongest person within his par-
ty, the Indonesian Democratic
Party of Struggle (PDI-P); he was
a newcomer to the national polit-
ical scene.
As if it was not difficult enough
for the newly elected president,
in the beginning of his presiden-
cy, the PDI-P-led ruling coalition
did not command the majority of
seats in the House. Governing in
such a hostile political environ-
ment for sure is difficult.
The opposition camp led by
Prabowo’s Gerindra was quick to
jump on these facts, portraying
Jokowi as a weak president. Such
narrative has been the recurring
theme of the opposition to gain
political scores since then on.
It turns out that President
Jokowi, however, has been a
shrewd politician. Later, his savvy
tactical moves brought in two op-
position parties, the Golkar Party
and the National Mandate Party
(PAN), into the ruling coalition,
which resulted in the PDI-P-led
Philips Vermonte
JAKARTA
coalition controlling the House.
Several Cabinet reshuffles were
also carried out on his terms, not
on others’. For example, pressures
started to mount from every cor-
ner, including from the PDI-P,
with many urging him to reshuf-
fle his Cabinet — in particular his
economic team — in 2015. While
eventually the Cabinet reshuffle
did take place, he did not change
his economic team.
Another example is when he
was able to bring in his preferred
candidate, Tito Karnavian, as the
chief of the National Police, re-
gardless of some resistance from
other political players.
Before that, President Jokowi
appointed Army general Gatot
Nurmantyo as the commander of
the TNI, disregarding the TNI’s
internal tradition of rotating the
position that would see someone
from the Air Force hold it.
There was relatively no oppo-
sition from the House or the TNI.
The President’s learning curve for
his presidential power was short.
In terms of managing relations
with the political elites, friends
and foes, he gained the upper hand
pretty quickly. Regardless, to the
President’s and others’ surprise,
serious challenge to his power
eventually came from society.
More aptly, from a certain seg-
ment of Indonesian society: the
more conservative segment of the
country’s Islamic society. Succes-
sive massive demonstrations on
the streets of Jakarta under the
pretext of “Bela Islam” (Defend-
ing Islam) in 2016, 2017 and 2018
occurred and reinforced political
division reminiscent of the 2014
presidential election.
Things seemed to go back to
square one for President Jokowi
as the incumbent. At the same
time, it should be noted that
things were not going smoothly
for Prabowo either.
Challenges on Jokowi’s side
Based on various credible opin-
ion polls, at the time of writing,
President Jokowi as the incum-
bent maintains a winning margin
in terms of electoral support over
Prabowo by about 15 to 20 per-
cent. All other things being equal,
the poll numbers look more prom-
ising for Jokowi than Prabowo.
The question of whether Prabowo will be a
democratic leader if elected is difficult to answer.
Nevertheless, for the first time
of the still relatively short period of
democracy in Indonesia, the econ-
omy has become a major election
issue. Ironically, the incumbent so
far has been on the defensive.
Although, as a matter of fact,
under the Jokowi presidency vari-
ous reforms and achievements
have been made and appreciated
by many, at home and abroad. But
the challenger has so far been more
successful in appealing to vot-
ers’ emotions about the perceived
failed promises of the incumbent
on the economic front.
The President has also re-
mained on the defensive when it
comes to identity issues. He has
been attacked as being “less Is-
lamic” by various Islamist groups,
although Prabowo as the pre-
ferred candidate of these groups
ironically cannot be referred to as
“more Islamic”.
Nevertheless, the fact that this
kind of comparison about private
character has somewhat been
brought up into public discourse
is worrying for a country that long
ago constitutionally settled the
question of the relationship be-
tween state and religion.
Even more worrying is that
Jokowi has been facing this kind
of issue since he ran for governor
of Jakarta in 2012 and during the
presidential campaign in 2014.
Challenges on Prabowo’s side
A legit question that many
keep asking about Prabowo is
this: Should he become president,
will he be a democratic leader?
The question surfaced based on
his role as the then-commander
of the Army Strategic Reserves
Command (Kostrad) during sev-
eral important political events
(including the kidnapping of ac-
tivists) that led to the fall of Soe-
harto in May 1998 and in the early
days of BJ Habibie’s presidency.
He was dismissed from military
service but never publicly cleared.
Hoping to get an answer to the
question about Prabowo’s exact
role during the fateful days 20
years ago will probably be useless.
There are many questions about
other dark spots within the coun-
try’s history that have never been
resolved anyway.
The question of whether Prabo-
wo will be a democratic leader if
elected is difficult to answer. How-
ever, the answer may be found by
observing his behavior and deci-
sions thus far. One such decision
is regarding his choice of Sandiaga
Uno as a running mate.
Sandiaga is also a member of
Gerindra. For the first time ever,
the presidential and legislative
elections will be held simultane-
ously in April. As such, there will
be a coattail effect.
Voters will see a single party
represent one ticket, so they will
not split their votes. Gerindra will
enjoy the electoral benefits the
most given that Prabowo and San-
diaga are their own party leaders.
This, however, might cost the
other parties in the coalition, in-
cluding the Prosperous Justice
Party (PKS) and PAN. The two
parties are struggling to ensure
that they can beat the 4 percent
parliamentary threshold as re-
quired by the Election Law.
The decision to have Sandiaga
as his running mate, in my opinion,
somehow indicates Prabowo’s un-
willingness to share power, which
is a principle that is very important
in the country’s multiparty system.
The lack of power sharing, in the
context of a multicultural Indone-
sia, is democratically dangerous.
Therefore, it is up to President
Jokowi to convince voters that
the economy has been progress-
ing in the past five years and will
progress more if he is elected. The
huge challenge for Prabowo is to
convince the voters that democ-
ratization, which started in May
1998, will continue if he is elected.
The writer is the executive
director of the Centre for Strategic
and International Studies (CSIS),
Jakarta.

OUTLOOK 2019
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Presidential agenda
Jokowinomics: What’s next?
F
our years ago in Oc-
tober 2014, I wrote an
article “The concept
of Jokowinomics” for
The Jakarta Post. In the article,
I emphasized how Joko “Jokowi”
Widodo as the seventh president
of Indonesia would bring new
hope, leading to the betterment
of the people.
The foundation was instituted
during his presidency, which be-
gan on Oct. 20, 2014.
In the next five years, if Jokowi
and his running mate, Ma’ruf
Amin, take office as president and
vice president from 2019 to 2024,
the process of improving people’s
well-being will march on.
More broadly, in the next five
years, the momentum, which will
start in 2019, will shift to the de-
velopment of Indonesians to be-
come more advanced, superior
and prosperous.
It is not only about creat-
ing space for expression, such as
through job opportunities, but
also about managing citizens’
lives, from cradle to the grave. The
plan is to further improve the so-
cial security and insurance system
that has been established by the
current Jokowi administration.
Through better social securi-
ty programs, health services will
be more evenly distributed and
more accessible across the coun-
try. During the last five years, the
government has distributed the
Indonesian Health Card (Kartu
Indonesia Sehat) to more than 92
million people to assist poor and
vulnerable households.
The quality of education also
continues to climb. For example,
the student participation rate
has climbed from 12.39 years in
2014 to 12.85 in 2017. The level
of school participation rate also
continues to grow. In the fu-
ture, Jokowi will develop educa-
tion that fulfills industry needs
through vocational schools.
Vocational education programs
will be of great importance con-
sidering his plan for the next five
years to continue revitalizing in-
dustry and infrastructure ahead of
the Fourth Industrial Revolution
Arif Budimanta
JAKARTA
(Industry 4.0). As a commitment
to revitalizing the industry, Jokowi
is determined to strengthen poli-
cies on natural resource manage-
ment, shifting the paradigm from
exploiting the resources as mere
trade commodities to utilizing
them as the locomotive of Indone-
sian economic development.
At the same time, industry link-
ages will be built, both forward
and backward, bolstering the syn-
ergy of all national economic ac-
tors. Likewise, increasing the use
of local components in the coun-
try will be a priority in the devel-
opment of national industries.
In the long run, such educa-
tional and industrial development
programs will play a vital role
in reducing poverty rate and in-
equality since they put a great em-
phasis on people empowerment.
In March, Statistics Indone-
sia (BPS) noted that the poverty
rate of 9.8 percent was the low-
est throughout Indonesian his-
tory. The level of inequality has
also been declining, as indicated
by the Gini ratio at 0.389. Owner-
ship of assets has started to spread
among society as well.
The effort to redistribute as-
sets as an attempt to further im-
prove national welfare has started
with agrarian reform programs.
Through state intervention, mar-
ginalized communities can now
own production assets that are le-
gal, which can be utilized for more
productive activities. Until now,
more than 3 million fields, equiv-
alent to more than 700,000 hect-
ares, have been redistributed and
legalized. Certainly, it is impor-
tant to note that the asset redis-
tribution program that has been
conducted, and is yet to be con-
tinued in the future, must be done
according to the existing legal
framework, not by means of “con-
fiscating” that in turn will cause
investment uncertainty.
Surely, the active state be-
comes very essential to establish
economic welfare for the whole
of society. The state plays a piv-
otal role in creating the frame-
work in which fair and open com-
petitive markets can exist. The
framework must be rooted in the
values and spirit of Pancasila, as
the philosophical basis for the
foundation of independent In-
donesia. This will become a basic
platform to create development
programs committed and imple-
mented by Jokowi and Ma’ruf in
the next five-year national plan, if
mandated to lead.
The Pancasila Economic Sys-
tem guarantees economic de-
mocracy that is structured as a
joint effort based on the princi-
ple of kinship. The system com-
prises the principle of economic
cooperation that accommodates
people’s economy driven by co-
operatives. The spirit of coopera-
tives, that was advocated by Bung
Hatta, must be revived and devel-
oped, not in conflict with the com-
petition but working together for
a common cause. In the future,
the system will be one of the main
Jokowi-Ma’ruf agendas as a strat-
egy to deal with unemployment,
poverty and inequality.
The investment sector should be
Jokowi’s investment policy record
that comes to actual policy accom-
plishments tied to pledges. He re-
mains eager to further improve in-
vestment and the business climate
in the country. This commitment
has been realized, through a presi-
dential regulation — to accelerate
the ease of doing business in Indo-
nesia. These task forces specifically
aim to ease the licensing process.
Meanwhile, the acceleration of
infrastructure development has
also become a priority of the In-
donesian government, which has
made every effort to deal with bu-
reaucracy and regulations that
impede businesses.
These commitments have led to
a notable improvement in the in-
vestment sector. This can be seen
from the “Ease of Doing Business”
ranking, which continues to im-
prove. Likewise, the value of the
Global Competitiveness Index
(GCI) also continues to increase.
On the next Jokowi economic
policy platform, food security will
also become one of the main con-
cerns. The policy will be based on
Law No. 18/2012 concerning food,
considering that the state has the
obligation to achieve availabil-
ity, affordability and fulfillment
of food consumption that is suf-
ficient, safe, excellent and nutri-
tionally balanced both at nation-
al and local level to individuals
equally in the entire territory of
the Republic of Indonesia.
It will always be a commitment
that the government will ensure
food affordability for the peo-
ple, households and individuals
at all time.
Staple food supplies and price
stabilization are essential to en-
sure everyone can afford them,
which is the most basic human
need and its fulfilment is part of
human rights that is guaranteed
in the 1945 Constitution as a basic
component in creating quality hu-
man resources.
Currently, it can be said that
the government has succeeded in
stabilizing the supply and price of
staple food at producer and con-
sumer level. The average price of
food is relatively controlled, shown
by inflation data that is still in the
range of 3 percent. The next plan is
to further improve the staple food
supply and price stabilization sys-
tem that has been established by
the current administration.
Moreover, the next Jokowi eco-
nomic policy platform has out-
lined key foreign policy priorities.
Its objectives to be achieved in
the strengthening of foreign poli-
cy and the improvement of inter-
national cooperation are to play
a more significant role in inter-
national relations to advance the
national interest in trade, invest-
ment and tourism cooperation
and expand the export market to
OUTLOOK 2019 3
non-traditional countries.
This vision will be realized
through a “free and active” for-
eign policy. This is a commitment
to deal with the current regional
and global dynamics as well as im-
proved role and leadership in poli-
tics and security, the economy, so-
cioculture, and cooperation with
dialogue partners.
Supporting a clean, effective
and reliable government in imple-
menting these programs is a ne-
cessity. Such bureaucracy is one
of the distinctive characteristics
of developed countries. Due to
the fact that the vision to join the
ranks of developed countries is
still elusive, Indonesia has shown
that it has walked the right path.
The programs formulated on
the next Jokowi economic policy
platform will be realized, such as
the actualization of Pancasila de-
mocracy, led by the wisdom of the
representatives of the people. For
this reason, the government will
open decisions that were closed to
citizens who should be involved in
government decision-making pro-
cesses to maintain an open, trans-
parent and systematic dialogue.
Furthermore, having employed
civil servants who have the new
skills needed to harness the pow-
er of technological change will be
a civil service workforce plan im-
plemented by Jokowi and Ma’ruf.
One way to make this happen is
through civil service recruitment
processes that are open, transpar-
ent and accessible.
The programs expanding on
Jokowi and Ma’ruf’s vision for the
future are clearly not only regard-
ed as physical development. More
broadly, however, it is also provid-
ing the perfect economic platform
that enables citizens to defend
economic liberty. Here, the active
state, under Jokowi’s presidency,
will have massive presence in or-
der to realize a just and prosper-
ous society based on Pancasila.
The writer is the chairman of
the Megawati Institute and a
member of Jokowi-Ma’ruf ’s
campaign team.
4 OUTLOOK 2019
Presidential agenda
Toward an Indonesian economy for all
I
n reviewing the merits of
leadership on the broad na-
tional scale, we must look
no further than a lawnmow-
er. Even a simple machine with
the simple task of cutting grass re-
quires all its moving parts to work
in sync. Each tiny cog must align
with another and all must work in
unison to function smoothly.
A machine that serves a specific
purpose would find itself in trou-
ble if even one cog did not work
well. Now imagine a machine
that faces multifaceted problems,
serves a plethora of purposes, and
more than 260 million lives are
dependent on its performance —
like Indonesia.
With intensifying global in-
teraction, economic interdepen-
dence in an open economy is in-
evitable. Strong leadership and
fundamentals in managing eco-
nomic resilience could lead to
massive growth and development
in a country.
However, the fact is, our coun-
try is far from being on the receiv-
ing end of dependency. Our econ-
omy still relies heavily on foreign
imprint, as is evident in our cur-
rent account deficit, tendency to
create short-term debt, high de-
pendence on imported goods and
services, and the weakening ex-
change rate.
It is clear that our economic
fundamentals are neither strong
enough nor on the right track to
the better.
These realities mean serious
consequences for our economic
structure. The socioeconomic gap
will continue to grow, while the na-
tional capacity to supply its own
needs will continue to decline.
Looking even further, we must
accept the fact that our econom-
ic fundamentals still have several
vulnerabilities, including pover-
ty and the widening income gap,
fragile job structure, weak GDP
structure, increased external de-
pendency, and the looming threat
of oligarchs dominating the econ-
omy. These vulnerabilities must
be managed through a strategic
and conceptual approach.
This approach must be linked to
Sudirman Said
JAKARTA
a comprehensive national devel-
opment plan that covers human
resources, socio-culture, defense
and security, and law enforcement.
The immediate goal should focus
on restoring our economy.
The following are a selected few
of the action plans for strengthen-
ing our economy, from the devel-
opment platform of presidential
candidate Prabowo Subianto and
running mate Sandiaga Uno.
First is restoring the foun-
dational economy. This can be
achieved through repairing the
incremental capital-output ratio
(ICOR), improving debt manage-
ment and development financing,
restoring professional manage-
ment at state-owned enterprises,
and reprioritizing infrastructure
development.
Indonesia also has the poten-
tial to become the world center of
sharia economy if it strengthens
its institutions, ecosystem, hu-
man resources capacity and social
fund management.
Second, creating new centers
of growth. To achieve social wel-
fare and equal distribution of
wealth, the primary focus should
be on upholding the people’s con-
stitutional rights as regards the
economy.
Hence, the way to go is econom-
ic development that focuses on in-
clusive growth, tackling poverty,
narrowing gaps through political
deliberation that sides with the
people, and job creation.
New centers of growth should
be developed, mainstreaming the
role of small and medium enter-
prises (SMEs) is a must — not an
option — and developing agri-
cultural and rural infrastructure
must be prioritized.
Third is food security and agri-
cultural development. Indonesia
sorely needs to cut down on im-
porting foods that we can produce
ourselves.
This could be done by strength-
ening state-owned logistics com-
pany Bulog’s authority in stabi-
lizing market prices and favoring
farmers and fishermen.
This must be accompanied by
land revitalization, expediting the
use of technology, and firm capac-
ity building in farmers’ knowledge
and skills to increase productivity
and value-added commodities.
The government should also
set up a financing institution to in-
vest in grassroots agriculture.
Fourth, ensuring energy secu-
rity. Issuing policies that push for
energy exploration, diversifica-
tion and conservation would lead
to decreased reliance in fossil fu-
els and imported energy.
We also need to revitalize mil-
lions of hectares of degraded land
by converting them into bioener-
gy estates. This could accelerate
increased renewables in our na-
tional energy mix.
Fifth is marine and fisheries
development. Our marine and
fisheries potential should be re-
aligned to guided to fishermen’s
welfare through prudent policy
planning.
This could be done by revising
regulations to favor fishermen,
increasing fisheries productivity,
managing our outermost islands
and strengthening civil marine
transportation.
We also need to fix financing
schemes for local fishermen. It
is also important to ensure legal
compliance, including the Ex-
clusive Economic Zone and set-
tling maritime boundary disputes
through existing international
frameworks.
Sixth, harness the creative in-
dustry and the digital economy.
The potential of the creative indus-
try and the digital economy should
be harnessed by creating an eco-
system favorable for growth.
New digital startups should be
oriented toward creating as many
new jobs as possible. The Creative
Economy Agency (Bekraf ) could
be transformed into a more effec-
tive body to spearhead creative in-
dustry development.
Tourism should also be an im-
portant part of the creative in-
dustry. Incentives should be giv-
en for developing destinations,
revamping promotional tools for
foreign visitors, and developing
halal tourism as part of the halal
industry.
Seventh is environmental man-
agement and conservation. Top-
down policies should include
preventing environmental deg-
radation, protecting wildlife and
biodiversity, maintaining water
resources management, and cut-
ting all reclamation plans that
cause environmental damage.
The institutional strength-
ening could be applied through
the provision of human resourc-
es, technology and a substan-
tial budget for environmental
conservation.
Eighth is tax reform, which of-
fers an opportunity to incentivize
new economic actors and better
management of state revenues.
Incentives policies could in-
clude two-year tax holidays for
new SMEs, effectively lowering
the tax rate to increase the tax ra-
tio, strengthening tax institutions
and maximizing the use of tech-
nology to spur state revenues.
The tax extensification and
intensification should progress
through a scheme that incentiviz-
es business and economic growth.
Building institutional leader-
ship
We must accept the bitter truth
that this country has experienced
mismanagement in its gover-
nance over the last few years, es-
pecially in the economy. Our gov-
ernment has been imbued with a
too personal approach tinged with
over-politicization.
Coherence and consistency
have been absent in the strategies
that were thought up using this
approach.
The uncontrolled influx of for-
eign workers, food imports that
JANUARY 15, 2019
have skyrocketed while domestic
products are abundantly avail-
able, and the sluggish develop-
ment of the energy sector are just
a few examples of the administra-
tion’s inconsistency.
The evidence speaks for itself:
In the last five years, our nation
has plunged into chronic “over-
simplification” from which it
needs time to heal. The failures
have nothing to do with economic
problems, but a problem in lead-
ership. The agenda of establishing
a foundational economy has been
forgotten, swept away in the eu-
phoria of ceremonial gibberish.
It is proven that an artificial po-
litical approach showing that a lead-
er that can do everything alone is
both unnecessary and misleading.
Thus, we need an executive
leader that can lead established
institutions, use management
tools and take strategic steps to
formulate visions, missions, strat-
egies and priorities that are re-
alized through active programs;
someone with a high level of con-
fidence that has been proven wor-
thy of employing and leading the
best and brightest Indonesians —
the best talents in their fields.
We need a leader who sets aside
his personal interests, one who
does not go around seeking his
own political credit and instead
works diligently through using
and strengthening state institu-
tions; a leader who consciously
sets checks and balances and pru-
dent practices through the ap-
propriate distribution of roles
within various state instruments
and shares the multiple aspects of
nationhood.
This approach would lead to
greater credibility for the na-
tion while increasing confidence
among both the national and glob-
al public. Developing institutional
leadership is a prerequisite to de-
veloping an Indonesian economy
that benefits all.
The writer is the debate and
campaign content director of the
Prabowo Subianto-Sandiaga Uno
national campaign team.
6 OUTLOOK 2019
State finance
Reflection on remarkably resilient year
A
s 2018 has come to a
close, we reflect on how
Indonesia’s economy
has been remarkably re-
silient amid the challenging global
economic environment. Indone-
sia was able to weather the storm
better in part thanks to a national
budget that was designed to be ag-
ile. This agility helps the govern-
ment swiftly introduce counter-
cyclical measures, when required,
in responding to external upheav-
als and cushioning the impact to
our economy.
Despite these challenges, we
closed the year with impressive
numbers and solid fundamentals.
Our national budget has proven
its mantle as a credible and pru-
dently managed fiscal instrument.
A mix of factors created the per-
fect storm resulting in the global
economic volatility we see today.
The monetary policy normaliza-
tion introduced by the United
States’ Federal Reserve (the Fed)
by raising its benchmark rate has
The deal of the year: Freeport-McMoRan CEO Richard Adkerson (right) and PT Inalum chief executive Budi Gunadi Sadikin shake hands
after the signing of an initial agreement on the purchase of the majority stake in PT Freeport Indonesia on Sept. 27, last year.
Sri Mulyani Indrawati
JAKARTA
tightened liquidity.
The US Treasury’s expansion-
ary fiscal policy, in the form of tax
cuts and increased spending, bol-
sters aggregate demand. Further-
more, the US trade policy vis-à-vis
China and Europe dampens glob-
al trade. The impact reverberates
around the world and translates
to appreciation of the US dollar,
decreased capital flow to emerg-
ing economies and uncertainties
in global trade.
Downside risks and increased
volatilities emanating from these
global events continue to sup-
press growth. The Internation-
al Monetary Fund adjusted its
global GDP growth projection
from 3.9 percent to 3.7 percent
for both 2018 and 2019. They had
also adjusted global trade volume
growth from 4.5 percent to 4 per-
cent in 2019.
We hope cooler heads will
prevail and the recently an-
nounced trade truce will lead to a
more positive path. For decades,
emerging economies have been
enjoying the benefits of interna-
tional trade that have translated
to impressive poverty reduction
and prosperity boost. We need
to safeguard the socioeconomic
progress made to date.
Last year marked the 10th an-
niversary since the inaugural G20
Leaders’ Summit in 2008 amid
the economic crisis in the US —
after the fall of Lehman Brothers
and AIG triggered panic that led
to the global financial crisis.
In 2008, all G20 leaders col-
lectively worked to save the
world economy from calamity, by
adopting synchronized cohesive
economic policies.
They successfully spearhead-
ed financial regulatory reform to
avoid future over-accumulation
of risks. Furthermore, to avoid a
race to the bottom, there has been
significant progress on coopera-
tion among tax authorities to fight
evasion through the Base Erosion
Profit Shifting (BEPS), Automatic
Exchange of Information (AEOI)
and a taxation framework for the
digital economy.
In the current global environ-
ment, we need the same level of
cooperation that was present 10
years ago. While each leader has
to address their own domestic
economic and political challenges,
strong cooperation is needed to
minimize negative spillover from
one country’s policy.
Confrontation will only ex-
acerbate the risks, erode confi-
dence and weaken global eco-
JP/Wendra Ajistyatama
JANUARY 15, 2019
nomic recovery. The call for
multilateral trade institutional
reform, in the World Trade Orga-
nization (WTO), should be based
on the spirit of improvement and
cooperation to achieve fair trade
agreements. All countries should
have the same opportunity for
their voice to be heard. These are
the global challenges for all.
Fiscal and economic perfor-
mance
Fortunately, even with this
challenging external environ-
ment, the broad picture of In-
donesia’s economy remains en-
couraging and underscores that
healthy economic fundamentals
have been preserved.
This is underpinned by a
healthy annual GDP growth of 5.2
percent in 2018 — one of the high-
est and most consistent among
G20 economies. This is partly
driven by robust domestic con-
sumption as well as recovery in
investment and external demand.
Furthermore, the unemploy-
ment rate is at 5.34 percent (the
lowest since 2010) and the pover-
ty rate stood at 9.82 percent (the
lowest in two decades). Inflation
has been benign at 3.13 percent in
2018. The Gini coefficient has also
improved from 0.40 to 0.38. These
remarkable achievements were
done while maintaining prudent
fiscal management.
Our 2018 national budget is
healthy, as reflected in the im-
proving primary balance that is
nearing zero, a significant im-
provement comparing to the pre-
vious year. Furthermore, the bud-
get deficit for 2018 declined to 1.76
percent of GDP, the lowest since
2012 and much lower than the
original plan of 2.19 percent.
In addition, the public debt to
GDP ratio has been maintained at
around 30 percent — far below the
60 percent allowable by law. This
prudent fiscal policy is sound even
if compared with developed econ-
omies and most G20 countries.
Indonesia’s overall fiscal per-
formance is solid with the tax ra-
tio in 2018 reaching 11.5 percent
of GDP — an increase of almost
 JANUARY 15, 2019
The pride of West Java: Kertajati International Airport in Majalengka, West Java, which was officially inaugurated in May, 2018, is one of the government’s important infrastruc-
ture projects.
one percentage point compar-
ing the previous year, without
jeopardizing the investment cli-
mate. We use tax incentives to
encourage industrialization and
investment appetite on top of
our policy to simplify investment
regulations.
Overall revenue collection in
2018 grew by 16.6 percent, while
public spending grew 9.7 percent.
Furthermore, overall revenue
reached 102.5 percent of the an-
nual target for 2018, while non-
tax revenue impressively reached
147.8 percent of the annual tar-
get. These indicators suggest that
business activities have increased
and profitability has improved.
Overall, this is an outstanding
turnaround policy.
Spurred by an increase in do-
mestic production activities, we
have also seen strong growth in
imports, which outstrip exports —
exacerbated by the higher oil price
as well as increased demands for
capital goods and raw materials.
The government took neces-
sary steps to keep the current ac-
count deficit at a healthy level and
preserve the confidence level in
the market.
Competitive and resilient
The government will remain
vigilant in monitoring these glob-
al dynamics. We will continue to
strengthen our policy mix and
maintain stability while preserv-
ing the momentum of growth.
Along with the nation’s inde-
pendent central bank, Bank Indo-
nesia (BI), the Financial Services
Authority (OJK) and Deposit In-
surance Corporation (LPS), the
government is committed to pre-
serve the stability of the financial
system and continue to deepen
our financial sector.
At the same time, to boost the
productivity and competitiveness
of our economy, we will invest
more in our human capital as well
as improve infrastructure for con-
nectivity and efficiency.
The increased budget alloca-
tion for education, health and
the social safety net is a testa-
ment of the government’s long-
term commitment to investing in
our human capital and in reduc-
ing poverty even further. Indone-
sia’s workforce needs to be able to
compete in the technological and
industrial revolution 4.0.
Indonesia is also undergoing
an infrastructure renaissance.
The government has made an im-
portant decision to address the
many years of under-investment
in this sector and bridge the infra-
structure gap. We are committed
to invite more private capital to
participate in building infrastruc-
ture, through more advanced and
diverse instruments to promote
public-private partnerships.
As a US$1 trillion economy,
Indonesia remains an attractive
market and investment destina-
tion. Our middle class is growing,
our young population makes a
potent workforce, our economic
policies remain prudent and our
improved investment climate is
attracting capital inflow.
Furthermore, we preserve the
people’s purchasing power, sup-
port small and medium sized en-
terprises (SMEs) through mi-
crocredits and tax cuts, as well as
promote tourism to new destina-
tions across the country.
In order to cut red tape and
further improve the business cli-
mate, the government has intro-
duced the Online Single Submis-
sion (OSS). In the past four years,
Indonesia’s standing in the World
Bank’s Ease of Doing Business Re-
port has aggregately improved.
In 2018, five credit rating
agencies confirmed Indonesia’s
investment grade status. Fur-
thermore, Indonesia’s Glob-
al Competitiveness Index im-
proved two positions to 45th place
out of 140 countries — in 2018.
2019 outlook
The recently approved 2019 na-
tional budget maintains the tradi-
tion of prudence and credibility in
our fiscal policy. The budget will
continue to be an instrument for
poverty reduction, job creation
and bridging regional disparities.
To finance various develop-
ment programs amid the global
uncertainties, the budget will re-
main healthy and credible. Fur-
thermore, the self-sufficient
nature of next year’s budget is evi-
dent from the significant project-
ed growth of state revenues, both
from tax and non-tax sources.
The 2019 budget carefully fac-
tored-in the prospects ahead in
light of the global economic con-
dition that is moving toward a new
equilibrium. Despite the political
year, we remain optimistic in our
OUTLOOK 2019 7
Antara
macroeconomic assumptions for
the 2019 budget.
In 2019, the government proj-
ects the economy will grow by 5.3
percent, inflation be kept stable at
3.5 percent, while global volatility
will continue to rise.
As an economy, Indonesia has
been able to withstand past hur-
dles and has learned a lot from the
Asian financial crisis of 1998 and
the global financial crisis of 2008.
One common lesson we grasped
is that we always need to focus on
reforms to strengthen our funda-
mentals. In the past two decades,
key reforms were introduced to
strengthen our economic resil-
ience and ensure that the econo-
my is managed more prudently.
Under the leadership of Presi-
dent Joko “Jokowi” Widodo, the
government remains committed
to the reform agenda.
2018 has been a remarkably re-
silient year for Indonesia. By the
same token, we are also optimistic
about Indonesia’s economic pros-
pects in 2019.
The writer is the finance minister
of Indonesia.
8 OUTLOOK 2019
Regional order
Strategic developments in Asia-Pacific
A
t the close of the 20th
century, I was inter-
viewed by Singapore’s
Channel NewsAsia net-
work, and was asked, who was
the most important person that
changed Asia? My answer was
chairman Deng Xiaoping who
opened up China in December
1978, 40 years ago, and made it
possible for China to become what
it is now, and gave the chance to
Asia (and the world) to develop
peacefully together.
Now China has become a great
power in its own right and the sec-
ond biggest economy in the world.
Domestically, there are popular
pressures and demands to stand
up to powers that caused suffering
from the beginning of the Opium
Wars 180 years ago, to when China
successfully overcame the painful
legacy of the past and achieved its
current successes as a global pow-
er. And President Xi Jinping does
understand those pressures.
Since the early 1980s, China
has participated in regional af-
fairs and developments initiated
by ASEAN, such as the ASEAN
Regional Forum (ARF), ASEAN
Defence Ministers Meeting Plus
(ADMM+) and East Asia Sum-
mit (EAS). Currently, China
also has bilateral trade agree-
ments with each ASEAN member
state, as well as one with ASEAN
as a whole.
In addition, China has been
an active member of Asia-Pacific
Economic Cooperation (APEC)
and the Pacific Economic Coop-
eration Council, and a member of
the Council on Security Coopera-
tion in the Asia-Pacific, a track two
regional construct on security.
China came up with a new ini-
tiative for Asia by establishing
the Asian Infrastructure Invest-
ment Bank (AIIB) to finance and
cooperate in building infrastruc-
ture in the region. At the global
level, China created the Belt and
Road Initiative (BRI) to establish
a new venture on global strategic
cooperation in the fields of infra-
structure, finance, trade, social
and people-to-people cooperation
along the traditional Silk Road at
Jusuf Wanandi
JAKARTA
sea and on land.
It is not meant to supplant the
existing international order, but
rather complement it by bringing
about new initiatives for global
cooperation. Thus, China is not a
total revisionist power as she has
benefitted so much from the cur-
rent order. She could partially be
considered revisionist.
China is basically still a status
quo power as shown by its mem-
bership in trade regimes such as
the World Trade Organization,
APEC and ASEAN-based regional
cooperation.
There were allegations that
China had been unfair on issues
like intellectual property rights
(IPRs) and state subsidies, but Ja-
pan and other countries had also
been accused of similar things be-
fore. Nonetheless, China has to
carefully look at the complaints
raised by the United States and
other Western countries regard-
ing these issues.
China is basically still a status quo power as
shown by its membership in trade regimes such
as the World Trade Organization, APEC
and ASEAN-based regional cooperation.
If these allegations are true,
China should make amends to
make itself credible. I believe
China is trying hard to do it, and
reform some of her policies on
trade and investment. And Presi-
dent Xi Jinping mostly answered
the questions and challenges that
Western countries put to China
in his opening speech at the Exim
Fair in Shanghai in early October,
Historic trip: India’s Prime Minister Narendra Modi arrives to launch the India-Indonesia kite exhibition
at the National Monument in Jakarta during his historic visit to Indonesia at the end of May, last year.
promising to open China’s mar-
ket, make foreign investment eas-
ier, as well as tighten up and im-
prove transparency on IPRs.
As a member of the interna-
tional community, China can play
by the rules as others do, and it
has been active in participating
in some United Nations initiated
efforts such as peacekeeping, en-
vironmental programs and the
Millennial/Sustainable Develop-
ment Goals. China strongly resists
any attempt by outside powers to
interfere in its domestic affairs.
However, there have been cases
where compromises were made
possible, such as on specific hu-
man rights issues. As the US will
resist the supremacy of China,
China also will resist any US at-
tempt to interfere in its domes-
tic affairs, let alone attempts to
change the current system of gov-
ernance into a liberal democracy.
In addition, China will pre-
vent at all cost efforts by the US
to hamper her goal of improving
her capabilities in high tech in-
dustries under the Made in China
2025 plan.
On the South China Sea dis-
putes, China has toughened its
position because it needs access to
the sea strategically.
In defending her interests,
China has been very assertive on
its own instead of taking the dip-
lomatic path as shown by her re-
action to the outcome of the UN
Tribunal on the South China Sea
in 2016.
However, at the same time I do
agree that China should not be
so assertive and, therefore, cre-
ate doubts about her peaceful
rise. The Chinese never accept-
ed the tribunal’s results because
JANUARY 15, 2019
AFP/Goh Chai Hin
they knew that the US and Japan
were behind it. As the decisions
were obviously anti-China, and
can hardly be implemented, the
question is who is going to adhere
to them? Of course the usual sus-
pects, but there is no more excite-
ment about its implementation.
ASEAN and China now have
a second chance to reach a con-
clusion on the Code of Conduct
(CoC), hopefully with a time
frame and contents that are ac-
ceptable to both sides, slowly but
surely. The CoC is important in
establishing regional order in the
South China Sea for both sides as
well as for others from outside the
subregion.
As China has mentioned, it
would like to uphold corrected
globalization, multilateralism and
an open economy.
Those principles are undoubt-
edly most important in keeping an
international order in place that
can balance the unilateralism of
the US, and at the same time sus-
tain peace and development glob-
 JANUARY 15, 2019 OUTLOOK 2019 9

ally and regionally.
Each and every country should
do its part in keeping its economy
open, as well as promote the in-
tensity of regional cooperation
to be able to overcome whatever
US President Donald Trump has
in mind.
Regional institutions to sup-
port are both ASEAN and West-
ern-initiated ones like APEC,
BRICS, ARF, ADMM+ as well as
the EAS (or perhaps the Indo-Pa-
cific in the future), together with
China’s initiatives like the Shang-
hai Cooperation Organization,
AIIB and BRI.
Also important are the Re-
gional Comprehensive Economic
Partnership and the Comprehen-
sive and Progressive Agreement
for Trans-Pacific Partnership.
Most of them should ideally be
complementary, as it is important
to keep the economy and politics
open in the region and the world.
Maybe that is for us to take up as
a challenge.
Since last year, the term “Indo-
Pacific” has become popular jar-
gon in the region. It has become
confusing as countries have di-
verging views and definitions of it.
At present, one of the biggest
confusions is related to the revival
of the Quadrilateral Security Dia-
logue 2 (Quad 2) as announced in
November 2017 in Manila, during
the EAS. Quad 1 has been slowly
diminishing in the last five years
because of different interests of
countries like Australia. Now, the
US has taken the lead for Quad 2,
which is similar to Quad 1, com-
prising Australia, India, Japan and
the US, for security cooperation to
constrain China.
The US’ policy is in line with
her declaration of China (and
Russia) as rivals in the 2017 Na-
tional Security Strategy of the US
report. And US Vice President
Mike Pence has put across this no-
tion very straight and direct.
This is serious, and opens up
a new chapter in China-US re-
lations, with significant conse-
quences for the Asia-Pacific re-
gion. Quad 2 can be considered
the implementation of the NSS:
containing China. It is no new
Cold War however, because there
are no two confronting ideolo-
gies. And the two big countries are
competing but also cooperating in
many fields, bilaterally such as in-
tegrating economic relations, as
well as multilaterally as the two
have to cooperate on many issues
before they can be solved.
One big question is on the future of
the role of the US in East Asia.
Problems continue to exist,
such as on nuclear proliferation
in North Korea (and Iran), as well
as in the global economy, environ-
ment and terrorism. This contain-
ment is of course not desirable for
Indonesia and ASEAN.
Indonesia has consistently pro-
posed that regional cooperation
should be open and led by ASEAN.
Thus, with this mindset, the EAS,
which comprises all relevant
countries in the region, including
India, Russia, the US and China,
should be the platform of choice
for the Indo-Pacific.
One big question is on the fu-
ture of the role of the US in East
Asia. President Trump is still am-
bivalent in this case. He insists on
his “America first” agenda, and is
basically against multilateralism,
or globalism as he calls it.
This has raised questions, such
as on the worth of the US’ alli-
ance with Japan, South Korea and
Australia. Although his military
staff and the White House have
claimed that US policy in the Asia-
Pacific remains business as usual,
you cannot take it for granted.
It is clear that Trump is a uni-
lateralist, and that at the end of
the day he is the boss and decision
maker. As the US has for 70 years
been the keeper of peace and sta-
bility in the Asia-Pacific, it is natu-
ral that she should be welcomed in
the region as she wishes, but prob-
ably no more as a regional hege-
mon, because she is against it with
her “America First” principle.
Others in the region should fill
the vacancy, if the US is not enthu-
siastic enough to stay.
Keeping this in mind, all coun-
tries in the region must continue
to cooperate closely and work to
keep not only our bilateral rela-
tions but also multilateral institu-
tions relevant.
All these developments are im-
portant for the next Indonesian
government to consider seriously
and make the necessary adjust-
ments in our own foreign policy,
no matter who wins the elections
in April 2019.
The writer is the vice chairman
of the board of trustees,
CSIS Foundation.

AFP/Roslan Rahman
rd
Big family: Posing for a group photo before the start of the ASEAN-United States summit on the sidelines of the 33 ASEAN summit in Singapore on Nov. 15, 2018, are (from left)
Malaysia’s Prime Minister Mahathir Mohamad , Myanmar State Counsellor Aung San Suu Kyi, Philippine President Rodrigo Duterte, Vietnam’s Prime Minister Nguyen Xuan
Phuc, US Vice President Mike Pence, Singapore’s Prime Minister Lee Hsien Loong, Thai Prime Minister Prayut Chan-O-Cha, Brunei Sultan Hassanal Bolkiah, Cambodian Prime
Minister Hun Sen, Indonesia’s President Joko “Jokowi” Widodo and Laos Prime Minister Thongloun Sisoulith.
10 OUTLOOK 2019
Food policy
Focus on demand also needed
T
he year 2018 was
marked by a number of
controversies over the
government’s food im-
port policy. The controversies oc-
curred when the Trade Ministry
decided to import 500,000 tons of
rice in January, another 500,000
tons of rice in May and 100,000
tons of corn in November.
The controversies grew after
the Agriculture Ministry said the
imports were not necessary given
the adequate supplies in the do-
mestic market, while the Trade
Ministry said it was necessary to
anticipate shortages in local pro-
duction, especially during non-
harvest periods, Ramadhan and
Idul Fitri, when demand for rice
was usually high.
The Agriculture Ministry also
said that corn imports were not
necessary because there would be
a surplus of 13 million tons in local
production.
Unfortunately, corn retail
prices increased significantly and
reached about Rp 6,000 per kilo-
gram, causing a price hike in feed
prices despite the surplus claim.
Smallholder livestock farmers,
especially those breeding layers
and broilers, cannot afford to buy
feed.
The controversies were main-
ly triggered by the quality of data
used by government agencies.
Academics, the private sector
and society as a whole expect no
further controversy concerning
government food policies in 2019.
Last October Vice President Ju-
suf Kalla announced a new esti-
mate for unhusked rice produc-
tion of 56.54 million tons, which
is 31.88 percent lower than the 83
million tons projected by the Ag-
riculture Ministry.
The new estimate was calculat-
ed using a sampling area method
(KSA), a new method to improve
the objectivity measurement of
harvested rice areas, using spatial
and digital technology.
In 2019, the KSA method will
also be applied to improve the
quality of data on corn and soy-
bean production, although it has
some weaknesses as raw data on
Bustanul Arifin
JAKARTA
land area for corn and soybean are
not easily available.
Indonesia needs a more com-
prehensive food policy for the
welfare of farmers and consumers
and business certainty, especially
in the political year of 2019. The
food policy should not only focus
on the supply side, but also on the
demand side, from the perspec-
tives of consumption, trade and
investment, which will be exam-
ined in this article.
The existing food policy on the
supply side includes special ef-
forts to increase the production of
rice, corn and soybean, the provi-
sion of subsidies for fertilizer and
seed, machinery, small-scale irri-
gation and other social assistance
for farmers and farmer groups.
Other supply-side policies are rice
protection in the form of the gov-
ernment purchase price scheme
Main staple: Workers carry sacks of rice in the Cipinang wholesale rice market in East Jakarta. The gov-
ernment’s decision to import rice often causes controversy because of inaccurate data on the country’s
rice production.
(HPP), agricultural insurance and
subsidized credit (KUR) to cope
with production risks.
On the demand side, existing
policies to protect consumers, es-
pecially at the lower end of the in-
come spectrum, include rice sub-
sidies for poor families through
the Rastra Program, which has
gradually been replaced with the
non-cash food assistance (BPNT),
and price ceiling policies through
the highest retail price and some
flexibility for the State Logistics
Agency (Bulog) in procurements
that are above the reference price.
Evaluation of existing policies,
such as the effectiveness of the
two price phenomenon (i.e. mar-
ket prices vs. reference prices),
possible distortions in food assis-
tance for the poor under special
circumstances of both hard and
soft infrastructure, capacity of hu-
man resources, etc.
The synchronization of food
policies is not adequate if it is only
resolved through a supply-side
approach or food production sys-
tem. The supply dimension is cer-
tainly a necessary condition, but
the demand dimension is a suffi-
cient condition.
A more credible food con-
sumption policy needs to be es-
tablished, according to a recent
study on the future of Indonesian
food demand, conducted by the
National Development Planning
Agency (Bappenas), the World
Food Program (WFP) and the
Food and Agricultural Organiza-
tion (FAO).
The patterns of food demand
and the character of the middle-
class have changed significantly, so
that future policies should be more
compatible with the changes (The
Jakarta Post, July 26, 2018).
Food trade policy is related to
farm-gate prices, which might not
be compatible with market mech-
anisms. Farmers are often trapped
in a state of high dependence on
collector traders (middlemen) be-
cause many of them sell their rice
before it is harvested.
This “cash and carry” system
is quite attractive for farmers be-
cause of the high discount factor
in the food economy. Here, the ac-
tual market mechanism does not
occur smoothly as the price for-
mation depends on the institu-
tional arrangements that underlie
the transaction of products.
It can be found along the value
chain of food products, involv-
ing producers, traders, wholesal-
ers, food industries, retailers and
consumers.
Given the nature of an archipe-
lagic economy, inter-island logis-
tics and the trade system in Indo-
JP/Umair Rizaludin
JANUARY 15, 2019
nesia play crucial roles. The policy
of developing a logistics system is
as equally important as food pro-
duction and consumption policy,
even determining the inefficien-
cy level or high price disparity
between producer and consumer
prices. Massive infrastructure de-
velopment in the past few years
should be able to improve the per-
formance of the logistics system.
The investment policy on trade
should be developed more com-
prehensively in order to attain
some of the Sustainable Develop-
ment Goals (SDGs), such as zero
hunger, zero poverty, reduced in-
equality, responsible consump-
tion and production.
Indonesia needs investment in
modernizing traditional markets,
cargo vessels and trains, halal-
food trading and trade financing.
Previous policies on industrial
deepening and added value strat-
egies on some food commodities
should provide lessons that up-
stream policies on increasing pro-
ductivity and production capaci-
ties are equally important.
The policy changes for the fu-
ture should focus on the avail-
ability of staple food and price
stabilization, which eventually
might contribute to the achieve-
ment of some SDGs. Policy deci-
sion should not be based on the
supply-side only, but also on the
demand-side, price indications,
food stock management and who
has the most control of such staple
and strategic foods.
The policy on food consump-
tion, trade and investment should
promote specialization, be com-
patible with regional economic
cooperation, simplify the proce-
dures and remove the constraints
of goods and services movement
from the borders to post-borders
and industries.
The writer is a professor of agri-
cultural economics at University of
Lampung (Unila), senior economist
at the Institute for Development of
Economics and Finance (Indef ) and
chairman of the Statistical Society
Forum (FMS).
 JANUARY 15, 2019
Risk Appetite Back In Emerging Markets
Indonesia will hold presidential and legislative elections in April 2019. Many have regarded 2019 as an economically challenging year. How challenging is
it? How will the 2019 elections have an impact on the economy, particularly on the banking sector? The Jakarta Post recently talked to the CEO of Citibank
Indonesia, Batara Sianturi, who is also the Chairman of the International Banks Association of Indonesia (PERBINA). Here’s an excerpt of the interview.
Question: Indonesia will hold presidential
and legislative elections in April of this
year. Tell us first how you view the current
global economic landscape prior to providing
some insights into how the elections
will impact the Indonesian economy.
Answer: Essentially, 2019 will be
a challenging year as the global growth
environment is not at its best condition. We
see the US - China trade tension is beginning
to take a toll on the growth rate of China
and anecdotally also on the growth rate of
the US.  Indonesia thus faces headwinds
potentially in the form of slowing export
growth.  The silver lining is on the capital flows,
since ironically, the expected synchronized
slowdown between the US and China as well
as lower commodity prices bode well for the
global inflation outlook. This increases global
risk appetite for emerging market financial
assets. Thus in terms of short-term capital
inflows, we think 2019 will not be as challenging
as 2018. Strong capital inflows will keep the IDR
at bay, thus providing liquidity to the market.  subsides. In the past, post-election euphoria
How will the global economic
environment have an effect on the Indonesian
economy?
Indonesia may face potential
slower export growth. We have already
seen signs of that happening from
the November trade figures. We’ll know
the next trade figure on Jan. 15, let’s see.
The trade tension between the US and China
has led to some multinational companies in
China mulling the possibility of relocating their
companies along with their supply chain to
other destination countries. Which countries will
benefit from the trade war? ASEAN countries
are closest in terms of geographical proximity
to China, followed by India and South Asia.
Will Indonesia get a piece of the action?  We
are hopeful, some companies, for example
in the footwear and electronics sector, have
expressed interest to reallocate here. However
such decisions will probably take time because
relocating a manufacturing base along with their
supply chain involves various complexities.
So, with Indonesia completing its infrastruc-
ture projects, I think the game changer will be
to step up the country’s initiatives with regards
to private investment, and there is plenty of
opportunities to do this.  As said earlier, peer
countries in the region are courting incoming
FDI from multinational companies seeking to
diversify production away from China because
of the Trade War.  We now have the hard infra-
structure to compete, but we must also step
up the game in soft infrastructure, to create an
operating environment of efficiency and lesser
regulatory uncertainties.   performance at the end of 2018.  The CAR
JP/Arief Suhardiman
Batara Sianturi
CEO OF CITIBANK INDONESIA
And now, let’s move to the issue of
the 2019 election. How do you view it when
linked to economy?
Looking at the economy in 2019, we will
split that into two phases: In the first half of
the year, January to June, we may see growth
supported by various stimulus ahead of the
election, followed by the festivity season.  likely pick up amidst easing concerns over
However, this would be more challenging to
sustain in the second half of the year, after
the election. Long delayed adjustments to
energy prices may be forthcoming, and
there are also export headwinds as discussed
earlier.  We recently witnessed President
Jokowi officiating the operations of a number
of trans-Java toll-road sections.  Many
more infrastructure projects will come to
completion as we head towards the latter part
of the year.  This potentially will create a slack
in the economy. Ideally, we could fill up the
slack with a recovery in private investment,
thus increasing banking activities as finance
follows economic activities.
How about the economic growth?
Indonesia’s economy will grow around 5%.
It can be 5.0%, 5.1% or 5.2%. As a one
trillion-dollar GDP country, 5 percent
growth is equivalent to US$50 billion a year.
This is expected to offer other opportunities as
well in the banking sector. That’s why we
are more positive in 2019.
Could you give some more insights into
banking sector and equity/bond markets
The banking sector experienced robust
ratio was 22.9 percent and loan grew at around
13 percent . Citibank Indonesia closed 2018
with loan growth around 26 percent.
 We have full confidence in the banking
sector. I think all the regulatory actions done
by OJK (the Financial Services Authority) and
monetary policy actions done by Bank
Indonesia have been spot on.
The IDR has started to strengthen. Along
with this, the stock and bond markets are
recovering, signaling a return of confidence
on the economy. Foreign portfolio inflows are
coming back in.  be a thing of the past. People rely less and less
 For what it’s worth, Citibank Indonesia
was actually one of the first to turn bullish on
the Indonesian equity market back in mid-
August last year. At the time valuations fell
too far given the still robust fundamentals
and the prospect of a peaceful election.
Citi upgraded the forecast for the Indonesia
composite to 6,600 by end of June
2019. Optimism likely will be extended until
well after the election, as political uncertainty
could last for 1 - 2 months
Politics aside, corporate earnings growth is
expected to grow in the double digits and that
will support the market’s performance.
 Recently our strategist recommended
positioning for IDR strength as we expect
demand for high yielding assets would
global cost of capital and this shall benefit
IDR. We have seen also good inflow early
this year into bond market. If you look at
inflation of 3 percent last year and 10-year
bond yield at around 8 percent, Indonesia
is very attractive from real interest rate
point of view. Additionally, Bank Indonesia’s
responsiveness in maintaining stability
should give investors comfort.
What about foreign perspective, which has a
great influence on the stock market?
Foreign investors compare Indonesia with
other emerging markets, especially the so-called
high yield & high growth emerging markets.
In this regard, we fare relatively well compared
to many other countries in terms of fiscal and
monetary policy credibility. Accordingly, we
weren’t the hardest hit during the turbulence.
And now that appetite for emerging markets is
back, we were one of the quickest to recover.
What lessons learned we can get from the
previous elections?
Generally political uncertainty creates
volatility. The sooner we have a decisive
conclusion of an election, plus clarity over the
future direction, these would generally be
viewed positively.  to support the equity market as well.
OUTLOOK 2019 11
How do you view FinTech companies-
facilitated Peer to Peer Lending increasingly
preferred by millennials? Is Peer to Peer
Lending a threat to banking sector? 
I don’t think Peer to Peer Lending is a
threat. It only complements what the banking
sector cannot reach. Artificial intelligence
and robotics will also come into play
globally. A lot of algorithmic trading is now
already happening. Research can now be
done through robust simulations and so I think
automation will come naturally. Analog will also
on phone banking because the digital banking
platform on smartphones is getting better.
Referring to China’s multinational companies’
plan to relocate their companies in emerging
countries as you said earlier, how should
Indonesia respond to it?
When all the infrastructure projects are
completed, what is next should be to accelerate
building and rebuilding human capital as
competitive as the one in peer countries. The
quality of our Indonesian human capital must
meet global standards, ready to compete
regionally and globally. At Citi we understand
this, many of our talents had overseas working
experience and they came back home as better,
more qualified, more professional and more
globally competitive bankers. Globalization is the
thing of the future. We are now seeing Indonesian
corporates, some in fintech/e-commerce
expanding beyond Indonesia. So I repeat again,
it is very important to prepare our human capital
to be as competitive as the one in peer countries.
Otherwise, Indonesia will lag behind. Of course,
we continue to improve the ease of doing
business ranking, first among ASEAN countries
and then beyond ASEAN.
Tell us about Citibank’s plan for 2019?
We will continue to focus on target market
segments.  In the institutional bank, we will
focus on multinational clients and our local
corporate clients. We will support them
through credit growth and solutions like we
did in 2018. We will bring also new digital
innovations in the institutional banking to
support our growing clients that are also
trying to expand beyond Indonesia. Some of
these new Indonesian players in the fintech,
e-commerce companies have regional ambition
as well. And Citi is the perfect partner bank to
support them in their regional expansion. In
consumer banking, we continue to focus on
wealth management business and also on our
credit card business as we see the opportunities
in the retail segment. Of course, we have our PT
CSI (Citi Sekuritas Indonesia) which will continue
12 OUTLOOK 2019
Monetary policy direction
Synergy for resilience and growth
T
he past year of 2018 has
been replete with oner-
ous challenges, beset
by global economic di-
vergence and uncertainty. Such
dynamics could persist into 2019
and beyond.
Despite inauspicious global
economic dynamics, the domestic
economy has performed well with
stability maintained as growth
momentum endures.
We projected economic growth
at 5.1 percent in 2018, backed by
strong domestic demand that ex-
panded at 5.5 percent.
Furthermore, household
spending could be maintained
at a solid growth of 5.2 percent,
buoyed by public purchasing
power and expansion of the gov-
ernment’s social assistance pro-
grams. In real terms, exports rose
by 6.9 percent but imports expe-
rienced a 12.3 percent growth,
implying that external demand
has contributed adversely to eco-
nomic growth in 2018.
In line with strong domestic
demand, the current account
deficit was relatively large in
the third quarter of 2018 at
US$8.8 billion (3.37 percent of
the GDP) compared to $8 billion
(3.02 percent of the GDP) in the
previous period.
The current account deficit
increased due to the rise of im-
ports to support government in-
frastructure projects, which will
enhance economic productivity
moving forward. For 2018, Bank
Indonesia forecast the current ac-
count deficit to remain within
a manageable threshold, namely
below 3 percent of the GDP.
Rupiah exchange rates have
moved in line with market mech-
anisms and support external
sector rebalancing toward sus-
tainable economic growth.
Depreciatory pressures on the
rupiah have stemmed from the
strong US dollar and a rever-
sal of foreign capital flows as
a corollary of global economic
uncertainty.
Nonetheless, the monetary
policy response and stabiliza-
tion measures implemented by
Perry Warijyo
JAKARTA
Bank Indonesia through close
coordination with the govern-
ment have dampened pressures
on the rupiah.
Year-to-date (ytd), the rupiah
depreciated by 7 percent as of
Nov. 19, 2018, which is less se-
vere than that reported in other
emerging markets such as In-
dia, South Africa, Brazil, Russia
and Turkey.
Furthermore, the rupiah ex-
change rate stability has been
bolstered by the strong posi-
tion of reserve assets, record-
ed at $115.2 billion at the end of
October 2018, equivalent to 6.2
months of imports and servicing
government external debt.
Low inflation has been main-
tained throughout 2018, which
has helped to increase public
purchasing power.
As of October, Bank Indone-
sia estimated year-end inflation
at 3.2 percent in 2018, which is
below the midpoint of the 3.5 ±1
percent target corridor.
From a BI perspective, we
are focusing monetary policy on
maintaining macroeconomic sta-
bility, with rupiah exchange rate
stability in particular.
Bank Indonesia has already
raised the BI 7-Day Reverse
Repo Rate by 175 basis points
to 6 percent in order to bolster
the attractiveness of domestic fi-
nancial assets as a preemptive,
ahead-of-the-curve response to
the current global trend of higher
policy rates.
The policy to stabilize the
rupiah in line with the curren-
cy’s fundamental value has been
implemented through dual in-
tervention in the foreign ex-
change market and government
bond purchases in the second-
ary market, especially when for-
eign capital has flowed out of
the markets.
Monetary stabilization policy is
backed by efforts to accelerate fi-
nancial market deepening. In the
foreign exchange market, break-
through policy has been institut-
ed in the form of more efficient
foreign exchange swaps and do-
mestic non-deliverable forwards.
The policy aims to support
market mechanisms when deter-
mining rupiah exchange rates and
expand the hedging instruments
available to domestic and foreign
corporations and investors.
Seeking to further deepen the
rupiah money market, Bank In-
donesia has issued new rules
concerning rupiah interest rate
derivatives, namely the Interest
Rate Swap (IRS) and the Over-
night Index Swap (OIS), thus
enriching the hedging instru-
ments and facilitating transpar-
ent yield curves for the money
market and bond market.
We believe this policy will
strengthen monetary policy
transmission and deepen the
Disruptive talks: Alibaba Group co-founder Jack Ma (right) and then-World Bank president Jim Yong-kim
talk about digital platforms at the Annual Meetings of the IMF and World Bank Group in Bali in October
last year.
government and corporate bond
markets.
Recently, Bank Indonesia en-
tered into swap arrangements
with other central banks to the
tune of around $80 billion, in-
cluding China ($30 billion), Ja-
pan ($22.76 billion), South Ko-
rea (10.7 billion won), Australia
(A$10 billion) and Singapore
($10 billion).
Bank Indonesia strengthened
liquidity management flexibility
in the banking industry through
the macroprudential liquidity
buffer (MPLB), set at 4 percent
of deposits in the form of securi-
ties holdings that can be repur-
chased to Bank Indonesia.
Furthermore, Bank Indonesia
has maintained the countercy-
clical capital buffer at 0 percent
and strengthened financial sys-
tem surveillance, targeting im-
portant banks and corporations,
in conjunction with the Finan-
cial Services Authority (OJK).
In addition to the swap trans-
actions mentioned earlier, name-
ly DNDFs, the OIS, and the IRS,
Bank Indonesia has also issued
several new regulations pertain-
ing to financial instruments such
JANUARY 15, 2019
as negotiable certificates of de-
posit (NCDs) and commercial
papers (CPs).
Moving forward, the domestic
economic outlook is promising,
with stronger growth and main-
tained stability expected.
Despite the flagging glob-
al economy, national economic
growth in Indonesia is estimated
to reach 5 to 5.4 percent in 2019,
backed by strong domestic de-
mand, including in spending and
investment, while the contribu-
tion of net exports is forecast to
improve as exports increase and
imports moderate.
Bank Indonesia predicts head-
line inflation to remain under
control in 2019 within the 3.5 ± 1
percent target corridor. The cur-
rent account deficit will decrease
to around 2.5 percent of the GDP
in 2019 as a result of measures
to control imports as well as
stimulate exports and tourism.
The bank intermediation func-
tion and economic financing
through the capital market will
continue to increase.
Bank Indonesia projects cred-
it growth in 2019 to reach 10 to
12 percent, with deposit growth
JP/Wendra Ajistyatama
 JANUARY 15, 2019 OUTLOOK 2019 13

expected in the 8 to 10 percent
range and adequate liquidity
could be maintained.
In the medium term, we proj-
ect stronger economic growth at
5.5 to 6.1 percent in 2024. Rapid
infrastructure development and
deregulation policy will increase
economic productivity.
By accelerating the structural
reforms, Bank Indonesia expects
economic growth to hit 6.1 per-
cent in 2024, with the current
account deficit below 2 percent of
the GDP. We predict income per
capita to increase from $3,500
currently to $4,800 in 2024, thus
confirming Indonesia’s status as
an upper-middle income country.
We will strengthen Bank In-
donesia’s policy mix in 2018
for 2019.
National economic resilience
must be bolstered to confront
the risk of global spillovers. Con-
sequently, monetary policy will
remain focused on stability, par-
ticularly in terms of controlling
inflation in the 3.5 ±1 percent tar-
get corridor and maintaining
rupiah stability in line with the
currency’s fundamental value.
Bank Indonesia will maintain
and expand accommodative pol-
icy with respect to macropruden-
tial policy, the payment system,
financial market deepening as
well as sharia economics.
Bank Indonesia will maintain
a preemptive, ahead-of-the-curve
monetary policy stance in 2019.
The policy rate will still be cali-
brated in accordance with do-
mestic and global economic de-
velopments to ensure inflation
remains under control and ru-
piah exchange rates are in line
with the currency’s fundamental
value. Bank Indonesia will strive
toward rupiah exchange rate sta-
bility through efficient market
mechanisms while applying dual
intervention policy as needed.
We will maintain adequate re-
serve assets and cooperate bilat-
erally with other central banks,
while strengthening regional fi-
nancial arrangements, including
cooperation to expand the use of
local currencies for bilateral trade
and investment in the region.
Bank Indonesia will continue
accommodative macroprudential
policy to stimulate the bank in-
termediation function in terms
of economic financing.
We will periodically review
the macroprudential interme-
diation ratio in order to catalyze
In the medium term, we project stronger
economic growth at 5.5 to 6.1 percent in 2024.
credit growth and simultaneous-
ly expand economic funding
and financing through offerings
of securities.
Similarly, we will also review
the macroprudential liquidity
buffer to support flexible liquid-
ity management in the banking
industry.
Similarly, in the money mar-
ket, Bank Indonesia will increase
transaction volume and expand
the use of repo instruments and
interest rate swaps (IRS) to aug-
ment liquidity, efficiency and
market conduct in the interbank
money market in terms of form-
ing yield curves for various ten-
ors. We believe money market
deepening will support a prolif-
eration of securities issuances and
transactions for economic financ-
ing in the long term.
We will constantly promote
sharia economics and financial
development unilaterally through
Bank Indonesia programs as well
as through the programs of the
National Committee on Sharia
Finance (KNKS).
Bank Indonesia will release
Bank Indonesia Sukuk (SUKBI)
as a tradeable sharia mon-
etary instrument, which will
strengthen liquidity management
at sharia banks and support the
long-term development of shar-
ia financial instruments.
We are also actively endors-
ing economic financing through
sukuk issuances, specifically for
infrastructure development as
well as the integration of shar-
ia social and commercial fi-
nance, including productive za-
kat and waqf.
We plan to expand MSME
development programs, with a
focus on controlling inflation
and reducing the current ac-
count deficit.
Key successes in terms of de-
veloping MSME clusters to pro-
duce strategic food commodi-
ties in various regions, including
rice, red chilli, shallots, garlic
and beef, will be replicated to
help control inflation.
To support the policy mix, we
will strengthen Bank Indonesia’s
organizational effectiveness and
efficiency. All Bank Indonesia’s
strategy and policy mix have been
defined in strategic programs
to achieve its new vision, which is
to make concrete contributions
to the national economy and to

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14 OUTLOOK 2019 JANUARY 15, 2019

become the best in emerging tion between Bank Indonesia

markets.
The organizational refinement
takes place by prioritizing the end
process, making work process
more effective and efficient.
In addition, we will continue
to strengthen policy synergy with
the government, OJK and other
relevant agencies.
The strong policy is imperative
not only to support effective task
implementation at Bank Indo-
nesia, but also to strengthen eco-
nomic resilience and stimulate
economic growth.
The synergy improves coordi-
nation between Bank Indonesia’s
policies and fiscal policies with the
government’s structural reforms
into a cohesive national economic
policy mix.
In term of controlling inflation,
coordination between the Infla-
tion Control Team and Regional
Inflation Control Team will be fo-
cused on four programs, including
available supply, affordable prices,
smooth distribution, and effective
communication.
and Deposit Insurance Corpora-
tion (LPS).
The three institutions also
conduct joint research as well as
exchange data and information
and collate integrated bank re-
ports in order to enhance policy
effectiveness and alignment.
The coordination to accelerate
financial market deepening is
facilitated through the Financial
Market Deepening Coordination
Forum (FK-PPPK), encompass-
ing the Finance Ministry, Bank
Indonesia and the OJK, with a
focus on innovating various in-
struments for economic financ-
ing through the financial mar-
kets, infrastructure development
and broadening the investor
JP/Dhoni Setiawan base, while ensuring regulatory
Road to revolution: A worker inspects a newly assembled New Mini Cooper Countryman at a BMW fac- harmony and actively participat-
tory in North Jakarta. Indonesia has experienced a shortage in skilled workers, making it difficult for the ing in international cooperation.
country to smoothly transition to the fourth industrial revolution aka Industry 4.0.
To maintain financial system cial System Stability Committee, Bank Indonesia’s macropruden- This article is abridged from
stability, we have strengthened which meets on a quarterly basis. tial policy with OJK’s micropru- Governor Perry Warjiyo’s address at
the crisis prevention and reso- Furthermore, bilateral coordi- dential policy is also a priority, the Bank Indonesia Annual Meeting
lution efforts through the Finan- nation to harmonize and align along with similar coordina- with bankers on Nov. 27, 2018.

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 JANUARY 15, 2019
Banking in 2019
Remain resilient in challenging year
T
he global economic con-
ditions turned a bit fog-
gy approaching the end
of 2018 with some sus-
pecting that the global economic
cycle might have been somewhat
at its peak. However, it is fortunate
that the United States Federal Re-
serve (the Fed) is likely to embark
on a less aggressive course in 2019
than last year in a bid to anticipate
the possible negative impact of a
protracted trade war.
The ongoing US-China trade
war would seemingly cast a shad-
ow over worldwide business con-
fidence, even if the US and China
have struck a temporary 90-day
ceasefire to deescalate trade ten-
sions (Chart 1).
The trade war issue in addition
to the projection of growing US
fiscal deficit could be two of the
factors that may force the Fed to
backtrack or slow down its tight-
ening pace in 2019.
To counter the the impact of
the trade war, the People’s Bank
of China (PBoC) may also contin-
ue to loosen its monetary policy
stance in 2019. China may need a
looser monetary policy in order to
maintain a steady 6 percent-plus
growth in the upcoming years.
This will hopefully give some
support to commodity export-
ing countries such as Indonesia,
although in terms of the overall
trend of commodity prices, they
are likely to be lower than in 2018.
Given the aforementioned
constraints, the only reliable
source of growth for Indonesia’s
domestic liquidity in the near fu-
ture might be government and
investment spending.
Meanwhile, the prospects of
credit growth could be highly un-
equal across sectors. Infrastruc-
ture-related sectors should still be
driving loan growth, while com-
modity and import-oriented sec-
tors should slow down under ex-
ternal pressures at least in the first
half of 2019.
Nonetheless, banks should still
be aware of the liquidity issue in
2019. The projected tightening li-
quidity mirrors Indonesia’s wid-
ening savings-investment gap —
OUTLOOK 2019 15
pect some reduction of the CAD Not all sectors, however, would export destination.
toward 2.5 percent of GDP or low- suffer equally. For instance, the Still, given the “weeding out”
er in 2019 by virtue of the rupiah’s slowdown in China should de- that the commodity sector went
depreciation as well as the belated press the prices of raw materials through in the aftermath of the
impact of the BI rate hikes. and industrial minerals for which 2014-15 commodity bust, we ex-
the country is Indonesia’s main pect the remaining debtors to be
Lending growth
Sooner or later, however, the
adjustment process will impact Chart 2. …but, Indonesian banks have ample equity buffer…
David E. Sumual loan growth. However, we still
JAKARTA expect that the productive loans
will still be growing at a moderate
pace — for a few reasons. Firstly,
and therefore the current account as mentioned before, recent loan
deficit (CAD). growth has been partly boosted
Bank Indonesia’s moves to ad- by SOEs, whose financing demand
dress the CAD, especially by rais- may be less rate-sensitive than
ing its policy rate by 175 bps year- that of the private sector.
to-date (ytd), should therefore Secondly, some corporates are
help to alleviate this problem still in a cycle of investment, espe-
in 2019. cially in machinery, thanks to the
However, the transmission of expectation of maxed-out capac-
this adjustment policy has so far ity in some sectors.
been relatively slow, far slower on Finally, the rising bond yields, Source: Bloomberg, BCA Research Team
the lending side than on the fund- capriciousness of capital flow in
ing side. the capital market, and rupiah
The relatively sluggish adjust- volatility has made other means Chart 3. …and still-strong profitability
ment process may have to do with of financing (bonds, equity, ex-
the “quasi-fiscal” factor, i.e. the ternal debt) far less appetizing
fact that state-owned enterprises than bank loans.
(SOEs) still have to finance their Moreover, we expect banks to
projects and/or other expenses grow more selective in their loan
that have been shifted over from disbursement. While the non-
the government budget. performing loan (NPL) ratio has
The ongoing weakness of com- remained stable, even declining,
modity prices is also hampering so far, the credit risk is likely to
exports and preventing CAD nor- worsen if the banks do not take a
malization. That said, we still ex- more prudent stance.
Chart 1. Risk premium of emerging market countries is rising…
500 CDS Source: Bloomberg, BCA Research Team
450
400
Chart 4. ...but its cost-efficiency could be improved
350 Turkey (374)
300
250
South Africa (227)
200
Indonesia (149)
150
Malaysia (112)
100
Philippines (95)
50 Thailand (42)
0
Jan-14 May-14 Sep-14 Jan-15 May-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17 Jul-17 Nov-17 Mar-18 Jul-18 Nov-18
Source: Bloomberg Source: Bloomberg, BCA Research Team
16 OUTLOOK 2019
somewhat healthier overall —
thus lessening the potential in-
crease in NPL.
On the other hand, there are in-
frastructure-related sectors like
utilities, logistics, construction
and real estate, which have shown
the strongest overall loan growth
recently. The growth in these sec-
tors is likely to continue despite
the government’s scaling back and
review of some projects.
The credit risk, however, is also
growing with some companies
recording negative operational
cash flow growth — although the
preeminence of SOEs among the
large contractors might mitigate
the risk to a certain extent.
Market volatility
In 2019, we might still see some
episodes of market volatility po-
tentially due to the sustained US-
China trade war drama. As such,
companies should be prudent in
managing their foreign currency
exposures with more disciplined
hedging policies.
Learning from 2018, the ex-
change rate volatility had hit
hard on import-dependent sec-
tors, including some in trading
and manufacturing in the first
half of 2018. But approaching
the year end, the market turned
around thus benefitting import-
ers and portfolio investors.
Nevertheless, the US-China
trade war should also be seen as
an opportunity for the govern-
ment to speed up structural re-
forms. The protracted US-China
trade war could actually divert
trade and investment from the US
and China to ASEAN countries,
Cashless payment: A trader receives a payment using a barcode in a
coffee shop in front of the Jakarta Smart City Hive (JSC Hive) build-
ing, Kuningan, Jakarta. Mobile payments using barcodes are growing
in popularity in the capital.
Money line: People stand in line in Benteng Vastenburg, Surakarta, to exchange their money for smaller denominations of Rp 5,000, Rp 10,000
and Rp 20,000 ahead of Idul Fitri celebrations in July. The small bills are used as Idul Fitri gifts, especially for children.
including Indonesia.
Some export-oriented activi-
ties where Indonesia tradition-
ally excels, such as textiles, foot-
wear, and paper/wood processing
and also electronics, may ben-
efit from the “investment-diver-
sionary” effects of the US-China
trade war. But to what extent this
would benefit local supplier com-
panies — and the banks which fi-
nance them — remains to be seen.
Despite the building clouds of
external threats, the likelihood of
a systemic problem in the Indone-
sian banking sector remains quite
remote, thanks to strong capital
buffers — especially relative to its
JP/Dhoni Setiawan
ASEAN peers (Chart 2). As such,
if the banking sector is still on the
defensive side in 2019, the risk of
a systemic banking crisis remains
strongly limited.
However, the divergence in
performance between larger and
smaller banks, coupled with in-
creasing pressures from fintech
companies should lead to further
consolidation of the banking in-
dustry in the long-term.
Indonesian banks should also
be able to sustain the changes im-
posed by the Basel III regulations
and IFRS-9 accounting standard
(both of which would be fully im-
plemented in 2019).
Generally, banks have already
held an equity buffer sufficient to
fulfill the Basel III criteria — in-
cluding conservation, counter-
cyclical and systemically impor-
tant financial institution (SIFI)
buffer. Bank Indonesia’s recent
introduction of the macropru-
dential liquidity buffer has also
allowed banks to better prepare
for the liquidity coverage ratio
(LCR) requirement.
Still, there are notable differ-
ences in performance between
the bigger and the smaller banks.
The very largest banks (BUKU-4
category) exhibit a relatively low
loan to deposit ratio (LDR) and
large net internet margin (NIM),
in addition to strong loan and
third-party fund growth.
These make them the most
well placed to weather the liquid-
ity pressure and potential loan
slowdown in 2019. Furthermore,
the biggest banks are also very
well provisioned relative to their
non-performing loan (NPL) ratio,
which minimizes the need for ad-
justment in accordance with the
new IFRS-9 accounting standard
(PSAK 71).
Meanwhile, the smaller and
medium-sized banks are see-
ing liquidity growth that has not
caught up with their accelerating
loan growth — making their LDR
climb up rather quickly. Such
banks also tend to have a higher
NPL ratio and higher operation-
al costs, courtesy of their relative
inefficiency.
Such a performance gap spells
an opportunity for the smaller
banks to be acquired by the larger
banks or foreign banks.
With the Indonesian banking
sector’s ample margins (Chart
3), as well as the fact that Indo-
nesia is a new frontier for digital
payments, these banks might
continue to be plum targets for
mergers and acquisitions for the
next few years.
The rise of financial technol-
ogy (fintech) companies will pose
additional challenges to Indone-
sian banks. Owing to Indonesia’s
scale and inefficient logistics,
banks have spent an enormous
amount of resources on physical
infrastructure, such as branches
and ATMs.
The rise of digital payment
JANUARY 15, 2019
JP/Ganug Nugroho Adi
may render much of this invest-
ment obsolete, especially in urban
areas, although this also allows
banks to streamline its operations
going forward (Chart 4).
The fintech companies have
many advantages compared to
the banks, namely that (1) they
do not have to worry about legacy
procedures; (2) they are more ag-
ile and flexible in implementing
innovative solutions; (3) they are
far less regulated regarding capi-
tal and liquidity requirement;
and (4) they are far more able to
attract investment from global
tech giants.
In the longer run, this trend is
likely to lead to even more consol-
idation in the banking sector, and
thus modest margins compared to
what is enjoyed currently.
All in all, the various challenges
of 2019 — macro, micro and tech-
nological — will put banks un-
der tough challenges in terms of
liquidity, profitability and asset
quality. And while the likelihood
of a systemic problem remains ex-
ceptionally limited, the situation
favors banks that are either more
selective, with mainly “blue-chip”
portfolios, or have sufficiently
broad-based clientele to diversify
the risk.
The writer is the chief economist
at Bank Central Asia (BCA).
The views represented in this
article are personal.
18 OUTLOOK 2019
Macro economy
Coping with global business cycle
I
ndonesia’s economic
growth recovered after
the global financial crisis
in 2008, reaching its peak
at 6.5 percent in 2011. Since then
it has stayed around 5 percent.
What are the near-and longer-
term prospects? The answer will
revolve around how investment
responds to recent policy changes.
Indonesia is among several
countries that fared well in the
global financial crisis of 2007-
2008. Although growth fell in
2008, it bounced back owing to ro-
bust commodity prices. From the
demand side, consumption and
investments were also strong. But
the bounce did not last long.
And, especially after the taper
tantrum in 2013, growth started to
suffer. Part of the explanation was
fiscal and monetary policy tight-
ening. The other was the fall in
commodity prices. During this pe-
riod consumption was still strong
but investments took a hit. Loan
growth fell from around 25 per-
cent in 2012 to less than 10 per-
cent by the end of 2017.
Besides the decline in growth,
the policy rate was also hiked
from 5.25 percent to 7 percent in
mid-2013 and remained at that
level until the end of 2016.
With the decline in inflation,
Bank Indonesia (BI) started to
relax its monetary policy. In two
years, it cut rates from 7.5 to 4.25
percent. But investments did not
immediately pick up.
Why? Other considerations
besides borrowing cost affect in-
vestment decisions. One was the
growth outlook itself. Another
was the weakening of the rupiah
— volatile from 2013 onwards.
In 2018, after almost five years
of deleveraging, investments
started to rise. This shows up in
loan growth — rising from ear-
ly 2018. At the same time for-
eign corporate borrowing, which
slowed down from 2014, started to
rise. But the global situation shift-
ed again. And domestic policies
were also adjusted in response.
The United States’ Federal Re-
serve started to hike rates in a
steady fashion from 2017. This put
Kahlil Rowter
JAKARTA
pressure on emerging markets.
For Indonesia, as the current ac-
count deteriorated, the rupiah be-
gan to depreciate.
At the beginning, BI intervened
to smooth the currency’s decline.
But, in May 2018, the bank began
to raise rates. The stated intention
was to align domestic rates with
global realities. The implicit mes-
sage is to prepare for imported in-
flation down the road.
The government also did its
share. From last year the message
was that of lower budget deficits.
This might seem contradictory
to the President’s infrastructure
development initiative. But this
strategy aims at stabilizing the
macroeconomy and to ensure
budget sustainability.
The budget deficit limit is 3 per-
cent of GDP by law. By maintain-
ing lower deficits, the government
has room to maneuver should rev-
enues underperform.
And yet the government deter-
mined that these policies were not
enough. To respond to the current
account deterioration the gov-
ernment launched three policies.
First was to raise import taxes.
Second was to increase palm oil
content in biofuel to 20 percent,
and third was to postpone sev-
eral large infrastructure projects.
One policy not yet implemented is
raising fuel prices.
These policies are not without
detrimental side effects. Restrict-
ing imports affects investments,
and has negative long-term
growth consequences. The biofu-
el policy increases costs for busi-
nesses, as they have to adjust their
machinery, and postponed proj-
ects will incur higher costs to re-
JANUARY 15, 2019
Antara
Breaking the ground: (From left) Lotte Group chairman Shin Dong Bin, Investment Coordinating Board
(BKPM) chairman Thomas Lembong, PT Lotte Chemical Indonesia president Kim Gyo Hyun and Indus-
try Minister Airlangga Hartarto take part in the groundbreaking ceremony for the construction of the
Korean business giant’s petrochemical plant in Cilegon, Banten, West Java, in early December, 2018.
start them later. global growth as well. Is there any- lar will rise as money flows into US
The impact of these policies on thing good to come out of this? assets considered as safe havens.
the current account will not be Yes. As global and especially These are factors beyond our
instantaneous. That will have to US growth slows down, the Fed control. For now, the Indonesian
wait until they reduce domestic may become less hawkish. In es- authorities have done their best
demand. The cost is slower eco- sence, this is what the Fed’s chair- given the available information.
nomic growth, which will take the man, Jerome Powell, said recent- But as circumstances change, we
wind out of investments’ sails as ly., which is quite an unexpected should be ready to adapt as well.
well. Yet, there might be a silver turn of events. Not immediately. But also, do not
lining around the corner. For emerging markets this is wait too long.
Financial markets now worry good news. It means less pressure In the meantime, further relax-
that the US economy is at the tail on their currencies. ation of investment procedures is
end of its expansion. The main Another indicator worth the appropriate response. The re-
cue is coming from the bond mar- watching is oil prices. Forecasting cent launching of a one-stop ser-
ket. During normal periods the 10- it is difficult as geo-politics and vice is a good example. Better co-
year US Treasury bond yields are speculation dominate price move- ordination among state agencies
1-2 percent higher than that of the ments. But still, falling oil prices and regions is also necessary.
two-year notes, but lately this dif- usually precede slowing global While foreign investment slows
ference has dwindled to around growth. it is also the time to improve reg-
0.2 percent. But don’t start to smell the ros- ulations. Let’s invoke Sadli’s law.
There are several explanations es yet. There is risk to this sce- Named after the former mining
for this, but the critical one is nario. If the US does enter into a minister Sadli — the law says that
the fear factor. That is, the mar- recession the financial contagion “bad times make for good policy.”
kets think that credit risk will could be dire. Fearful investors
rise shortly. would shift their positions away
Added to this is the aggres- from emerging economies to saf- The writer is a lecturer in the
sive US trade policy. This is slow- er assets. school of economics and business,
ing down global trade and with it That usually means the US dol- University of Indonesia.
20 OUTLOOK 2019
Oil and gas
Challenges and prospects
T
here are numerous
challenges that need
to be addressed, al-
though many of them
were common knowledge dur-
ing the last election, when many
people in the resource industry
had hoped that there would be
improvements. Sadly, this has
not improved as expected, which
has led to the country’s deficit in-
creasing due to the increase of im-
ports because of the demand for
oil and gas products. This may be
a sign in some areas of an increase
in productivity.
The challenges are many. The
prospects of the oil and gas indus-
try do not look bright unless the
fundamentals of doing business to
attract investment are improved,
which is the main challenge.
The following statement was
made in 2015, “Indonesia will
become the world’s largest oil
importer by 2019 as the lack of
investment hampers efforts to
boost proven oil reserves as well
as production, while domestic
demand for the commodity in-
creases rapidly.” It appears that
Indonesia is on track to make this
statement true.
The challenge for the next
elected president is still the same
for the natural resource industry
as it was when the last presiden-
tial election was held on July 9,
2014, which was to increase the
production of the nation’s natural
resources that it is blessed with.
Why is the country importing
more than it produces? Indone-
sia has the human and natural re-
sources to be self-proficient.
Although it needs help, this
does not need to be international
investment, it should be nation-
al investment, which is not na-
tionalistic as Indonesia has the
skills. What it is lacking is tech-
nology for exploration, which is
still being carried out as it was in
the 1960s. Very little has changed
since then.
Deputy Energy and Mineral
Resources Minister Arcandra-
Tahar stated recently, “It is my
hope that the procedures and pat-
terns of work that we have done so
George Barber
JAKARTA
far are changed.
The old ways have proven to
be less effective in selling our oil
and gas blocks, therefore we must
find new ways, innovations and
ideas, so what we sell is oil and gas
blocks, not data.”
There is something wrong with
this statement in my view, as he is
in a position to make the chang-
es required. It will be difficult to
sell oil and gas blocks without re-
liable data, the risks and costs are
too high for the vast majority of
investors, which is unlikely to be
the major oil and gas companies.
Instead we should be looking at
small- to medium-sized compa-
nies because they are the future.
Some changes have been made,
such as the “Gross Spilt” regula-
tion, but what has not changed
with this regulation is the “RISK”
that is inherent with exploration,
which is in the region of 80 per-
cent loss, or a 20 percent success
rate if we are lucky.
Technology has long been a key
driver in the success of the oil and
gas industry in the past. The use
of digital technologies to change
a business model and provide new
revenue and value-producing op-
portunities is driving the industry
to a whole new level.
But it is not driving the indus-
try to new levels in exploration.
The challenge is that the new gov-
ernment must allow companies to
use technology.
Apparently it will for those
companies that come under the
“Gross Split” scheme, although
this has not been stated clearly in
writing. What about the compa-
nies that fall under the eagle eye of
the Upstream Oil and Gas Regula-
tory Special Task Force (SKK Mi-
gas), where they made a commit-
ment to carry out exploration in a
certain way.
There is no leeway for change.
This means that they are not al-
lowed to use technology, but they
are allowed to spend money at
high risk as it is a commitment.
Someone, somewhere came up
with the following “no cure no
pay”, in Indonesia if you are
sick and you do not pay, you do
not get cured.
Well, Indonesia is sick in the
lack of knowledge of its natural
resources, therefore someone,
somewhere needs to pay to cure
this problem, not the technology
provider.
The prospects of the oil and gas industry do not
look bright unless the fundamentals of doing
business to attract investment are improved.
What is the ultimate goal of ex-
ploration? It should be to increase
the production of oil to allow the
country to become self-proficient
and not rely on imports, not just
for one’s own gain.
If technology is adopted, this
then becomes a multiplying fac-
tor, other trades such as logistics
will increase their work, which in
turn means they will employ more
people, which in turn allow these
people to spend the money they
earn, which in turn increases the
gross domestic product (GDP) of
the country.
This is not happening today
as the regulations and the lack of
decision-making is not happen-
ing. These are challenges that can
and must be met by the incoming
government.
Technology is not the chal-
lenge, the challenge is to accept
the technology, just as we accept
the technology that drives our
smartphones, very few companies
promote technology if it does not
work and is proven worldwide.
Decreasing the amount of mon-
ey that the Geological Agency has
for exploration is not increasing
the knowledge of the nation’s re-
sources.
Stating that US$2 billion is go-
ing to be invested in exploration is
not an investment by the govern-
ment, it is a commitment by pri-
vate companies to explore with a
high chance of failure, which will
not increase the nation’s oil pro-
duction significantly.
They need to be allowed to use
technology that saves them time,
cost and risk that will benefit the
country as a whole.
There is a recent suggestion
that by simplifying the policy, oil
and gas contractors could also col-
laborate with survey companies
to enter the open oil and gas mar-
ket. In addition, it will also open
opportunities for seismic survey
companies to acquire data.
Both survey and seismic com-
panies understand the risk in-
volved in exploration, why would
they want to become involved
when they know that the risk is
very high?
At this present time, they are
happy to carry out a survey, be
paid for the size of area and line
kilometer that they survey. Does it
matter to them if they discover oil
or gas? The answer is no, therefore
why would they want to become
involved? Does a drilling company
care if they drill a dry or water wet
well? They do not.
The challenge is also to de-
velop the mature blocks that
could be like new discoveries if
the petroleum system was fully
understood.
Another challenge is to develop
the “giant fields” that are thought
to exist but need to be confirmed
and allow companies to do this
without being tied by regulations
and politics.
The geothermal industry for
the private sector is not faring
any better. The uncertainty of the
feed-in tariffs is stopping would-
be investors from investing in
JANUARY 15, 2019
what could help Indonesia reduce
its reliance on coal and oil for its
main source of power. Yet again
the country is tied by regulations
and decision-making to utilize
technology.
Another challenge for the in-
coming president is to ask the
question, “Why do we say we are
rich in resources when we do not
know where they are?
I seem to recall, one energy
and mineral resources minister
asking this question to geologists
at the Geology Agency. The an-
swer was that we do not have the
technology pak. Well, the tech-
nology is available.
The whole of Indonesia can
become explorable instead of
80 percent being unexplorable,
which will allow companies to de-
velop the nation’s resources in an
environmentally friendly manner
at much-reduced risk and cost.
Other challenges to address
are: Why is the oil and gas sector
slow in development, so complex
and segmented?
Why are decision makers not
making decisions for the benefit
of the country? Why do they talk
about using technology, but when
a solution is offered to them, they
do not respond?
The new president must be able
to see the real problems in the en-
ergy sector, where he must strat-
egize to tackle these ingrained
problems as it has been there for a
very long time.
If technology is not adopted for
exploration, nothing will change
and we will still be hearing state-
ments by ministers that we need
to explore, we need investment.
The various government depart-
ments must come together for
the nation.
The infrastructure program
can be paid for by increasing the
nation’s oil and gas production.
The writer is an independent
exploration consultant, who consults
for Terra Energy and Resource
Technologies, governments and
institutions in various countries in
Southeast Asia.
 JANUARY 15, 2019
Industrial revolution
Leverages and risks of i4.0
T
he pace of economic
development and the
maturity of individ-
ual ASEAN markets
are varied and so are their levels
of preparedness to compete re-
gionally and globally. However,
with regional integration efforts
and cooperation, fast-develop-
ing countries such as Indonesia
are demonstrating resilience and
a new appetite or potential for
growth.
Indonesia has the 11th larg-
est manufacturing sector in the
world, but according to the World
Economic Forum’s Readiness for
the Future of Production Report
2018 it has room for improve-
ment across the key drivers of
production.
There is a need to stimu-
late adoption of new emerging
technologies into production
systems. This would further en-
hance productivity and enable
innovation when supported with
the right skill sets, infrastructure,
institutional frameworks and
governance.
The government recognizes
the promise of Industry 4.0 (i4.0)
toward strengthening its produc-
tion, as well as accelerating in-
vestments for building a robust
economy. Making Indonesia 4.0
is a strategic road map, which is
expected to position the country
among the top 10 economies in
the world by 2030.
With its focus on five industries,
namely food and beverages, tex-
tiles, automobiles, electronics and
chemicals, the road map would
trigger exponential change in the
dynamics of local industries.
The change could be posi-
tive in terms of a slow transition
from traditional low-cost labor
business models to technology-
empowered production systems.
With such approaches, Indonesia
would be able to enhance or dou-
ble output, while managing costs,
as well as build local innovation
capabilities by investing more in
research and development.
In the long term, the potential
value of Industry 4.0 is compelling
and offers exciting opportunities
for both industry and the nation.
Edwin Utama
JAKARTA
The new leverage with i4.0
The industry or lead companies
are already looking at the poten-
tial of Industry 4.0 and how it can
provide them new leverage to en-
hance their competitiveness. For
a start, they are implementing new
emerging technologies to drive
operational efficiencies and make
positive business impacts. For in-
stance, through digitalization of
core processes, organizations are
not only able to improve produc-
tion performance, but also sustain
it at a high level. What is important
is to ensure that such technologies
or their outcomes are effectively
addressing specific pain points to-
ward redefining the production
paradigm for better operations,
processes and performance.
Second, for effective implemen-
tation of Industry 4.0, companies
need to develop to move away from
tradition practices and develop a
new set of capabilities. These can
be integrated with emerging tech-
nologies for creating new opportu-
nities. The tricky question, howev-
er, is always how to determine and
prioritize capabilities that should
be built in-house or externally.
This should be a decision based
on the company’s future competi-
tive advantage and whether build-
ing in-house capabilities and gain-
ing an insider’s perspective can
help the development of break-
through innovations.
Another critical aspect of Indus-
try 4.0 is the ability to capture the
benefits of digital technologies. For
this, companies need to manage
their information architecture by
integrating machines, equipment
and plants, migrate to the cloud to
improve flexibility, speed and cost
of production and build cyber-re-
silience, with emphasis on secur-
ing data and systems.
For the success of these strate-
gic measures, it is important that
the Industry 4.0 transformation
road map is systematically de-
signed. This involves an in-depth
orientation and understanding by
the management and senior lead-
ers for the need to embark on the
Industry 4.0 journey and the ex-
pected outcomes or value.
The planning must involve an
accurate assessment of the current
state of systems and operations,
supported by tools, methodolo-
gies and mobile applications and
use cases from diverse industries.
It is also important for the leaders
or drivers of Industry 4.0 to envi-
sion the future of the organization
led by i4.0. This, in itself, would al-
low them to be cognizant of vari-
ous risks and opportunities, as
well as the resource requirements
at each stage of the road map’s im-
plementation. Leading companies
therefore define a bold vision and
establish ambitious, step-change
objectives across the organization.
The success of Industry 4.0 or
whether companies are able to ful-
ly benefit from its implementation,
depends on the level of sophistica-
tion of the approach toward change
management, involving many
functions and executions across
multiple functions or plants. Some
of the preconditions include adopt-
ing Industry 4.0 as a strategic busi-
ness intervention rather than an
IT megaproject, efficiently manag-
ing the transformation and coordi-
nation activities, striking the right
balance between central control
and local delegation and deploy-
ing the best budgeting methodol-
ogies to cover various open inno-
vation initiatives and study new
technologies, which can accelerate
the performance of Industry 4.0
deployments.
The old risks of transformation
As more and more companies
join the industry 4.0 revolution,
the risks associated with the de-
gree of transformation that busi-
nesses experience in the process
remain numerous. They may in-
clude premature deployment of
technologies or applications, inef-
ficient allocation of time, money
and resources and lack of plan-
ning or a big vision. However, by
keeping in mind the four most
fundamental principles concern-
ing Industry 4.0, companies can
not only go after long-term value
but also start seeing the benefits
of Industry 4.0 now.
Start with problems, not tech-
nology
Companies investing in Indus-
try 4.0 must remember the Pareto
Principle — and with our clients in
Indonesia, we have often seen this
in extreme, that just 10 percent
of the problems drive more than
60 percent of the value. In other
words, companies should focus
on solving the smaller number
of problems that offer the lion’s
share of financial improvement
opportunities.
A better approach is to start
top-down from the biggest pain
points and then match it with a
bottom-up approach understand-
ing the technologies available.
Doing so also establishes the val-
ue-at-stake and can quickly deter-
mine the amount of investment
that could be justified.
Re-invent, don’t just automate
In the rush to implement, com-
panies often simply digitize or au-
tomate their existing processes.
This often leads to automatizing
waste and inefficiencies instead of
identifying and resolving the un-
derlying inefficiencies by deploy-
ing technology for a purpose. This
not only proves expensive but also
non-value-adding.
The best solution is to adopt
technology applications or behav-
ioral solutions that aim to mini-
mize or eliminate the root causes
of various types of waste. These
include overproduction and in-
ventory, idle and waiting time that
causes low productivity, expen-
sive internal transport, over pro-
cessing and defects.
Don’t forget about the people
Companies often focus their
Industry 4.0 efforts on the tech-
nology and machinery while ig-
OUTLOOK 2019 21
noring behavioral issues that may
underlie the problems they are
trying to solve. Our experience
indicates that the effort to un-
lock value from Industry 4.0 is 10
percent “hardware”, 30 percent
“software” and 60 percent people
and change management.
So instead of investing in sen-
sors and control systems to moni-
tor or improve process efficiencies,
companies can also deploy model-
ing and simulations to better un-
derstand the basic process, make
more informed decisions and re-
duce the need for direct control. As
a result, companies would be able
to identify ways to make their pro-
cesses more efficient, enable their
people and ultimately extract the
full value of the digital solutions of
an Industry 4.0 initiative.
Consider low-tech not just
high-tech
In yielding to the pressure and
dazzle of Industry 4.0, companies
may fail to fully appreciate the
costs of implementation and fail
to explore alternative low-tech so-
lutions that may be inexpensive
and more efficient.
Conclusion
As the country progresses on
its Industry 4.0 road map, busi-
nesses need to tap various oppor-
tunities, identify the levers and
be wary of the hazards associat-
ed with implementing new tech-
nologies. These include pursuing
small gains while ignoring oppor-
tunities for major returns from
more promising targets, digitiz-
ing processes without addressing
underlying inefficiencies, disre-
garding behavioral root causes of
process problems and not con-
sidering whether simpler alterna-
tives would do the job as well or
better for less money.
Winning companies must navi-
gate through the Industry 4.0 pro-
cess keeping these four key prin-
ciples in mind for competitive
advantages.
The writer is a partner and
managing director of the Boston
Consulting Group in Jakarta.
22 OUTLOOK 2019 JANUARY 15, 2019

Property market

Good deal or risky bet?

T
wo years ago, when I tra has gradually diminished. We Chart 1. Jakarta apartments annual sales and forecast
wrote the outlook for began to see that prices are more units
20.000
2017 in this paper, I negotiable today than before.
used the headline, “The As such, if you have spare mon- 17.500

long and winding road (to recov-
ery)”. Contrary to the downbeat
heading, our view at that time was
quite optimistic: expecting a quick
rebound on the back of aggressive
infrastructure development by
the government, a series of new
policy packages to support eco-
nomic and business growth and
last but not least, potential out-
come from the successful tax am-
nesty in late 2016.
Unfortunately, it turned out
that 2017 was a continuation of
the sluggish period that started
in 2015.
Fast forward and now we are at
the end of 2018. If we look back
at what happened from the be-
ginning of the year through data
and charts for all sectors of the
property market in Jakarta in
particular, we could say that the
market is yet on a positive trajec-
tory mode.
That makes me wonder if the
headline that I used two years ago
could eventually be happening:
Are we on the long and winding
road to recovery?
Such a pessimistic view is bol-
stered with the prediction that the
economy next year would not be
healthier than this year, instead it
can be more challenging.
President Joko “Jokowi” Wido-
do even warned us that “winter is
coming” if global economic pow-
erhouses continue to compete
selfishly and only think about
their own interests.
The trade war between the
United States and China com-
bined with volatile geopolitical
tensions remain a threat for the
global economy, and Indonesia is
no exception.
Based on that scenario, busi-
ness activities, including the
property sector, is seen to experi-
ence another tough period. Not to
mention that 2019 is the election
year, which is historically dubbed
a “wait-and-see” period.
If so, is the property market still
an attractive investment in Indo-
Anton Sitorus
JAKARTA
nesia? For me, it will be naïve to
say that the answer is “no”.
With a huge population, a ris-
ing middle class, lots of high net
worth individuals (HNWIs), fast
urbanization and supported by a
prudent government, this status
will hopefully continue after the
next election.
With better economic policies
now in place, the property sector
has bright prospects in the short
term and also in the long term.
As such, investing in property
assets even during the sluggish
period, in my opinion, would con-
tinue to be profitable. I even think
that the current market situation
will benefit investors and pro-
spective buyers to find good deals
in the market.
As we all know, developers in
Indonesia are quite persistent in
their pricing. Very often we hear
that prices continue to increase
on a regular basis — in some cases,
every Monday — even though the
clock had shifted from the seller’s
market to buyer’s market.
Now, after several years of a
tough marketing period, the man-
Chart 2. Jakarta mall supply, demand, vacancy and forecast
sqm
300.000
New Supply
250.000
200.000
150.000
100.000
50.000
0
2010 2011 2012 2013 2014
ey and plan to secure your dream
property, maybe now is the best
time. Furthermore, as we antici-
pate market activity during the
election year will continue to re-
main modest, we believe any pro-
spective buyers and investors
would be greeted with big smiles
by everyone in developers’ mar-
keting offices. They may even
serve you a nice selection of tea
and cakes to ensure you leave with
a booking order.
But like any other investment
instruments, the property market
is not without risks.
Yet, as long as you take proper
steps, investing in properties — ei-
ther in the primary market or sec-
ondary market — would suppos-
edly be rewarding.
On the other side, we think de-
velopers should come up with
more intriguing yet reasonable
products in order to secure buy-
ers’ interests in this challenging
environment.
In terms of focus segments,
we are in the view that develop-
ers should target end-users more
rather than their investors, as de-
mand from this segment (such as
newlyweds and young families
who mostly fall under the catego-
ry of millennials) is increasingly
robust and would likely dominate
demand in the future.
Understanding the behavior
of the millennial generation and
their preferences is the first step
30%
Net Take-up Vacancy
25%
20%
15%
10%
5%
0%
2015 2016 2017 2018F 2019F 2020F 2021F
Source: Savills Research & Consultancy
15.000
12.500
10.000
7.500
5.000
2.500
0
2012 2013 2014
in securing a good market share in
the future.
This, combined with the fast-
changing consumer trends and
mounting disruption from new
business models driven by the
internet (web 2.0 and later 3.0),
algorithms, artificial intelligence
and blockchain technology, has
slowly influenced property mar-
kets in advanced economies and
soon after, developing markets
like Indonesia.
We are on the brink of a tran-
sitional period. As such, be pre-
pared if changes in the market
landscape occur quicker than
we expected. In this case, exist-
ing developers could take part
in shaping future growth; If not,
new players will emerge.
This is already happening in the
hotel sector, then offices and soon
the industrial sector. We are quite
sure that other sectors would in-
evitably follow in the future.
The following is our view on the
Jakarta property market in 2019
and beyond by sector:
Chart 3. Jakarta CBD office supply, demand, vacancy and forecast
700.000
New Supply
600.000
500.000
400.000
300.000
200.000
100.000
0 0%
2010 2011 2012 2013
2015 2016 2017 2018F 2019F 2020F 2021F
Source: Savills Research & Consultancy
Apartments:
A supply constraint
Jakarta is increasingly becom-
ing a more expensive place to live
when it comes to buying a home.
With scarcity of land and high
prices, getting the desired proper-
ty could only be achieved by some
small prosperous buyers.
On the other hand, considering
its population growth, the size of
wealthy prospective investors
and combined with the backlog
size, demand in the capital city is
significant.
While landbank owned by de-
velopers in Jakarta is getting lim-
ited, there are ways to generate
new supplies and developments
in the market.
One option is utilizing gov-
ernment or state-owned assets,
particularly those located near
public transport nodes such as
train stations and bus terminals,
which can be developed with a
transit-oriented-development
(TOD) concept.
This has been initiated by re-
40%
Net Take-up Vacancy
35%
30%
25%
20%
15%
10%
5%
2014 2015 2016 2017 2018F 2019F 2020F 2021F
Source: Savills Research & Consultancy
 JANUARY 15, 2019
lated state-owned enterprises like
railway company PT Kereta Api
Indonesia (KAI), construction
firm PT Pembangunan Perumah-
an (PP), contractor Wijaya Karya
(Wika) and publicly listed con-
struction company Adhi Karya
(Adhi) for the past two years.
However, having learned from
other markets in the region like
Singapore and Hong Kong, we felt
that the pace of development and
the number of TOD projects can
be increased more aggressively
as this concept is believed to have
significant prospects here.
Referring to the apartment
sales chart below, transaction
volumes have continued to de-
crease in the past three years,
which is primarily the result of
constraints in developing land in
the capital city.
This effect can be seen in the
sales of apartments in Bogor, De-
pok and Bekasi in West Java, as
well as Tangerang in Banten (Bo-
detabek), which has shown some
improvement over the years as
developers shifted their atten-
tion to decentralized areas out-
side Jakarta.
Until the third quarter of this
year, the apartment market in
Jakarta had transacted around
2,000 units in the primary seg-
ment and we expect to close the
year with around 3,000 units, a
big 50 percent drop from sales
in 2017.
Furthermore, this trend is
likely to continue along with
shrinking land availability within
the city — unless the government
(together with the private sector)
is willing to consider and begin
to look at regeneration or the ur-
ban renewal concept, starting
from their underutilized or un-
derperforming assets as the main
priority.
Malls: The story continues
The last two years in the re-
tail market was characterized by
a slower take-up, a rising vacan-
cy rate and tough competition
among mall owners to secure
new tenants and retain existing
ones from leaving (or closing al-
together). That came from the
fact that many malls in Jakarta
are always packed with visitors
during the weekend and finding
an empty parking space can be a
frustrating task.
Based on our survey, mall va-
cancy in Jakarta continued to rise
due to limited demand. By end of
LRT city: A miniature mock-up of an apartment complex that is to be built near a light rapid transit (LRT) station in Jakarta is on display at a
property expo at the Jakarta Convention Center (JCC) in September 2018.
September, vacancy rose by ap-
proximately 70 basis points (bps)
to around 13 percent as net de-
mand dropped to negative territo-
ry amid a lack of new supply.
The increasing empty space in
Jakarta’s malls was contributed
largely by the closures of big for-
mat retailers, in particular depart-
ment stores.
In addition, a number of mid-
size players in the fashion and
apparel business also suffered a
weak performance, which caused
them to close their outlets.
We believe that competition
from online platforms to this type
of retailers has intensified over
the past two years and with the
convenience as well as value prop-
osition offered by online retailers,
consumers seem to be choosing
the latter.
The latest surveys also showed
that people continue to shift
their spending from shopping to
vacationing, as supported by the
growth in budget airlines, and
also to saving to protect them-
selves from uncertain economic
conditions.
While we anticipate slow de-
mand growth to continue next
year, vacancy rates are expected
to remain stable in view of limit-
ed new supply in the market un-
til 2020.
However, the competition
from online platforms, which
increasingly offer convenience
and attractive pricing compared
to physical stores, like it or not,
would shape the future landscape
in the retail sector.
As such, not only retailers, mall
owners must adapt and integrate
themselves into this ongoing phe-
nomenon in order to survive.
With changing consumer pref-
erences, malls must reinvent
themselves or lose their custom-
ers. Malls of the future should
provide elevated shopping
experiences.
Active interaction between
malls’ managements and retail-
ers is expected as each party’s re-
quirements, barriers and goals
would become more complicated
than before. Malls of the future
should also be innovative and
quickly adapt to rapidly changing
customer behavior.
They should become places
where people want to be. That
said, developers should also make
an emotional connection with
their target market, incorporat-
ing heritage values, special curat-
ed spaces as well as more public
spaces that can invite surround-
ing and/or specific communities.
Those public spaces can be
used for various attractions to
boost customer engagement,
which in turn can increase traffic
and revenue.
Offices:
A changing environment
The world is changing so fast
and the way companies run their
business has also started to trans-
form. As we are now at the begin-
ning of the 21st century, where
quite a majority of the workforce
are millennials — who, accord-
ing to many surveys, tend to have
different work habits than the
earlier generations — the type of
workplace is gradually changing.
That trend is also happening here
in Jakarta.
The days when offices were
just about desks and chairs have
slowly gone. Modern-day en-
terprises have shifted their em-
phasis to saving time and mon-
ey, while promoting a culture of
working better together.
Inspired by the great success of
tech companies like Google, Face-
book, Twitter and more recently
e-commerce companies, we saw
a tremendous growth of start-up
businesses in Indonesia.
While “conventional” corpora-
tions like banks, insurance firms
as well as companies in trading
and commodities sector are strug-
gling with current economic vola-
tility, new start-ups continue to
grow and gradually influence the
office market.
Due to their preference of hav-
ing flexible working spaces at af-
fordable rates, the Jakarta office
market saw a rise in coworking
spaces.
In the period between January
and September, our data shows
that new enquiries in the office
market in Jakarta were contrib-
uted largely by new and expand-
ing coworking space operators
such as CocoWork (now called
Co-Hive), GoWork, WeWork, Ko-
lega and Union Space, while other
leasing transactions involving ex-
OUTLOOK 2019 23
JP/David Caessarre
isting tenants were mostly reloca-
tions and consolidations.
Despite the aggressive growth
in coworking spaces, the office
market in both the Central Busi-
ness District (CBD) and outside
the CBD area is still overshad-
owed by high vacancy rates as the
result of massive supply over the
last four years. By end of Septem-
ber, the vacancy rate in the CBD
area stood at around 25 percent,
while outside the CBD, it stood at
around 24 percent.
Looking ahead, available space
in the market is projected to in-
crease as we anticipate a number
of building completions to take
place next year.
The rise in vacancies is seen
to put more pressure on rents,
which are currently positioned at
around 10-25 percent lower from
the peak in 2014, depending on
the grade.
Accordingly, this is expected
to trigger enquiries from exist-
ing tenants that are looking to
upgrade their premises or con-
sidering to relocate to a more
prestigious location at costs that
could be similar to the current
premises.
Meanwhile, we also expect the
expansion of coworking space op-
erators to continue next year and
probably years after, in order for
them to achieve the targeted eco-
nomic of scale.
The writer is head of research and
consultancy firm Savills Indonesia.
24 OUTLOOK 2019
Energy policy
Renewables: Dusk or dawn?
O
ver the past few years,
there has been a sig-
nificant increase in
awareness on issues
pertinent to climate change and
the urgency of shifting from the
world’s fossil fuel “addiction” to
renewable alternatives. Main-
stream media has published sub-
stantial coverage around these
issues, such as reporting on the
recent attention-grabbing Spe-
cial Report on Global Warming of
1.5 °C by the Intergovernmental
Panel on Climate Change. The re-
port presented the pathways for
limiting global warming to 1.5°C
that would require rapid energy
transitions, whereby renewables
would need to supply 70 to 85 per-
cent of electricity by 2050. The
current pace of energy transition
is insufficient to avoid the adverse
impacts of climate change.
Last year was another record-
breaking period for global re-
newable energy (RE) uptake,
according to the Renewable En-
ergy Policy Network for the 21st
Century (REN21) in its publica-
tion Renewables 2018 Global Sta-
tus Report. The expansion came
thanks to the largest ever increase
in renewable power capacity, con-
tinued falling costs, increases in
investment and advances in en-
abling technologies.
A recent publication by the
United Nations Framework Con-
vention on Climate Change high-
lighted a central finding that
climate finance in developing
countries had increased by 24
percent in 2015 to US$33 billion
and, subsequently, by 14 percent
in 2016 to $38 billion.
However, it also suggests that
while global investment in renew-
able energy and renewable energy
subsides is rising, global invest-
ment in fossil fuel and fossil fuel
subsidies remains considerably
higher. The persistence of this
investment imbalance, despite it
now being several decades since
renewables became mainstream,
is a clear indicator that govern-
ments and markets are not fo-
cused enough on removing dirty
energy from the market mix.
Aretha Aprilia
and Nuki Agya Utama
JAKARTA
China plans to adopt clean en-
ergy including non-fossil ener-
gy and natural gas to replace coal
as the primary energy source by
2030, despite having added 40
percent of the world’s coal capac-
ity since 2002, and thus consum-
ing half the world’s coal to date.
While in the United Kingdom,
coal generation capacity has  fall-
en by one-quarter, and there were
only six coal-fired plants left in the
UK in 2017. The difference in ap-
proaches between China and the
UK to reducing coal usage high-
lights the global nature of the
problem and efforts being made.
If countries continue to pro-
mote and expand coal-powered
generation, they are putting pol-
luting equipment in place that will
be there, still polluting for decades
to come.
Energy transformation
In Indonesia, the country’s Na-
tional Energy Plan aspires to trans-
form the energy mix by 2025 to 30
percent coal,  23 percent renew-
able resources, 25 percent natural
gas and 22 percent oil.  Indonesia,
therefore, is still set to produce its
largest amount of power from coal
for the foreseeable future, whereas
renewables are targeted to account
for 23 percent of generation — de-
spite many having expressed pes-
simism that this could actually be
achieved given the current energy
policy landscape.
The New York Times last month
published an extensive article on
energy, clearly noting that for a
clean energy transformation, we
need to phase out coal immediate-
ly. Although some countries have
pledged their commitment to this
notion, the number pursuing this
path cannot offset the volume of
coal emission from places like
China, and, therefore, a real global
transformation cannot occur fast
enough to avert the adverse cli-
mate change impacts.
Indonesia was mentioned in
the article as the country that is
“digging more coal”, along with
other countries such as Vietnam,
Japan and India. Reasons for coal
dependence were due to the still
immense supply of coal left to be
exploited, powerful companies’
influence on the government in
the form of subsidies and the in-
expensiveness of coal compared
to other fossil fuel energy sources.
According to the 2012 publi-
cation Power Generation Optimi-
zation in ASEAN by 2030 from
Kyoto University, natural gas and
renewable energy were suggested
to form Indonesia’s power gener-
ation mix considering the project-
ed high cost of coal by 2030.
The publication advised In-
donesia to reduce it coal depen-
dency by nearly half by 2050, and
to replace it with natural gas and re-
newable energy sources such as so-
lar, biomass, geothermal and hydro.
Energy policies in Indonesia
are in a constant state of change,
and appear to also be heavily reli-
ant on the government’s regime.
PricewaterhouseCoopers (PwC)
published the Indonesian Power
Industry Survey 2018 in which the
outcomes of a survey on investor
confidence were presented.
The majority of respondents
stated that regulatory uncertainty
was the major barrier to investing
in new large-scale power genera-
tion facilities.
The survey also presented re-
spondents’ concerns on the regu-
latory and legal framework in In-
donesia that were deemed to lack
support for private investment.
But it was not all doom and gloom.
Despite the above-mentioned
concerns, 65 percent of inves-
tors surveyed by PwC still plan to
make an independent power pro-
ducer (IPP) investment within
the next 12 months. Although in-
vestor interest remains high, Fi-
nancier Worldwide magazine not-
ed that new greenfield projects in
Indonesia were slowing down as
investors adopted a “wait and see”
stance to have greater certainty
in the electricity business invest-
ment climate.
Generally speaking, even with
renewable energy technologies
becoming increasingly cost-com-
petitive with fossil fuels, stable
government policy remains cru-
cial to attract investment in re-
newables. Policy stability would
help to reduce the regulatory and
financial risks borne by energy in-
vestors and could increase their
appetite to invest in the capital-
intensive renewable energy pow-
er generation sector.
Incentives
Along with creating a general
sense of policy stability and har-
monization among the various
government institutions, incen-
tives such as zero import tax for
renewable energy equipment, a
standard approach many nation-
al governments have taken, could
provide real financial stimulus
to accelerate RE penetration in
the country.
Indonesia is competing with
other growing nations for energy
investments. Indonesia’s recent
history of frequently changing en-
ergy policies has put the country
at a disadvantage with interna-
tional investors looking at mul-
tiple country level investment
environments.
Stable regulation and incen-
tives focused on investors will lead
to more RE deployment, however,
there needs to be a true reckon-
ing of the external costs indirectly
borne by both the government and
the citizens that comes from fossil
fuel-derived grievances on public
health and the environment.
By taking the step to acknowl-
edge the negative health/environ-
mental impacts and indirect costs
fossil fuels impose on societies, In-
donesia could find new justifica-
tion for creating fair and balanced
power tariffs and focused incen-
tives to help the country compete
JANUARY 15, 2019
for investment and put a solid
foundation under the RE sector.
In addition to policy and incen-
tives, operational effectiveness
of government and state-owned
entities can be a major factor in
investment. It is a general expec-
tation that the government is sup-
posed to serve as a single entity
that works collectively to tackle
the nation’s pressing energy prob-
lems, rather than working in silos.
Coordination among ministries
should, therefore, take place, such
as among the Energy and Miner-
al Resources Ministry, the Public
Works and Housing Ministry, the
Environment and Forestry Min-
istry, the National Development
Planning Board (Bappenas), the
Finance Ministry, state electricity
company PLN and others.
Furthermore in an ideal world,
PLN would also serve as a service
provider of electricity to citizens
rather than a profit maker for
the government and not perceive
electricity merely as a commodity.
PLN is now the sole off-taker,
and if oligopoly is not an option,
then at least PLN should be de-
tached from any political agenda.
Medium and long-term energy
targets, strategies and policies
should be steadier, and avoid any
impulsive alterations regardless
of the changes of administration
and/or ministerial incumbents.
Indonesia may well have all the
policies and targets in place, but
in order to move forward we need
robust enforcement, policy stabil-
ity and transparency.
Essentially, Indonesia is getting
there, albeit gradually. It is evi-
dent that coal is still at the heart of
Indonesia’s electricity generation
because of economic and develop-
ment reasons. Renewables-wise,
we are still at the dawn of the very
long days ahead.
Aretha Aprilia is an energy and
waste management specialist at
CDM Smith Indonesia. Nuki Agya
Utama is a former post-doctoral re-
searcher and program coordinator
of Kyoto University’s department of
energy science, Japan.
 JANUARY 15, 2019
EU’s palm oil rule
How should Indonesia respond?
P
alm oil is Indonesia’s
largest export. It pro-
vides more in export
revenue than coal, gas
or oil. It plays a pivotal role in any
trade policy decisions made by the
national government.
Indonesia’s three largest export
markets are India, the European
Union and China. China’s role in
global price pressures is less di-
rect. China has imposed tariffs
on United States soybeans and is
sourcing them from other mar-
kets; this has brought the global
price of soybeans down, dragging
on palm oil prices.
Indian demand concerns are
relatively straightforward. The
rupee has fallen significantly this
year; this has largely been caused
by a spike in oil prices.
This has placed pressure on
household spending and made
imported oils more expensive. At
the same time, the Indian govern-
ment slapped tariffs on imported
palm oil in a bid to prop up the lo-
cal agriculture sector.
Chinese and Indian pressures
for the most part are being driv-
en by other market forces, e.g. oil
prices and soybean prices.
Problems in the EU are differ-
ent. They are regulatory and po-
litical; they have been driven by a
number of actors. Palm oil has dis-
placed other vegetable oils in Eu-
rope since the year 2000.
Last decade, the EU developed a
renewable energy strategy. It set out
minimum requirements for renew-
able fuels in transportation under
the Renewable Energy Directive
(RED). This was partly to reduce
fossil fuel dependence and green-
house emissions; it was also to re-
place payments for European rape-
seed farmers as the EU’s Common
Agricultural Policy was reformed.
The RED was introduced in
2009; imported palm-based (from
ASEAN) and soy-based (from Ar-
gentina) biodiesel increased their
share of this market while de-
mand remained flat. Why? The
EU remains an expensive place to
manufacture biofuels.
In response, European oilseed
producers and politicians called
Khalil Manaf Hegarty
MELBOURNE
for restrictions on imports of
biodiesel. For example, the EU
hit Indonesian and Argentinean
biofuels with anti-dumping tar-
iffs that were later declared illegal
by the World Trade Organization
(WTO).
Environmental campaign
In order to qualify for the RED,
fuels must meet a number of envi-
ronmental criteria. The most im-
portant of these is that biofuel feed-
stocks cannot come from forest
areas or peat areas that were plant-
ed after 2008. Calls grew to restrict
palm oil imports on environmen-
tal grounds, arguing that emissions
from oil palm cultivation meant
that there was no greenhouse ben-
efit from using palm oil.
In 2018, the EU was required
to review the RED. In doing so, it
was to determine which feedstocks
could be used in the bloc’s renew-
able energy program. This review
included the inclusion of the idea
of indirect land use change (ILUC).
The principle is as follows: Demand
for biofuel crops would mean that
more land must be planted (or for-
est cleared) for food crops.
ILUC cannot be observed di-
rectly; it is not possible to say
whether land has been cleared as
an indirect result of biofuel poli-
cies — it is only possible to mod-
el it. These models are subjective
and can therefore be politicized.
It is highly likely that the EU
will single out imported oils — in-
cluding palm oil from Indonesia —
and state they have a “high risk” of
causing ILUC, but the EU would
most likely keep a pathway open
for palm oil. It may, for example,
push a certification regime that
would make it possible for some
suppliers to be considered either
high or low risk.
It can almost be guaranteed
that compliance would be difficult
for exporters. This has certainly
been the case for timber exports
from developing countries since
the introduction of the EU’s due
diligence regulations for timber.
A complete block on palm oil
for the RED would put Indone-
sia and Malaysia offside, precisely
at a time when the EU is trying to
ink trade and cooperation agree-
ments with both countries.
Indonesia and Malaysia have
already been particularly aggres-
sive within the WTO in calling for
details on the revised RED. They
have been joined by other export-
ers — such as Colombia — that are
particularly concerned about the
impact of the new regulations.
Palm oil is also the world’s most efficient oil
in terms of input and yield and Indonesia and
Malaysia are the most efficient producers.
In the world of trade policy,
these types of regulatory disrup-
tions are sometimes referred to
as non-tariff measures (NTMs).
They are often accidental, but oc-
casionally deliberate. The point
isn’t to block trade completely, but
to disrupt supply, imposing an in-
direct cost on exporters.
These disruptions — if illegal —
are often resolved by an increas-
ingly dysfunctional WTO, but res-
olution takes time.
Detractors might try to argue
that biofuels aren’t an important
market for palm oil, but this is not
the case.
The global biodiesel market
represents about 12 percent of the
world vegetable oil trade. By way
of comparison, China represents
about 10 percent of the global ex-
port market. The EU is the world’s
largest biodiesel market and im-
ports about 2.4 million tons of
crude palm oil (CPO) for biodiesel
production.
Biodiesel represents a distinct
and different demand to food and
other industrial applications. No
producer would give up on the
Chinese market, for example.
In August 2018, President Joko
“Jokowi” Widodo and Energy and
Mineral Resources Minister Igna-
sius Jonan extended the B20 bio-
fuel blending mandate across the
entire transportation sector.
The requirement is expected
to effectively double demand for
biodiesel within Indonesia, ac-
cording to several estimates. This
would push domestic demand for
biodiesel refining to somewhere
in the vicinity of 6 million tons
of CPO annually, an increase of
about 3 million tons.
In the months that followed,
Malaysia and Indonesia both in-
troduced biofuel blending man-
dates. These measures would
make some difference to the de-
mand dynamics in ASEAN, as well
as in global markets.
This would ameliorate any
fall in demand in the European
biodiesel market, but that is not
necessarily their intention. They
are among broader macroeco-
nomic measures.
In one instance they are about
shoring up aggregate demand in
a time of falling prices and main-
taining the livelihoods of millions
of smallholders.
In Indonesia, the mandatory
biofuel blending was a means of
reducing crude and petroleum
imports as prices spiked, putting
pressure on the Indonesian cur-
rency. Malaysia is somewhat insu-
lated from oil prices — it exports
more than it imports.
Why the RED
However, if this is the case, why
is the RED — and countering its
impact on the palm market — so
OUTLOOK 2019 25
important? It is a matter of prin-
ciple and it is a critical juncture for
the future of palm oil in all mar-
kets, particularly Western markets.
Both the US and the EU have
long histories of attempting to
keep palm oil out of their mar-
kets. The US soybean lobby waged
a “tropical oils” health campaign
in the 1980s and 1990s in an at-
tempt to keep palm oil out of the
US market.
European rapeseed and sun-
flower producers have launched
similar actions against palm oil
— on environmental grounds. If
palm oil is cut from the RED, it
would send two signals.
It would give other countries
(e.g. the US) further grounds to
block palm-based biodiesel from
their markets.
It would also encourage policy-
makers to push for tighter regula-
tions on palm oil use in food and
elsewhere. The EU has already
signaled that it is seeking to limit
“imported deforestation”.
Palm oil is also the world’s most
efficient oil in terms of input and
yield and Indonesia and Malaysia
are the most efficient producers.
One commentator has described
it as a “disruptive technology”.
Antipathy toward it in all markets
is not going away any time soon.
Commitments by successive
governments toward halting oil
palm plantation expansion and
the RSPO’s prohibition on defor-
estation are not about to quell this
opposition.
Many policymakers in the EU
believe they have a moral case for
banning palm oil. They have little
or no regard for Indonesia’s devel-
opment objectives and do not un-
derstand Indonesia’s significance
regionally or globally.
“Beating” a RED ban on palm
oil would go some way to upend-
ing this moral attitude.
The writer is a trade and sustain-
ability consultant and has worked
with palm oil groups in Indonesia,
Malaysia, Nigeria and Papua New
Guinea. He is the editor of the Palm
Oil Monitor.
26 OUTLOOK 2019
Belt and Road Initiative
Catalyst for green growth
G
rowth is fundamen-
tal to the functioning
of our maturing world
economy. It may be
needed more pressingly in lower
income countries than elsewhere
but is universally needed, nev-
ertheless. Centuries of experi-
ence have taught us that growth
can never be taken for granted. It
needs nurturing, occasional game
changers coinciding with major
technological innovations or posi-
tively disruptive policy overhauls.
We have recently enjoyed buoy-
ant growth in the wake of techno-
logical innovations despite policy
mistakes that we committed on
an almost regular basis, as we did
before the Asian financial crisis of
1997-1998, and the global financial
crisis of 2007-2008.
We count on them while we
seek to grow faster. However,
there are downsides to the cur-
rent digitally driven innovations.
They tend to be extremely di-
visive, allowing winners to take
almost all of the sweet fruits as
demonstrated by flagship compa-
nies of the current globalization.
What is more, automation eats
up a large number of jobs, includ-
ing jobs that were considered safe
from automation. How far and
how fast we can generate replace-
ments for the lost jobs remains to
be seen. This is not to say that the
world can dispense with techno-
logical innovations.
For as long as humans have
been creating technology they
have set themselves on their own
trajectory that they can only par-
tially control.
The important point is that ma-
jor policy initiatives are needed
to balance the disruptive effects
that come along with the digital-
ly driven innovations, which ac-
cording to some scientists may
even soon arrive at a singular-
ity, a situation in which learning
machines exceed human beings in
intelligence.
Depleting natural resourc-
es even farther is not a realistic
choice. In fact, through the Par-
is Agreement governments have
agreed to cut greenhouse gas
Djisman Simandjuntak
and Jusuf Wanandi
JAKARTA
emissions. Given such a commit-
ment, the world is challenged to
squeeze a higher unit of growth
from a given resource use.
Answering the challenge is cer-
tainly difficult, but the way the
world economy grew in the period
after World War II indicates that
efficiency improvement in re-
source use is a feasible target.
The Marshall Plan and Europe-
an integration that followed a few
years thereafter, the marathon
of trade liberalization under the
General Agreement on Tariffs and
Trade (GATT) and later the World
Trade Organization (WTO), the
revolutionary shift of the Repub-
lic of Korea, Chinese Taipei, Hong
Kong SAR, and Singapore and,
most miraculous of all, the New
Economic Policy of China are ex-
amples of dramatic policy changes
that triggered a strong and lasting
economic growth.
The post-war growth is uneven
spatially. As far as Asia and Europe
is concerned it is concentrated
along the North-West South-East
axis. It basically leaves out the
Western provinces of China, cer-
tain parts of South Asia, Central
Asia, the Middle East and even
East Europe.
The same happens to Africa
despite its preferential access to
the European Union. Connecting
these areas to the main trade and
investment route is, therefore, a
historical opportunity or even a
historical call to Asia, Europe and
the world at large.
This is what the Belt and Road
Initiative (BRI) is doing. With the
BRI and preexisting initiatives,
the entire world would be con-
nected through land and mari-
time infrastructure.
BRI as a living design
The BRI covers immense land
and maritime areas on three con-
tinents where more than 50 per-
cent of the world’s population live
in rising living standards.
It is home to people with very
different living standards, at vary-
ing stages of technological ad-
vancement, with different reli-
gions, folklores, political systems
and other elements of cultural di-
versity. Many of the BRI countries
are already confronted with divi-
sive forces of their own which are
very deeply rooted.
Ingenuity will be needed in the
design of the BRI to enable it to
function as a glue rather than an
additional force of division. Or-
chestrating the BRI as a connect-
ed growth area is a herculean task
to perform.
So far the BRI is most popular-
ly known for the huge networks of
infrastructure that it plans to es-
tablish with the help of Chinese
investment. An amount of invest-
ment in the order of US$8 trillion
is often mentioned in connection
with the BRI.
It is a huge investment, repre-
senting roughly 2.5 percent of the
Chinese technology: This picture taken on Dec. 7, last year shows
the construction of the 9th and 10th units of the coal-fired power plant
PLTU Suralaya in Cilegon, Banten. A number of Chinese companies
have been involved in the construction of power plants in Indonesia.
combined gross domestic product
(GDP) of the participating econo-
mies. It would come as a major re-
lief to the 45 developing countries
of Asia which, according to the
Asian Development Bank (ADB),
will need to invest around $26
trillion.
While huge, the expected BRI-
related infrastructure investment
falls far short of the $26 trillion in
the period of 15 years from 2016
in order to maintain growth mo-
mentum, eradicate poverty and
respond to climate change.
Hence, China, the rest of Asia,
the Pacific, Europe, Africa and the
world at large share an interest in
making the BRI a success.
Better physical connectivity
among the BRI economies will
speed up the movement of goods,
services, capital and people. Many
goods and services will enjoy an
improving tradability.
Trade and investment costs
will fall. Division of labor or spe-
cialization among the BRI econo-
mies, particularly among neigh-
boring economies will expand and
deepen. With new infrastructure,
new technologies come along.
More efficient in resource use,
the new infrastructure will also
be greener. What is more new
businesses will be crowded in.
Antara
JANUARY 15, 2019
Indeed, it is these crowding-in
effects that we expect the most
from infrastructure. They are the
litmus test for the success of in-
frastructure.
Trade and Investment Program
The BRI involves an extreme-
ly complex set of issues of which
many will emerge at later stages.
Some issues have already circu-
lated widely in a friendly or hos-
tile manner. Let me focus on just
a few issues, particularly invest-
ment trade issues, growth issues
and governance issues.
As indicated earlier it is the
crowding-in or multiplier effect
that will determine the extent to
which the BRI is going to deliver
its intended results.
Many of the BRI economies
have had a long experience with
trade and investment liberaliza-
tion through unilateral, regional,
plurilateral and multilateral ini-
tiatives and have profited from
those experiences handsomely.
Many others in Central Asia, South
Asia and Africa are yet to integrate
properly with the rest of the world
through trade and investment lib-
eralization initiatives. Even for the
“established traders” like China
and ASEAN, renewed efforts are
needed to keep themselves open to
trade and investment.
Enthusiasm for opening is
weakening as reflected in the pro-
tracted negotiation on Regional
Comprehensive Economic Part-
nership (RCEP). ASEAN has
hardly introduced any meaning-
ful initiatives on trade and invest-
ment in recent years.
The inward-looking trend that
erupted in the wake of the world
financial crisis of 2007 and 2008
has not been reversed. What is
more there is room for further
trade and investment liberaliza-
tion in the BRI economies despite
the progress made in the past.
Beyond nondiscrimination
China may consider preferential
access to the Chinese market for
goods and services originating in
the least-developed economies
in the BRI, engaging thereby in
“benefaction” similar to what de-
 JANUARY 15, 2019
veloped economies did 50 years
ago in response to the demand
from the developing world.
Linking China-financed infra-
structure with an increasing capac-
ity to export in the borrowing coun-
tries is imperative to avoid a debt
problem arising in the future where
interest payments and debt repay-
ments create a balance of payment
problem of crisis proportion.
Needless to say, open trade in-
vestment policy can only lead to
better trade preparedness, if com-
plemented with capacity building
and trade and investment facili-
tation. Hence, the design of BRI
must also include a trade and in-
vestment program aimed at en-
abling borrowers to earn enough
foreign exchange when the time
arrives for debt servicing.
Whether or not such export
capacity is generated by domes-
tic or foreign investors, including
Chinese investors, is of second-
ary importance, though political-
ly there is also a limit to foreign
presence that a country can re-
ceive in good faith.
If one looks back to past de-
cades, all major policy initiatives
were centered round trade and
investment policy reforms, which
include greater opening toward
the rest of the word, greater free-
dom to do business and removal of
distorting policy measures.
At a time when many govern-
ments are turning inward, inter-
nalizing trade and investment
measures in BRI design is critical
for its success. China can influ-
ence the BRI’s trade and invest-
ment agenda by integrating it in
lending terms and conditions, but
also indirectly through its partici-
pation in ASEAN, RCEP, the Asia
Europe Forum and other forums.
The BRI offers a great opportu-
nity for a greener economy. With-
in the BRI, China can catalyze an
institutional setting more condu-
cive to a green economy, which
it has laid down in recent years
while dealing with pollution prob-
lems of its own.
Green industries and services
have grown very fast in China in
recent years. In clean convention-
al energy such as carbon capture
and sequestration (CCS) China
has made more progress, realiz-
ing that it will continue to depend
on conventional energy for a long
time to come. China has topped
the world in recent years in the
research, development and adop-
tion of renewable energy, particu-
Sleek lines: Women wearing traditional kebaya blouses take a wefie next to a model of a high-speed train
during the groundbreaking ceremony for the development of the Jakarta-Bandung high speed railway
project in Cikalong Wetan, West Bandung regency, West Java, on Jan. 21, 2018. An Indonesia-China joint
venture, PT Kereta Cepat Indonesia China will spend Rp 70 trillion (US$4.8 billion) to build the 142-kil-
ometer railway.
larly wind, solar, and bio energy.
It has also made a lot of prog-
ress in water resource conserva-
tion and recycling as well in de-
salination technologies. China will
remain at the top in terms of CO2
emissions for a long time to come.
The sheer size of its population and
very rapid growth combine to re-
sult in such large-scale emissions.
At the same time, China has
demonstrated a very strong com-
mitment and ability to study, de-
velop and adopt greener practices
of economic development on both
the hard and soft side, with these
recent experiences China can also
guide the BRI into a green econo-
my platform for collective learn-
ing by doing.
Growth and preemption of
debt problems
The fact that in its early stages
the BRI is dominated by the loan
relationship between China as
creditor and the rest of the BRI as
borrowers, necessitates a built-in
fiscal prudence.
Whether one likes it or not,
governments everywhere are ex-
posed to continuous scrutiny as
regards its fiscal profile. A prudent
government is expected to limit
its annual borrowing to not more
than 3 percent of GDP and to con-
trol debt at not more than 60 per-
cent of GDP. Even under such fis-
cal prudence a government will
have to be able to generate addi-
tional taxation capacity.
The rate of economic growth
in such an economy must rise to
allow higher tax revenue in due
course of time.
Otherwise, debt crisis is already
pre-programmed for both sides,
the creditor and the debtor, at the
time the loan is disbursed.
The costs of such crisis are much
heavier than the pecuniary costs.
Generating additional growth im-
petus is, therefore, essential for any
borrower in the BRI. This brings
us back to similar issues that were
discussed in relation to the build-
ing of export capacity.
Infrastructure is usually not a
good sector as tax payer. Its ser-
vices are usually subjected to a
wide range of distortions, includ-
ing price control.
Infrastructure is judged not on
its own returns but on the extent
to which it gives birth to success-
ful business enterprises.
One can certainly attempt to
minimize the likelihood of de-
fault by assuring that loans are
directed to infrastructure proj-
ects with the highest expected re-
turns, that users are charged with
a price in excess of costs, that
procurement is conducted in the
JP/Arya Dipa
most transparent and competi-
tive way, that the project is man-
aged and maintained in the best
professional way in the interest
of the highest possible produc-
tivity. Ways must be found to im-
pose such requirements.
While the BRI should maintain
its autonomy in setting its own
standards of development financ-
ing, there is a lot that it can learn
from the practices of other in-
frastructure lending institutions
such as the Asian Infrastructure
Investment Bank (AIIB), the ADB,
the World Bank and the European
Bank for Reconstruction and De-
velopment (EBRD).
In times of economic conver-
gence, sound development lend-
ing practices also get increasing-
ly similar across economies and
regions. With the BRI, the world
of development financing is
changing.
There is a non-zero probabil-
ity that in the early stage of its
development the BRI will pri-
marily be dealing with borrowers
with poor rating whose access to
the resources of the established
development banks is very lim-
ited. Countries with better credit
standing may engage in adverse
selection, directing good proj-
ects to institutions with tougher
requirements and less bankable
OUTLOOK 2019 27
projects to the BRI. On the oth-
er hand, the BRI’s lending would
border on redundancy, if it sets ex-
actly the same conditions as other
institutions do.
Primus inter-pares
In the BRI’s early stage, the
centrality of China is a necessity.
An initiative as grand as the BRI
requires a strong champion. In
playing its championing role, Chi-
na will have to win friends in the
participating countries.
BRI diplomacy is crucial.
Groups of friends similar to BRI
Scholarship should be formed
and nurtured. China will also
have to demonstrate a commit-
ment to transparency, account-
ability and fairness, or good gov-
ernance in short.
The BRI will need to be more
balanced and comprehensive in
its issue coverage and more inclu-
sive in its structure. This way al-
legation and premature worries
about China’s hidden intentions
can be demystified gradually.
The world is very lucky these
days to be able to enjoy a rela-
tively strong growth of output
and trade despite the loss of en-
thusiasm and trust in multilater-
al and regional trade negotiation
and cooperation, the ease with
which the United States uncou-
pled from the core international
institutions that it brought to life
over 70 years ago and the ten-
dency of many governments
to go the inward-looking way
while addressing trade and in-
vestment issues.
However, unchecked this re-
treat from open trade and invest-
ment is going to harm the world
sooner or later and severely so.
Through the BRI and other or-
ganizations and forums of which
China is member or participant,
China should urge other coun-
tries to re-engage in trade and in-
vestment issues.
Given what China has accom-
plished through its New Econom-
ic Policy over the last 40 years,
translating the positive experienc-
es into a global trade and invest-
ment agenda as a continuation of
what the world has painstakingly
accumulated in the last 70 years
or so is greatly opportune.
Djisman Simandjuntak is Pra-
setya Mulya University rector. Jusuf
Wanandi is the vice chairman of the
board of trustees, CSIS Foundation.
 Spend more
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