Great Expectations: CEOs in Indonesia Looking Forward to Improved Business Conditions

South-east Asia’s largest consumer market and one of its most dynamic growth destinations is now turning a corner in terms of business confidence and expectations, the latest OBG Business Barometer: CEO Survey shows. While for some time, both foreign and domestic investors in Indonesia cited infrastructure,
political uncertainty and frequent changes in legislation as their top concern, many now have an altogether more positive outlook.

Indeed, the OBG Business Barometer: Indonesia CEO Survey, conducted over a period of three months in early 2017, reveals that 92% of local CEOs had either very positive or positive expectations of local business conditions in the coming 12 months.

In addition, some 40% of respondents said they are very likely to make a significant capital investment
within the next 12 months.

This shift in outlook is supported by improving foreign direct investment (FDI) data in 2017. Indonesia’s Investment Coordinating Board (BKPM) reported that FDI in Indonesia grew by 2.1% in Q4 2016. The latest FDI cycle is driven by investments in machinery and electronics, with paper and printing in second place. Pharmaceuticals, mining, and vehicles also showed improvements in investment volumes. Indonesia’s future economic growth will be driven by higher household consumption as well as a pick-up in private sector investment in sectors such as housing, infrastructure, energy, and manufacturing. The current official target of 5.1% growth for 2017 could be exceeded if the country manages to accelerate public works programme in infrastructure – still the main hurdle to faster expansion. External risk to the economic outlook comes from US monetary policy and a higher than expected inflation rate, which would trigger monetary tightening.

Meanwhile, there has been a strategic shift as far as growth priorities are concerned. The National Development Planning Minister Soemantri Brodjonegoro announced in April the country plans to focus on six sectors to achieve growth: processing industry, agriculture, trade, information and communication, construction and financial services. A partial recovery in commodity prices and an ongoing investment drive in the energy sector should help to fund long-term infrastructure projects.

However, the government’s role in this process remains relatively limited. Some 54% of respondents said less than 20% of business is spurred by government spending. The survey confirmed a widely held view that the most effective support the government can provide is to improve the bureaucratic process.