In light of ASEAN integration, Indonesian government focusing on strengthening SMEs' competitiveness

Standing as a critical pillar of the Indonesian economy, small and medium-sized enterprises (SMEs) are the country’s largest employers and a significant contributor to GDP growth, although they have been hit by Indonesia’s economic slowdown, with many struggling to access credit and export markets, in addition to feeling the pain of a commodities price drop.

In light of these challenges, the government has moved to launch a comprehensive SME support strategy, including new stimulus packages aimed at boosting credit access, assistance for exporters and investments in communications infrastructure to enable greater SME digitisation. These efforts, coupled with anticipated new investment in SME innovation following recent revisions to the government’s negative investment list, should also see SMEs maintain their foothold in the coming years, supporting the government’s long-term economic target of becoming a middle-income country.

SME Impact 

Although Indonesia was a prime example of an Asian economic powerhouse between 2010 and 2011, with GDP growth averaging 6.2% annually, it is now in an economic slowdown as a result of plummeting commodities prices, an economic slowdown in China and weakening domestic demand (see overview). Growth slowed to a six-year low of 4.79% in 2015, and while projections for 2016 are somewhat brighter, with the IMF projecting 4.9% real GDP growth, the country remains far off from its targeted 7% annual GDP growth which, under the principles of it’s long-term development agenda, would see it reach middle-income status by 2025.

One of the most-affected segments in Indonesia has been small businesses. According to a February 2015 report by the IMF, SMEs accounted for 97.2% of total employment in Indonesia, the highest ratio out of 13 countries that were surveyed, compared to 87.5% in Korea, 79% in Germany, 58.9% in Malaysia and 49.4% in the US. At 57.8% the segment’s contribution to GDP is also higher than any other country surveyed, compared to 50% in Japan, 52% in Sri Lanka and 53.8% in Germany.

In October 2015 Reuters reported that current economic conditions, combined with unprecedented wage growth which has not been matched by productivity gains, has had a dramatic impact on SME employment, with thousands of lay-offs reported in the previous year, while new job creation has remained sluggish (see analysis).

In light of these challenges, stakeholders, including the Indonesian Chamber of Commerce and Industry, have increasingly called on the government to support small businesses, arguing that the country can not meet its economic targets without focusing public investment in SMEs. The segment continues to face a host of challenges, most notably a lack of access to international markets and credit, which have constrained export growth and led the government to emphasise SME finance and digitisation within its host of economic stimulus packages that have been rolled out since September 2015.

Regional Integration 

Unlike its contribution to employment and GDP growth, the IMF reported that the trade contribution of SMEs is comparatively lower than other major global exporters, with the segment’s share of total exports standing at 15.8%, compared to 53.9% in Japan, 29.5% in Thailand and 19% in Malaysia. Much of this can be attributed to the low participation of SMEs in the supply chain, with the IMF reporting that just 6.3% of SMEs in Indonesia have access to a supply chain, compared to 52% of larger firms. This could have a significant impact on SME growth as regional integration continues.

It also presents a particular challenge following the start of ASEAN Economic Community (AEC) integration at the end of 2015, creating a single market for all ASEAN countries, with regional trade growth expected to grow significantly in the coming years as a result. In December 2015 the Straits Times reported that by technical measurement, Indonesia’s readiness for AEC integration stood at 94%, higher than the ASEAN average of 92%, although challenges still remain with regards to SME inclusion, employment and language skills. SME participation in regional integration will be critical, and many stakeholders have expressed concerns that local SMEs will lose out to Asian corporate giants and multinationals eager to invest in a single regional production base.

With Indonesia’s population now numbering more than 250m, there are also concerns that its huge consumer base will make Indonesia more of a market for AEC countries, rather than an investment destination. Indeed, the Straits Times reported that although some large state-owned enterprises, such as Bank Negara Indonesia, have been quick to tap new AEC opportunities, small businesses remain largely unaware of the opportunities available on the AEC single market.

Credit & Digitisation 

In addressing the challenges facing SMEs as they seek to better access international markets, the government has focused on two primary areas: access to finance and digitisation. SMEs have long struggled to gain a better foothold via access to new credit.

In a 2015 study carried out under the auspices of the Asian Development Bank, researchers at Trisakti University in Jakarta found that out of 2.7m Indonesian businesses surveyed in 2010, 29.5% reported that lack of capital posed a serious constraint to growth. Indeed, lack of capital stands as the most significant challenge facing businesses in Indonesia, followed by marketing difficulties, and both a lack of and high costs of raw materials. The report found that only a small percentage of SMEs had ever obtained credit from banks or other financial institutions.

The IMF, meanwhile, reported that Indonesia’s SME credit gap – meaning the difference between formal credit provided to SMEs and the total estimated potential need – stood at $11.8bn in 2015, or an average figure of $29,000 per enterprise.

Stimulus Support 

The government has launched a host of new stimulus packages aimed at boosting lending, in addition to creating a new seven-day reverse repo rate, which came into effect in August 2016 and is expected to see monetary easing better translated into lending growth (see analysis).

The government’s 11th stimulus package, meanwhile, will provide export-oriented public business loans to SMEs, divided into working capital loans and investment loans. Both of these finance streams will be channelled to export-oriented SMEs, and will be offered by the state-owned Indonesia Eximbank at a 9% interest rate. The government also unveiled plans to provide SMEs with micro-loans to a maximum value of Rp5bn ($365,000) per borrower, and up to Rp25bn ($1.8m) for registered SMEs. “There needs to be an integrated system for micro-credit, as right now the system doesn’t cover this type of small-scale credit,” Antonius CS Napitupulu, president director of state-owned insurer Askrindo, told OBG.

Go Digital 

Although these government efforts will certainly help, particularly in light of AEC integration, both public and private stakeholders recognise the critical role innovation will play in boosting SME exports. Indeed, at the ASEAN-US Summit hosted in California in February 2016, President Joko Widodo urged SMEs to tap into the digital economy in order to expand to international markets, noting that the government is working to enhance, improve and expand the country’s communications infrastructure through initiatives such as the Indonesia Broadband Plan, which envisions a high-speed network connecting all the Indonesian islands.

Digitisation offers perhaps the best opportunity for SME growth and advancement. In an August 2015 report on SME digitisation in Indonesia commissioned by Google, global consultancy group Deloitte found that boosting digital engagement among Indonesian SMEs could increase the country’s annual economic growth by up to 2%, further supporting it’s efforts to become a middle-income country by 2025. The report, titled “The SMEs Powering Indonesia’s Success: The Connected Archipelago’s Growth Engine”, found that greater use of digital technologies including social media, broadband and e-commerce could boost SME revenues by up to 80%, increase employment by 150% and make a business 17 times more likely to use innovative practises.

Room For Improvement 

After surveying 437 SMEs across Indonesia, Deloitte found 36% were considered “offline”, meaning they had no access to broadband internet or a computer; 37% were classified as “basic”, with access to broadband internet, a smartphone and an online presence; 18% were considered “intermediate”, meaning they also maintained a presence on social media and interact with customers online; and 9% were considered “advanced”, meaning they offered sophisticated connectivity, social media integration and e-commerce capabilities.