Saturday, January 25

Will lower interest rates stimulate Indonesia’s economy?

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In a bid to boost economic growth, Bank Indonesia (BI), the country’s central bank, has cut its benchmark interest rate for the fourth time in four months.

At its monthly meeting on October 24, BI announced that the seven-day reverse repurchase rate would be cut by 25 basis points, to five per cent. The decision was the fourth consecutive time the rate has been slashed since July, with the central bank reducing its benchmark by 100 basis points over the period.

The developments, which go some way to reversing the 175 basis point hikes made over the course of last year, were described in a statement from BI as “pre-emptive” measures designed to “stimulate domestic economic growth momentum against a backdrop of global economic moderation”.

Indonesia recorded year-on-year (y-o-y) growth of 5.02 per cent in the third quarter, slightly down on earlier projections of 5.10 per cent, as well as on second quarter levels of 5.05 per cent y-o-y. This figure was the lowest rate of growth since mid-2017, as investment, household consumption and government spending all saw subdued growth.

Despite this, BI expects the economy to meet year-end targets of 5.1 per cent growth, increasing to 5.3 per cent next year.

Special economic zones key to growth

The cuts in interest rates form part of broader plans designed to stimulate growth and investment in the economy, as President Joko Widodo begins his second five-year term in office.

In mid-October Darmin Nasution, the coordinating minister for economic affairs, outlined plans to develop more special economic zones (SEZs), along with an expansion of tax incentives to encourage investment in them.

Nasution outlined plans to simplify rules on existing tax holidays, by granting investors tax breaks based on the size of their investment in SEZs.

The government is looking to inaugurate seven new SEZs next year. This move seeks to position Indonesia as a prime destination for companies moving out of China to avoid US tariffs. The authorities hope to attract 726 trillion ruppiah (US$51.5 billion) in investment into SEZs by 2030.

Building on the 13 existing sites, the new developments include a digital park on Batam Island and an export-focused zone for electronics, automotive and chemical industries in central Java.

In addition, the government has sought to incentivise investment with a proposal to reduce the corporate income tax rate: at 30 per cent, it is currently the highest in Southeast Asia.

Officials are expected to submit a proposal to Parliament before the end of the year that would look to progressively reduce the rate to 20 per cent, starting in 2021.

Another key reform relates to the country’s negative investment list, which prevents foreign investment in specific sectors. Often seen as a deterrent to foreign investment, President Widodo has vowed to relax the list, such that the full ban would only apply to selected business sectors such as gambling, cannabis cultivation, chemical weapons and the wildlife trade.

Industrial plan

The proposed reforms should help boost activity in manufacturing and industry, areas that have been identified as potential growth drivers.

The government’s Master Plan of National Industry Development 2015-35, which focuses on developing upstream and intermediate industries, aims to increase industry’s contribution to GDP from current levels of around 20 per cent to 30 per cent by 2035.

The plan is supported by the Making Indonesia 4.0 strategy, which seeks to diversify the economy away from natural resources by developing high-tech export industries.

Launched in April last year, its key areas of focus include 3D printing, artificial intelligence, human-machine interface, robotics and sensor technology. The government hopes that it will create between seven million and 19 million new jobs between 2018 and 2030.

This piece was produced by the Oxford Business Group