TheJakartaPost
Please Update your browser
Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.
Analysis: Banking support for potential manufacturing industries to reduce
Indonesiaâs economic growth has been gradually decreasing since the third quarter of 2012
Change Size
I
ndonesia's economic growth has been gradually decreasing since the third quarter of 2012.
The prime suspects are reduced investment and a slowdown in net exports. Moreover, exports grew negatively in the third quarter of 2012 and second quarter of 2014.
The current-account deficit (CAD) is still the main risk factor for Indonesia's macroeconomic conditions in the short- and medium-erm.
Based on the latest conditions, we expect the deficit to hover at around 3.1 percent of gross domestic product (GDP).
As we know, the significant contributor of the deficit is the oil and gas trade balance, which costs approximately US$2.6 billion. Hence, Indonesia's economy is forecasted to grow only between 5.2 and 5.3 percent in 2014, down on the growth achieved in 2013. Options to minimize the deficit lie between cutting fuel consumption and reducing other import commodities through import substitution.
In the short-term, the government has to reduce the fuel subsidy in order to maintain a healthy fiscal budget and to manage fuel consumption. The need for such a policy is significant, as oil-import growth decreased drastically from 73.7 percent in 2010 to 7.4 percent in 2013.
The second option would be to minimize import commodities that comprise a high share of overall imports. In 2013, 10 major import commodities reached roughly 76.9 percent of total imports.
The commodities were mineral fuels, machinery, electrical and electronic equipment (EEE), iron and steel, textiles, vehicles, plastics, food and beverages, organic chemicals, and articles of iron and steel.
According to this list, we can start to analyze which commodities would potentially be part of an import-substitution policy.
First, EEE and vehicles are unique commodities for Indonesia, since they both account for high import and export shares at the same time.
This condition relates to the fact that EEE and vehicles are also the main export commodities from ASEAN to global markets.
Thus, the production network of these commodities spreads across ASEAN, including Indonesia.
As part of the regional production network, it will be difficult to avoid intermediate input imports from ASEAN in the production process.
However, Indonesia still has an option to use domestic materials to increase value added, such as exploring domestic tin as a material to produce EEE components.
For vehicles, meanwhile, the highest import content is spare parts and accessories.
On average, import content to produce spare parts and accessories is more than 50 percent.
Nonetheless, the solution for vehicles is rather complex because it links to the availability of steel and petrochemical (plastics) to produce spare parts as well as accessories.
Second, steel and petrochemicals are important industries because of their link to other industries. Steel and plastics are heavily utilized as input goods for other industries, such as the automotive industry.
If we compare the share of GDP from both commodities, we find that the share and growth rate of petrochemicals are higher than those of the steel industry.
Hence, the highest priority should be given to the steel industry in Indonesia.
In 2013, the steel industry's share to manufacturing production was minuscule at only 1.9 percent.
Moreover, the average growth from 2008 to 2013 was approximately 3.7 percent, far below Indonesia's GDP growth, which increased by 5.92 percent over the same period.
The problem is the country's high dependency on imported materials to produce steel.
Between 2011 and 2012, around 55.5 percent of the input for the steel industry came from other countries, mainly Japan and China.
However, imports cannot be avoided because domestic production is lower than demand.
Taking an optimistic view, however, the demand for steel will grow even further because of the rapid growth of infrastructure and property development in Indonesia.
One of the world's largest steel producers, South Korea's POSCO, is harnessing this momentum and building a slab factory in cooperation with PT Krakatau Steel in Cilegon, Banten, leading to expectations that slab imports will decrease in the future.
Another possibility is to explore iron ore reserves in Indonesia, most of which are located in Kalimantan, Maluku and Papua.
Third, foodstuffs and footwear are commodities that have exhibited the greatest improvement in market share.
Their respective market shares rose from 0.63 percent and 1.81 percent in 2003 to 1.01 percent and 3.03 percent in 2013. Therefore, both foodstuffs and footwear could be a focus of export promotion for Indonesia.
The most-exported foodstuffs are meat, fish and fruit, which of course have a low import dependency.
The promotion of exports will give these sectors an opportunity to develop and to be rising stars alongside other exports.
Footwear is also a promising product to expand our exports. In 2013, footwear accounted for the highest market share compared to other commodities.
The problem once again lays in the lack of input production ' in this case, leather. Domestic leather production in Indonesia can only meet up to 60 percent of the demand within the footwear industry, while the remainder is imported.
Another problem has arisen, however, because the government has banned leather imports from several countries due to the potential contamination of animal-related diseases. As a result, some footwear firms have ceased their operations due to the difficulty of sourcing raw leather goods in the market.
Thus, stable input production is crucially important to support the development of the footwear industry.
In the long-term, the cattle industry is one of the country's key potential industries, but the most challenging part is to find areas that have enough space and food to allow cattle breeding.
Funding is critically important to support the various manufacturing industries listed above.
In general, the share of credit distributed to manufacturing industries has declined over the years.
The graph shows that in 2001, credit disbursed to manufacturing reached approximately 37.5 percent compared to other credit disbursements.
Unexpectedly, over the following decade, the credit share to manufacturing industries decreased significantly to only 15.6 percent in 2010. This happened because credit growth in manufacturing was far lower than credit growth in other sectors.
There have been improvements since 2011, with the share of credit growth gradually increasing from 15.7 percent to 17.5 percent in 2013.
Although the improvement is not overly significant, it can be seen as a 'recovery state' of manufacturing credit.
The good news is that the quality of the credit, measured by non-performing loans (NPLs), has improved over time.
In 2001, NPLs on manufacturing credit was 17 percent, higher than the NPLs on total credit of 12.2 percent. But, conditions changed in 2013 because NPLs for manufacturing were lower than those on total credit, namely 1.7 percent compared to 1.8 percent.
This shows that the credit quality within manufacturing was better than other credit.
All these industries, which can help to reduce the CAD, offer a potential market for the financial sector, especially banking.
The industry that has the lowest average NPL rate (0.9 percent) and highest compound annual growth rate (62.6 percent) is the automotive industry. Thus, it is not surprising that the banking sector is keen to support the industry.
However, banks should also widen their focus to support other industries that have low credit growth but good records of loan disbursements.
These industries are food and beverages, steel and the EEE industry.
The food and beverage industry has great potential due to its large market share, indicating a rise in exports over time.
On the other hand, the steel industry does not enjoy tremendous market share, but there is high domestic demand due to the development of infrastructure and property.
For EEE, its prospective market relates to its regional production networks throughout ASEAN countries. Other industries, such as petrochemicals and footwear, have high compound annual growth rates, but also high NPL rates.
The average NPL rate for the petrochemical industry between 2010 and 2012 was 13.6 percent, while the average NPL rate for footwear during the same period was 2.6 percent.
Nonetheless, this does not mean that the petrochemical and footwear industries are of no interest to banks.
They are still attractive in the sense that banks need to analyze whether their high NPL rates relate to delays in the construction of factories or other external factors.
In conclusion, there are three ways to reduce the CAD. First is to reduce imports for the EEE and automotive industries by exploring the potential of the same raw materials in Indonesia.
Second is to reduce imports for the steel industry by exploring iron ore reserves in Kalimantan, Maluku and Papua.
Third is to improve export commodities that have a high market share, such as food and beverages and footwear.
The support of the banking sector is a necessary precondition to develop all of these potential industries in order to bring down the current-account deficit.
___________________
The writer is regional analyst at Bank Mandiri.
