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Analysis: Sulawesi: An island of opportunity amid economic slowdown
Amid the backdrop of global economic turbulence, the Indonesian economy grew by 4
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Amid the backdrop of global economic turbulence, the Indonesian economy grew by 4.79 percent in 2015, exceeding projections from the majority of economists. The figure, however, still marks the lowest point over the last five years.
One of main reasons for this was the end of the commodity price boom, which slowed down exports and tax revenues from products such as coal, oil and crude palm oil (CPO). This has also directly affected regions that have been relying on the export of raw materials and mining commodities to support their local economy. Among those whose economic growth suffered the most last year are East Kalimantan (-0.85 percent), Aceh (-0.72 percent) and Riau (0.22 percent).
In general, provinces in Sumatra and Kalimantan were among those hardest hit by last year's economic downturn. Slow economic growth in the two regions dragged down Indonesian economic growth, as the two regions account for 31 percent of the national economy, collectively being the largest contributor to Indonesia's GDP after Java.
Despite the sluggish trend, it is interesting to learn that not all islands experienced economic slowdown last year. Java, Bali, Nusa Tenggara, Sulawesi, Maluku and Papua saw their respective economy grew by above the national figure. Java, the country's most populated island, grew by 5.85 percent, Bali and Nusa Tenggara by 10.29 percent, Sulawesi by 8.18 percent and Maluku and Papua by 6.62 percent.
Among those islands, Sulawesi is an outstanding case. Despite its long-standing dependency on commodity exports, the island, which comprises six provinces, managed to maintain economic growth by a healthy margin in 2015. South Sulawesi saw its economy grew by 7.15 percent last year, West Sulawesi by 7.37 percent, Central Sulawesi by 15.1 percent, Southeast Sulawesi by 6.88 percent, Gorontalo by 6.23 percent and North Sulawesi by 6.12 percent. It was an extraordinary achievement, since the majority of other provinces with commodity-based economies were bogged down by the decline in commodity prices.
A thorough analysis on Sulawesi's economic performance reveals a number of distinct characteristics of the six provinces. Those characteristics are somehow intertwined with one another and establish a solid foundation of high economic performance. First, most provinces are agriculture-based, with around 30 percent to 40 percent of GDP coming from the agriculture sector. Second, the mining-and-quarrying sector in the region outpaced the national average. Third, those provinces have seen many ongoing infrastructure projects that contributed significantly to the region's economy.
The agriculture sector still plays the key role in supporting the local economy in all parts of Sulawesi. Some examples of agricultural commodities coming from the island are cocoa, coconut and paddy. While coconut is mostly produced in North Sulawesi, cocoa grows abundantly in the southern and southeastern parts of the island. Meanwhile, South Sulawesi is also known as one of the country's main rice suppliers, particularly to meet demand in eastern Indonesia.
Although agriculture has contributed significantly to Sulawesi's economy, the growth of the sector is slower than the national average. The problem might be that the manufacturing industry to process agriculture outputs, such as cocoa and coconut, is still under-developed on the island.
For example, North Sulawesi is known as the biggest exporter of crude coconut oil in Indonesia. However, the province is struggling with the limited number of manufacturers to produce coconut-based products. It would be highly beneficial to the region if we had a downstream coconut industry to add value to exports. The same goes for South Sulawesi. As one of the main cocoa-exporting provinces, the development of cocoa manufacturers is a prerequisite to increase the values of export products.
Another characteristic is the high performance of the mining sector in Sulawesi's provinces. All mining sectors in Sulawesi provinces grew above the national sector growth rate, with a relatively high contribution to the regional economy.
In 2015, the mining sector performed badly, shrinking by 5.08 percent at the national level. The main reason for this contraction was the coal production slowdown in response to declining prices. By contrast, all provinces of Sulawesi saw the mining and quarrying sector grew by a healthy margin. South Sulawesi saw its mining and quarrying sector expand by 7.85 percent, West Sulawesi by 8.04 percent, Southeast Sulawesi by 11.29 percent, Central Sulawesi by 26.71 percent, Gorontalo by 3.95 percent and North Sulawesi by 8.17 percent.
The astonishing growth of the mining sector in Sulawesi, especially in Central Sulawesi and Southeast Sulawesi, is a result of investment inflows to build nickel smelters, compensating for the effect of the export ban on raw nickel.
The last characteristic, meanwhile, is related to the high level of growth and contribution of the construction sector to Sulawesi's economy. Thanks to the investment in nickel smelters in Central and Southeast Sulawesi, construction also grew rapidly in the two provinces at 20.95 and 12.59 percent, respectively.
There are also numerous ongoing road projects, like the construction of the Laha-Lakapera road in Southeast Sulawesi and the Palu-Parigi bypass in Central Sulawesi that contributed to the island's economic growth.
We expect that in 2016, the construction sector will continue to grow strongly in Sulawesi and support regional economic growth. Last year, the sector contributed between 7.82 percent and 14.29 percent to Sulawesi's economy.
In conclusion, Sulawesi's extraordinarily high economic growth is the result of private and public investment. Smelters are private investment fully supported by the government, while many other infrastructure projects constitute public investment. This combination shows that a region with high economic growth is the result of collective efforts by the public and private sector rather than solely relying on either private funds or government budgets.
Learning from this example, it is very likely for other regions, such as Sumatra and Kalimantan, to achieve high economic growth despite low commodity prices. As long as the government and private sector work hand in hand, we always have the power to boost the economy and achieve high economic growth in the region. Another lesson for regions that still rely heavily on agriculture is the importance of developing downstream industries to add more value to the commodities produced in the region and to increase export value.
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The writer is a regional and industry analyst at PT Bank Mandiri
