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Indonesia experiences production contraction

Written by John Guzman

Indonesian parliamentary election held last April is a form of a preparation for the upcoming presidential elections 3 months from now. While national elections are seen as a beacon of hope for many Indonesians, they provide fewer stimuli for wary investors. The slowdown of manufacturing activities since the beginning of the year is enough reason for investors to hold off, as well.

HSBC Indonesia Manufacturing PMIā„¢ (Purchasing Managers’ Index) most recent report, released on the 1st of April, shows Indonesia falling to 50.1 in March, compared to 50.5 in February, representing a seven-month low. Where, PMI reading below 50 represents contraction while reading above 50 indicates expansion. The report stressed a further drop might be expected in manufacturing.

Mahendra Siregar, chairman of the Indonesia Investment Coordinating Board, said the total investment in 2014 is expected to grow 15% to about IDR 456 trillion, after rising 27.3% last year, as reported by Bloomberg. Although elections could stir economic activities, investors are wary of the weaker growth and current-account deficit.

Contraction in production this year would not come as a surprise for the World Bank. The multilateral bank has predicted the country will slow its economic growth due to several factors. World Bank senior economist, Jim Brumby, warned investments would be choppy, saying he saw signs of an investment plateau. Borrowing costs were high and imports of capital goods were also costlier on the weak currency, according to Jakarta Globe report.

Foreign mining companies, which are affected by the ban on exports of mineral ores including nickel, iron, and bauxite, since January 12, 2014, will contribute heavily to the contraction of manufacturing in the country. Unless local mining companies invest on mining operations and make up for the loss. Either way, it would take some time for local companies to produce in large scale, thus making the slowdown of economy for this year inevitable. The ban forms part of the policy of outgoing President Susilo Bambang Yudhoyono to make Indonesia a manufacturer of higher-value goods.

The Heavy Equipment Association of Indonesia whose members include Caterpillar, Komatsu, and Hitachi expects a decrease in the production of heavy equipments this year as direct consequence of the ban. The contraction might also be felt at the upstream and downstream level of production across different industries.

Indonesia might has one prospect to increase production, which is Oil explorations. The local, Antara News, warned the country could face an energy crisis; if it does not carry out explorations.

Aussie Gautama, deputy of SKK Migas, said the government should not rely only on foreign oil companies to carry out explorations. He further added, foreign investors are currently less interested in oil explorations in Indonesia, pointing out Pertamina has the financial capability to explore more fields. Gautama based this possibility on the fact; PT Pertamina acquired an oil field in Algeria last year, for almost USD 1.75 billion.

The current wait-and-see mode among investors in Indonesia may continue, until the election of the next president. Even then, the country may continue to experience contractions in production, unless a better environment climate is felt by investors.

–Edited by Mohamed P.Hassan

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