What Explains Current Declining Business Confidence in Indonesia?

Regarding the ASEAN region, business optimism experienced a slight decline to a net balance of 43 percent, from 50 percent previously, with Indonesia as the third most confident regional economy.

Global Business Confidence Ranking:

Country	Result
India	86%
Ireland	84%
UK	80%
Germany	79%
USA	74%
New Zealand	70%
Netherlands	66%
Nigeria	64%
Singapore	59%
Canada	57%
Sweden	51%
Australia	50%
Malaysia	49%
Indonesia	48%

^{Source: Grant Thornton International Business Report Q2-2014}

Indonesian businesses are less confident in the prospect for business growth. Net 68 percent expect revenue to grow, a 16 percent decline from net 84 percent last quarter. A 21 percent decrease is seen on the selling price expectation, from net 57 percent to 36 percent. Expectations for employment has also dropped 15 percent, from net 55 percent to 40 percent, while the expectation for making profits decreased 26 percent, from net 76 percent to 50 percent.

Johanna Gani, managing partner at Grant Thornton Indonesia, said: “The declining confidence is explainable. It is typical to see a stagnant stage of economy before an election. The race between Indonesia’s president candidates is tighter than initially expected, thus fuelling uncertainty to the outlook. We can expect the situation to slow down the economic activities in the short run. Indonesia business leaders are citing regulations and red tape, and economic uncertainty as two of the key factors for business growth” Other major challenges include shortage of finance and orders, rising energy cost, transportation and ICT infrastructure, and exchange rate fluctuations.”

“Uncertainty made some investors nervous. Most of the businesses, both private and state owned, are playing wait and see. They tend to be prudent, such as delaying investment, delaying Initial Public Offering (IPO) until they have a clear vision about the political conditions during and after presidential election.”

Johanna Gani also said: “The quite constant annual increase in labour wages providing investors with another reason to play on the safe side. The rising cost of labour, which lead to the increase of production costs, are not necessary always followed by an increase in labour productivity. This is considered as a big burden for the investor. They will be paying a high attention on the policy on the labour issue from the new ruling government.”

“Several macroeconomic situations are also playing a key role to the decline in business optimism. The conflict in Iraq which potentially pushes up the price of crude oil globally; the slowdown of China’s economic growth contributes an additional weight to the growth of global economy; and the Minerba Act, which slows down Indonesia’s economic acceleration. Given the conditions, the IDR exchange rate is expected to remain sluggish until the presidential election is over.”

As her closing remarks, Johanna added: “Despite the short-term uncertainty, we believe the business leaders are optimistic in the long run. According to our research, we see an increase of businesses with plan to spend on research & development over the next year, with a 24 percent increase from net 12 percent to 36 percent. It is a positive sign that businesses are forward looking, and feel optimistic toward the country’s economy in the long run. I reaffirm my position in April 2014 that the presidential election will in the long run provide positive contributions to Indonesia’s economic growth, with investment as its motor. A recent Consumer Confidence Survey initiated by the Central Bank in May 2014 also reported that Indonesian consumers are optimistic about the economy in the coming six months. Twelve out of eighteen cities in Indonesia confirm this finding. So, despite the strong headwinds ahead, we believe a positive outlook for the Indonesia economy.”

Grant Thornton is one of the world’s leading organisations of independent assurance, tax and advisory firms. For more information about the company, visit: www.internationalbusinessreport.com

The Grant Thornton International Business Report (IBR) provides insight into the views and expectations of more than 10,000 businesses per year across 30 economies. This survey draws upon 22 years of trend data for most European participants and 11 years for many non-European economies.

Data collection is managed by Grant Thornton’s core research partner, Experian. Questionnaires are translated into local languages with each participating country having the option to ask a small number of country specific questions in addition to the core questionnaire. Fieldwork is undertaken on a quarterly basis. The research is carried out primarily by telephone. Research in Indonesia is carried out by in-depth interview.

IBR is a survey of both listed and privately held businesses. The data for this release are drawn from interviews with 6,700 chief executive officers, managing directors, chairmen or other senior executives from all industry sectors conducted in February 2014.

¹ The net balance is the percentage of the respondents who are optimistic less the percentage of those who are pessimistic. The highest possible figure is +100 percent and the lowest is -100 percent.

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