Growth expectations may have been reined in, but foreign investment will continue to flow into Indonesia despite the risks, agreed participants at SR Asia’s final event of 2013
Risk professionals based in Jakarta highlighted lasting and looming challenges at the final StrategicRISK Indonesia Risk and Insurance Management roundtable for 2013. Indonesia’s top risk managers met the SR team, local brokers and Zurich’s regional representatives to examine the state’s risks and opportunities.
There was wide agreement about the primary risks faced by organisations operating in Indonesia. Education and training, skills shortages and retention of talent were all up for debate, as were regulatory change and challenging economic conditions.
Political risk was another area of concern, with uncertainty over this year’s presidential election combined with the global slowdown affecting risk outlooks in Indonesia. It was clear that, despite the huge opportunities on offer, participants felt major investment was likely to remain on hold until after the election.
Economic growth in Indonesia appears to be cooling, reflecting a dip in foreign investment, commodity prices and domestic consumption. Its current account deficit continues to widen, with imports increasing faster than exports.
But, as Aon Risk Services technical adviser and head of specialty in Indonesia Cameron Sheild explained, policy shifts such as the reduction in fuel subsidies will help stimulate growth. “The country’s growth prospects are undisputed, particularly if long-term development plans and public policies boost investment in the expansion of labour skills and infrastructure,” he said. “However, in the current economic environment, corporations’ projections a year ago might well fall short of the expectations of today. One might say the honeymoon is over. [But] make no mistake: Indonesia is still an extremely attractive place to invest, in comparison with other countries.”
XL Axiata enterprise risk management specialist Johan Candra said inflation was “increasing quite significantly and impacting on purchasing power”. “The Indonesian rupiah is depreciating against the US dollar,” he said. “Large corporates in Indonesia need to have a sustainable strategy to pass through these harsh economic conditions.”
Astra International risk consultant Duma Irene Mitalevanie said the state faced challenges in continuing to develop strongly and sustainably. “Indonesia has a lot of debt, especially to the International Monetary Fund,” she said. “The government doesn’t clearly define the goals of the country and there is a lack of guidance for creation of healthy and integrated business.”
Mitalevanie said economic growth was uneven because of a concentration of economic development on the island of Java, particularly in Jakarta. “Indonesia used to be an agricultural country, focusing on development of the agricultural sector and successfully meet domestic needs,” she said. “Now it has to import food raw materials to meet domestic needs.”
Howden Indonesia president director Willy Ignatius said major overseas investment had to grow. “The main risks facing foreign investors remain the same: political uncertainty, legal uncertainty and the ability to repay loans,” he said.
Willis Indonesia president director Simon McCrum said that in the run-up to the elections there had been considerable electioneering around nationalism and protectionism, and he expected this to increase. “The mining industry has been particularly affected by changes in regulation, but most sectors are feeling the impact to varying degrees,” he added.
Foreign investment measures
Growing nationalism had all but stopped foreign investment in mining, Sheild said. “In September, the minister of energy and mineral resources issued regulation number 27 of 2013 regarding procedures for share divestment price determination and change of investment particulars [MoEMRR 27/2013].
“MoEMRR 27/2013 makes a number of important changes to the regulatory regime for foreign investment in the local mining industry and has taken most foreign investors in the local mining industry and their advisers by surprise.”
Uncertainty over proposals to curb foreign ownership of banks have also been questioned, he added. “On the other hand, the government has pledged to revise a list of industry sectors open to foreign companies as a part of an effort to boost foreign investment amid declining growth figures,” he said.
McCrum believes commodity prices and forex pressures “will find Indonesian companies struggling to compete, which in turn brings a different set of concerns and risks to the table”.
Ignatius said the weakening of the rupiah had already created additional costs for any company that used US dollars to buy raw materials. “This will, in turn, create higher inflation and push up the cost for any company to continue operating,” he said.
The price of commodities was, quite simply, “our benchmark to determine whether our projects are a go or a no-go”, said Bumi Resources Minerals enterprise-wide risk management head Rachmadi Gustrian. And Putri Perdana Sari, risk management manager at catering firm Aerofood Indonesia, said commodity price fluctuations “affect food costs and, in the end, our ability to generate or increase profit”.
Foreign investors would continue to invest in Indonesia, Mitalevanie said, because it had “a bright future”. “It is also supported by the Asean Free Trade Area (AFTA), which will be applied in 2015, so it will be easier for foreign investors and workers doing business in Indonesia,” she said. However, Ignatius cautioned that AFTA might cause “disruption between foreign Asian workers and Indonesian workers if Indonesian workers are not able to compete”.
He also pointed to the threat posed by last year’s street demonstrations demanding higher minimum wages. “This will cause the company on the outset to lose production,” he said. “In the longer run, it will create higher overheads. This is frightening for any company – along with the government and associations not being able to balance, it might be forced to go out of business, which would not be good for unemployment figures.”
Another people-related risk is the availability of skills and talent, as rising labour costs and low skill levels cause difficulties for companies eager to grow in Indonesia.
McCrum said all industry sectors needed to work together to address the issue. “Education will be the key for the future. I can see a time when industry establishes and supports ‘academies’ to provide properly trained manpower to their sectors,” he said.
JLT Indonesia president director Arman Juffry said there was a need for a more proactive approach in introducing risk management to Indonesian business people. “Perhaps an early introduction to risk management and ERM can be done via associations, chambers and universities,” he suggested.
Risk management is often seen as more of a cost centre than a profit centre by boards in Indonesia. Ignatius felt there was a need to educate managers and executives in terms of looking at risks as a whole and not only towards transferring those risks. “People should be developed to review risks strategically and consider management risks from within – that is, the ability for a company to retain some of those risks, and potentially to transfer those risks effectively,” he said.
Lockton head of sales (Singapore) Peter Jackson pointed to Indonesia’s “fast-growing, young, educated and articulate class of junior and middle managers”. “They are eager to learn and can be developed to apply modern thinking in the Indonesian business environment,” he said.
Looking ahead, issues such as dealing with sophisticated risks related to nanotechnology and biotechnology were on risk professionals’ radars. Natural catastrophe came up time and again, with one participant labelling the country a “supermarket of disaster” because of its exposure to every type of natural hazard.
McCrum saw natural catastrophes as inevitable. “Flooding is and remains a major risk in Jakarta, the financial impact of which local insurers are only starting to take notice of,” he said.
Environmental issues would not be the only factors to hit Indonesia’s inhabitants and economy, added Mitalevanie. “The big changes will also occur in cultural, media, technological, socio-cultural, political and even biological factors. Business competition is increasing, along with a public mindset that is more self-critical than ever. Companies are required to adjust to the impact of globalisation for the sake of their survival.”
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