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Weak manufacturing predicted to drag investment this year

Jakarta Post - March 28, 2016

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Tassia Sipahutar, Jakarta – Weak manufacturing growth is projected to drag investment prospects this year, with no bottoming out in sluggish manufacturing anytime soon.

A new report by DBS Group Research found that investment underperformed in the past three years despite rapid growth in the last quarter of 2015.

Investment grew 6.9 percent year-on-year (yoy) in the fourth quarter of 2015, its fastest growth since 2013. However, it has accounted for only 30 percent of the gross domestic product (GDP) from 2013 until now. When compared to the 8 percent average growth in the previous 10 years, investment has only risen by an average 4.9 percent from 2013 until 2015.

The report argued that the problem was not in infrastructure despite talks surrounding the "sorry state of infrastructure". "Investment in buildings and structures [about 75 percent of total investment demand] has actually remained relatively stable, averaging 6.2 percent growth per year for the past three years."

Instead, machinery and equipment components – all of which are related to manufacturing – have been lagging. DBS pointed out that investment in machinery and equipment fell mostly in the negative territory between 2013 and 2015 after a period of strong growth in 2011 and 2012.

DBS economist Gundy Cahyadi wrote in the report that since most machinery and equipment was imported, imports of capital goods had also been falling since the middle of 2013.

"This is why recent data continues cause worry. As of February 2016, imports of capital goods were about 35 percent lower than they were three years ago. We have yet to see any sign of bottoming out."

This is in contrast to imports of consumer goods, which have rebounded with the rupiah's recovery.

As imports of capital goods continue their downward trend, so does manufacturing. Manufacturing GDP growth, as shown by the report, came in at 4.3 percent in 2015, the slowest since 2008-2009.

DBS said that there should be significant recovery in manufacturing. Otherwise, the country will continue to see lackluster performance in manufacturing and equipment that will impact investment performance, when investment itself is expected to assist Indonesia in achieving 5.3 percent economic growth in 2016.

Meanwhile, an earlier report by the World Bank put emphasis on manufacturing improvement as well. In its Indonesia Economic Quarterly report, the World Bank said that a breakthrough in the freight logistics system and infrastructure had to be supportive for manufacturing industries to grow.

According to a recent World Bank survey, logistics costs account for 20 percent of sales in Indonesia. In terms of inventory, it is also higher compared to in other countries at 26 percent of total logistics costs, whereas in it stands at 16 percent in Thailand and 13 percent in Malaysia.

"Many manufacturers simply do not know when their parts will arrive due to uncertainty in port handling, paperwork and road transportation. To avoid production delays, firms keep inventories high, which increases overall logistics costs."

Source: http://www.thejakartapost.com/news/2016/03/28/weak-manufacturing-predicted-drag-investment-year.html.