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Overview of Manufacture Sector in Indonesia: The Outlook

Indonesia’s government ratings have now been upgraded from stable into positive. Some aspects show signs of a reduction in structural barriers, which includes the level of external vulnerability.

Indonesia’s vulnerability towards external shocks is declining. It follows higher foreign exchange reserves, a slower rise in private sector external debts, and narrower current account deficits.

The Policies

Furthermore, policy effectiveness in Indonesia is also improving. It is proven by Indonesia’s continuous track record of macroeconomic stability and fiscal discipline. Moreover, ongoing improvement on structural economic, fiscal and regulatory reforms play their important roles to create policy effectiveness.

Updated regulations:

The government’s decision to revise fuel subsidies also contributed to narrower current account deficit. It eliminates price distortions as well, that once depended on demand for petroleum imports.  In addition, investment in domestic manufacturing sectors contribute to import substitution.

The Forecast

Manufacturing sector in Indonesia is targeted to provide employment to 16.3 million workers this year, or up 5 percent from 15.5 million workers last year. The manufacturing development has been a good strategy for reducing the domestic unemployment rate. Manufacturing sectors which absorb highest numbers of workers are textile, footwear, food & beverage, and automotive industries (read: Recruitment in Indonesia: Understanding the Labor Situation and Recruitment Process).

The food and beverages industry is predicted to contribute 33.6 percent share to Indonesian gross domestic product (GDP), coming from the non-oil and gas manufacturing industry. It is followed by the machinery and equipment sector with 10.7 percent of contribution.

The Indonesian government indeed sets high hopes on manufacturing sectors this year. The government expects the non-oil and gas manufacturing sector to grow, from 5.3 percent to 5.7 percent in 2017. This figure is higher, compared to this year’s anticipated expansion of between 4.67 percent and 5 percent.

Manufacturing performances of most of emerging Asia have been improving in January. The latest purchasing manager index (PMI) shows the improvements. The PMI of Indonesia, India, and Myanmar have risen past the 50-mark, as shown in the table below.

Countries PMI Increase
2017 2016
Indonesia 50.4 49.0 1.4
India 50.4 49.6 0.8
Myanmar 51.7 49.4 2.7

The PMI of Indonesia, India, and Myanmar have risen past the 50-mark. Indonesia’s PMI is up to 50.4 from 49.0. India’s PMI rose to 50.4 from 49.6, and Myanmar’s up to 51.7 from 49.4.

Meanwhile, a rebound in new work intakes in January has helped Indonesia’s manufacturing industry improved. At the same time, business confidence related to the 12-month production outlook have improved.

However, the trend for trade will remain challenging as there is so much uncertainty in the global economy.

Moreover, the manufacturing sector still faces a problem. The problem is not on the demand. With a large population, globalized consumers, and growing middle class, there will be no shortage of domestic demands.

The problem is on the supply side, which is unable to cope with such large domestic demands. The industrialization trend in Indonesia has risen. It refers to declining share of manufacturing output, employment in the gross domestic product (GDP), and total employment.







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