This pandemic fallout has helped set up a tough fight for what FDI remains, as some multinationals persist in their drive to move production away from China.
The World Bank last year counted 33 Chinese-listed companies that, as the trade war raged, announced plans to set up or expand production abroad. Vietnam landed 23 of these and the remainder went to Cambodia, India, Malaysia, Mexico, Serbia and Thailand.
In just the latest example, South Korean electronics giant Samsung is likely to soon join Google and Microsoft in expanding operations in Vietnam, with plans to move some television production there when it closes a factory in the Chinese city of Tianjin in November.
In Indonesia, meanwhile, Nissan this year closed its plant in Jakarta and other multinationals are believed to be keen to shift some production out of the country. At least for now, though, they are listening to pleas from the government of President Joko Widodo – commonly known as Jokowi – to stay put.
Amid much fanfare, the President in June announced that five companies, including Panasonic, had committed to shifting factories from China to Indonesia. LG Electronics was also planning to make Indonesia a new regional hub for Asian and Australian markets, while 20 American companies had shown interest in relocating from China to Indonesia.
This month Australian mining magnate Andrew Forrest renewed his acquaintance with Indonesia’s Co-ordinating Minister for Maritime and Investment Affairs, Luhut Binsar Pandjaitan. The two promised to work together on renewable energy and hydro power projects that could generate sizeable investments for Indonesia, but so far the agreements are not financially binding.
Similarly, no firm commitments from the US have materialised and the surge in COVID-19 infections and fatalities has not helped. Three weeks ago, LG was forced to shut a factory near Jakarta after 200 employees tested positive for the virus.
COVID-19 risks have this year joined a field of red flags for companies mulling multibillion-dollar decisions, notes Australian National University Associate Professor Greg Fealy.
He says Jokowi government oscillation between rapid economic recovery and stringent pandemic control won’t help.
“Jokowi’s balancing act between public health and economic recovery is not going to work,” he says.
“As long as the public issue is worsening, people won’t have economic confidence and people won’t invest because they don’t think it’s safe and they are not sure when it is going to end.”
Indeed, the pandemic is now affecting the workings of government, with big clusters in key agencies including the Department of Health. The Minister for Fisheries Edhy Prabowo and Dino Patti Djalal, a former Indonesian ambassador to the US, have both been hospitalised after testing positive. Last week, a 41-year-old Australian mining executive died in Jakarta after catching the virus.
The Indonesian capital has gone back into a partial lockdown after the governor warned its hospitals would soon be overwhelmed.
In Vietnam, meanwhile, Hanoi has reopened its bars and karaoke venues this week after getting on top of a second wave. Since the virus re-emerged in the central city of Danang, Hanoi has confirmed just 11 new cases, taking the total number in Vietnam to 1063, with just 35 deaths.
There is a growing sense that Indonesia is at a turning point. If it manages to get infection numbers under control, it can get back to business and enact the reforms that would make it more attractive for multinationals. If not, the nation could face a period as turbulent as any since independence 75 years ago.
With unemployment set to surge and consumption again in the doldrums, the government is preparing to once again revise its GDP forecasts for the year.
The Asian Development Bank this week revised down its regional forecast and now expects south-east Asia to contract by 3.8 per cent before bouncing back by 5.5 per cent next year. The main risk to this forecast, it says, is that of prolonged COVID-19 fallout that derails the recovery process – particularly in Indonesia.
“Despite strong macroeconomic fundamentals, Indonesia is expected to face a difficult growth path through the end of 2020, given the magnitude of uncertainty in the scope and trends of the pandemic in Indonesia,” says Winfried Wicklein, ADB’s Indonesia director.
Speaking at the launch of the ADB report, Hidayat Amir, director of the Centre for Macroeconomic Policy at Indonesia’s Department of Finance, said the surge in COVID-19 cases created a high degree of uncertainty.
“The risk is still very high and the impact on the economy could dramatically change at any moment,” he said.
At the same event, the Centre for Strategic and International Studies in Jakarta urged the Jokowi government to improve testing, tracing and isolation.
Yose Rizal Damuri, head of the CSIS’ economics department, says the ADB’s forecast of 5.5 per cent growth in Indonesia next year is optimistic, given economic recovery is unlikely before the health crisis is under control. While the CSIS had hoped pandemic numbers would peak this month, it has now pushed that back till November.
“Of course access to a vaccine would be good for our society and the economy but focusing on a vaccine is very high risk,” he says.
Indonesia ranks higher than rival Vietnam in the United Nations’ Competitive Industrial Performance Index, and mean monthly earnings for both medium-skilled and low-skilled workers are lower in Indonesia than in Vietnam, according to the World Economic Forum. The nation has the potential to catch up to its neighbours but it is still a few steps back, according to investment bank Citi.
“Economies that are more likely to benefit from geographical diversification are those with higher degrees of export similarity [to] China, and therefore [have] supply chains already in place,” it noted in a recent report. “Vietnam, India, Malaysia, Taiwan and Thailand could therefore be near-term beneficiaries.”