Indonesia’s economy is on the rise and thus seeing the country take its rightful position as a major destination for foreign direct investment (FDI). Having previously been overlooked in favour of other countries in Asia such as India and China; Indonesia is now hard to ignore. The country is unique in many ways as the biggest archipelago in the world, the largest Muslim majority country, the world’s third largest (albeit young) democracy and a leading exporter of numerous high value commodities such as palm oil and thermal coal. Its distinct characteristics are now coupled with political stability, self reliance and robust economic growth which saw the country largely shielded from the global economic crisis. Indonesia now finds itself at a key point in its transition from that of a low income to middle income economy and from a primary producer to a value added exporter as well as knowledge based economy. Investment opportunities are ripe in all sectors; ranging from infrastructure to manufacturing and services. This represents a window of opportunity for investors to participate in a market in the world’s fastest growing region that exhibits strong fundamentals and is poised to flourish.
The country faces many challenges ahead of itself in securing the business environment for investors and sustaining economic growth. Core issues of corruption and excessive bureaucracy are still hurdles for any investor while unqualified human resources and poor infrastructure are restraining GDP growth from reaching the levels being seen in India and China. However, slow but steady steps are being taken to address the aforementioned obstacles. Undoubtedly, Indonesia possesses the fundamentals to be a leading global economy over the coming decades. This analysis aims to provide readers with a brief overview of some of those core fundamentals that differentiate the country to provide firm foundations for all business and investment ventures.
Indonesia is endowed with diverse natural resources and is strategically positioned among markets from which there is high demand for them. The country was the only South East Asian member of OPEC until 2008 and continues to be a major liquid natural gas (LNG) exporter. In energy and mining, Indonesia is the world’s leading thermal coal exporter, the largest tin exporter and home to vast deposits of precious metals such as gold, silver and copper. Its unique topography yields highly sought after attributes. For example, its coal offers low sulphur content and high calorific value while its deposits of both coal and other minerals are found close to the earth’s surface thus maintaining competitive extraction costs. Located on the Asia Pacific ‘Ring of Fire’ with over 40% of the world’s proven geothermal energy reserves; Indonesia has access to huge renewable energy sources to meet its domestic needs. This places it in the enviable position of being able to reap the full benefits of exporting its other energy resources. Its climate and highly fertile soil due to volcanic activity make it suited to the cultivation of high value agricultural commodities such as palm oil, rubber, coffee and cocoa. The vast availability of land and the low levels of productivity in many of these key crops give the scope for increased output. Indonesia’s geographical proximity to energy and resource hungry China and India provide natural markets for future exports alongside its own rapidly growing domestic market.
Such natural resources make the country unique among other emerging markets in providing long term energy and food security for its burgeoning population. The challenge that now exists is that of effective and sustainable management. Long an exporter of primary products, Indonesia has been riding the global commodity boom while failing to take advantage of value added processes to boost revenues. The country is tightening its grip over its natural resources by securing domestic needs over that of exports and in some cases banning the export of primary resources. While controversial, this is presenting opportunities for investors to bring technical knowledge and expertise as the country seeks to move up the value added chain. Prospects for investment are to be found in areas such as petrochemical refinement, smelting plants for metal mining and other downstream processes in energy and agricultural commodities.
As a country of some 240 million people and growing, the size of the Indonesian domestic consumer market is an alluring attribute for any investor. The country’s resilience over the course of the global financial crisis illustrated the merits of its immense population and economic self reliance. Bucking the trend of most other G20 economies, in 2009 the country recorded 4.5% GDP growth and achieved higher than expected growth of 6.1% in 2010. This can be attributed to strong private consumption which accounts for over 60% of total GDP. This placed the country in good stead as demand for exports from developed markets tailed off with the financial crisis leaving many other emerging economies in a state of flux.
Indonesia’s lower middle income population continue to realise their consumer aspirations off the back of expanding consumer credit and rising incomes bringing GDP per capita to $4,200 at PPP at the end of 2010. A growing middle class that is poised to reach 150 million people by 2014 (Nomura) is opening up the scale and scope of the consumer market. What lays ahead to take full advantage of the consumer boom is ensuring that Indonesia’s manufacturing sector plays a greater role in the production of the goods being purchased. Imports are still largely responsible for meeting the country’s insatiable appetite for gadgets such as smart phones and other high tech goods that the country as yet does not produce.
In terms of future outlook, Indonesia is entering a ‘sweet spot’ as a convergence of its young, working population with that of relatively stable inflation and sustained economic growth is fuelling consumer spending. There is much to be said for Indonesia’s demographics as a key component of its future growth potential. Over 50% of the population is below the age of 30, is highly adaptive to new technology and has a low dependency ratio among its workforce giving rise to a so called ‘transitional demographic dividend’. This is in marked contrast to countries such as China where an ageing population and a high dependency ratio due to the one child policy is taking its toll. For Indonesia, this optimal environment is projected to continue for another decade to 2020, according to the World Bank, after which the population will begin to age faster and modern lifestyles reduce the birth rate.
To fully reap the benefits of this transitional period, Indonesia must avoid the ‘middle income trap’ of failing to transcend its income level to become a fully developed nation. As witnessed in countries such as South Korea, investment in higher education, research and innovation to create a skilled workforce that produce high technology goods is the way to do this. On paper at least, this is the direction that Indonesia is headed according to the Economic Masterplan to 2030 that would see a transition to a knowledge based economy. However, realising this goal will be dependent on realisation of private sector and foreign direct investment. This represents a pivotal stage as investors have an opportunity to come into the market during exciting and unfettered growth to thus play a role in this transition.
Indonesia has undergone a political transformation since the upheaval of 1998 which saw the fall of General Suharto after 30 years of authoritarian rule and a collapse of the Rupiah. The country is now a vibrant democracy that is continuing to strengthen its political structures and deepen the enfranchisement of the population. Over past decade, varied experiments with democracy has seen the rise and fall of extreme religious parties and an equilibrium found in the direction of secular, reform minded nationalism. The 2009 election results signalled a maturity among the electorate through the re-election of the incumbent president, Susilo Bambang Yudhoyono who became the first Indonesian president to be democratically elected for two consecutive terms which hugely boosted global investor confidence. His firm stance on terrorism and national security is another welcome continuation of his tenure. Other political reforms such as decentralisation of political power to regional and provincial leaders, while still at an experimental stage, is serving to unleash the potential of Indonesia’s less developed regions outside Java and fostering more even participation in the country’s growth.
The political situation is not without its risks; the speed of economic and political reform under President Yudhoyono’s coalition has come under fierce criticism for its inertia and pandering to vested interests of coalition members. Political noises towards greater protectionism are regular occurrences that often result in overlapping regulations which creates investor uncertainty. In the run up to the 2014 elections, party interests are coming to prevail over that of political progression with a stalemate over many proposed new bills. The gap between the rich and the poor is also widening while corruption continues to be a persistent issue.
However, despite the various push and pull forces to veer of course; the country remains on a stable track while fully acknowledging its political flaws. The deepening politicisation of the electorate is seeing greater demands and expectations being placed upon their politicians. The relatively free media is providing the space for open debate and discussion as well as bringing into question accepted cultural and political norms. This is a healthy environment for the future development of democracy and the gradual stamping out of detrimental and corrupt practices. The political system therefore continues to be a work in progress but not without its concerns. Yet, the events of the Arab Spring and the political turmoil that has ensued show that seemingly stable authoritarian regimes all have an expiry date which is brought about by the inevitable peaks and troughs of economic cycles. The over centralisation of authority is also a major flashpoint, as witnessed in countries such as Thailand. The immediate impact of Indonesia’s decentralisation has been excessive waste and bureaucracy. However, this is part of the process of political maturation that will eventually yield a series of coordinated regions that have adopted policies which compliment their particular attributes and commercial strengths. From this long term perspective, investors can have confidence in Indonesia’s stability and its political system will continue to strengthen in the decades to come.
Indonesia’s advantages as a business and investment destination are defined by the current global and political environment that is highlighting several key parameters to be considered in emerging markets. The country’s natural resources, potential in renewable energy and food security offer a sustainable buffer to the climbing prices being seen in oil and foodstuffs which is fuelling social discontent in other markets. Their potential as feedstock for value added manufacturing will also be vital in steering the country through its transition to a middle income and developed economy. The vast population that is set to grow to 288 million by 2050 will serve in both a highly skilled productive capacity as well as consumer market as the country reaches its predicted position of being the world’s 6th largest economy (PricewaterhouseCoopers).
Population: 246 million (estimated, 2012)
Currency: Indonesian Rupiah
Nominal GDP: $845 billion (2011)
GDP per capita: $4,700 at PPP (2011)
GDP Growth: 6.5% (2011)
External Debt: 25% of GDP (2011)
Ease of Doing Business: 129/183 (WB, 2012)
Corruption Index: 100/178 (TI, 2011)