In spite of challenges, Indonesia is booming

In spite of challenges, Indonesia is booming

“Indonesia is the least-unattractive country in the world”
-M. Chatib Basri, chairman of the Indonesian Investment Coordinating Board

Things are going pretty well for Indonesia. Since surfacing virtually unscathed from the 2008 financial storm, the country has proceeded to join the G20 large economies (2009), won its first investment-grade credit ratings for over a decade (2011 and 2012), and grown GDP at a rate of 6% through 2010-2012. As recently as the 1997-1998 Asian financial crisis, Indonesia’s economy was in tatters, and social and political upheaval put an end to President Suharto’s three-decade-long rule.

Yet today, Indonesia boasts the world’s 15th highest GDP, and earned investment-grade credit ratings from Moody’s early last year, and from Fitch Ratings in 2011. Those are enviable statistics, especially in the current economic climate, and they reflect what is essentially a consumer spending boom, predicted to last for years. While a lot of attention is showered upon China and India, premised on their significant sizes (and thus, markets) and their prospects for growth, Indonesia is starting to shine in comparison, following stagnating or even declining investments in the two giants.

In China, foreign direct investment (FDI) rose 1.44% in Q1 to a figure of $29.9 bn, and in India, FDI decreased 6.3% to $9.95 bn. In contrast, FDI poured into Indonesia, increasing by 27% in Q1 to a record $7 bn. This reflects how China’s booming economy in particular has been largely driven by investment and exports. Observers predict a rocky road for China when crossing over to a more consumption-driven model, facing the fact that export is a fickle source of prosperity and that Europe and the US are likely to struggle with economic woes for many years to come.

Multinational corporations are scurrying to get a platform in this promising environment. With projections that the pool of middle-class consumers will double to 141 million by 2020, there is an obvious potential for a wide range of industries, from car companies, to cosmetics and KFC. Subway is “definitely coming” to Indonesia according to Stefan Grbovac, an area development manager for Subway in Singapore, and a surge in auto sales of 17.8% in the first quarter from a year earlier has lured General Motors to invest $150 million in the country.

President Susilo Bambang Yudhoyono

President Susilo Bambang Yudhoyono can enjoy the benefits of a booming economy in Indonesia

Private equity is not holding back either. Kohlberg Kravis Roberts was the latest passenger to jump on the bandwagon, agreeing to buy a 9.5% stake in Tiga Pilar Sejahtera, a Jakarta-listed snack producer, worth Rp427bn ($42m) at current market valuations. KKR’s entry is widely viewed as a vote of confidence for long-term investors in Indonesia. Last year, KKR opened a Southeast Asia office in Singapore, and is currently looking to make further investments in sectors with promising prospects such as consumer products, healthcare, insurance and other financial services.

This race to market happens in spite of challenges in terms of bureaucracy – it takes 80 days just to obtain a business license. The Indonesian Investment Coordinating Board aims to ease this process by cutting the number of documents foreign companies need to apply for a business license by 50%, and it has installed online and real-time tracking of applications to further attract global brand names. Indonesia has already granted a business license for manufacturing or retail to Apple even though the company has yet to decide whether to invest in Indonesia.

Aside from bureaucracy, there is a lack of infrastructure as well as pervasive corruption. Indonesia is no. 118 of 176 nations on Transparency International’s corruption perception index, which is not conducive for FDI.

After eight years under President Susilo Bambang Yudhoyono, the country faces elections next year, which will be a predictor of the future direction of Indonesia. One of the more pervasive types of corruption is political, seeing as Indonesia’s campaign finance laws have not kept up with the process of democratisation. The outcome is that political parties are financing their ever costlier operations with the same shady methods that characterized the era of President Suharto (1967-1998).

The latest scandal to rattle Indonesian politics was when the Islamic-based Prosperous Justice Party, the fourth-largest party in the House of Representatives and a member of President Susilo Bambang Yudhoyono’s governing coalition, had its chairman arrested in January over allegations of bribery from a local company to ensure that it received a larger share of a government-issued quota to import beef. In May, other Prosperous Justice Party leaders were accused of organizing a payoff of more than $1 million intended for the party’s 2014 legislative election campaign.

Titi Anggraeni, executive director of the Association for Elections and Democracy, explains, “We have free and fair elections in Indonesia, but not free and fair competition. Candidates use money as a shortcut to win elections.”

Measures to curb corruption have been proposed, and include rules governing public disclosure of parties’ expenditures and sources of income, limits on campaign spending, appointing corruption monitors and prosecuting party officials for violations. They remain to be implemented, but the pressure to do so is increasing.

Categories: Asia Pacific, Economics

About Author

Mikala Sorenson

Mikala Sorensen is an Economist with regional expertise in Europe. She holds a first class honours degree in Philosophy, Politics and Economics from the University of York and a Masters in Economics from the University of Copenhagen. Having interned at the Danish OECD-delegation in Paris and currently working at the Danish Ministry of Finance, she specialises in politics and macroeconomics. Analysis for GRI is an expression of her own views.