Indonesia – the rising star

It may not be getting as much attention from the world as China and India, but make no mistake, every business expert and economist are well aware of the economic potential of Indonesia.

With renewed vigour after the 1997/98 Asian Financial Crisis, that the tiger economy is now roaring back, emerging as a star performer in the region and drawing international interest.

The latest endorsement came from renowned economist and New York University professor Nouriel Roubini (aka Dr Doom or Dr Realist.) Roubini told the Jakarta Globe over the week he was impressed by what he saw the moment he stepped foot on Indonesia, and that he was bullish about the country's economy because of its overall policy framework and its government's commitment to reform.

Roubini was quoted as saying: “They know what needs to be done and there's a willingness to do it and at a speed that it needs to be done.”

Resource-rich Indonesia, with a population of about 245.6 million, is the largest economy in South-East Asia. According to the World Bank, the country's gross domestic product (GDP) or the total value of goods and services produced in its economy was worth US$706.6bil in 2010. This made it the fifth largest economy in Asia, and the 18th in the world.

Roubini believes Indonesia could rise to be the 10th largest economy in the world by the end of the decade and the sixth largest by 2030. The country's huge domestic consumption, low debt levels and young demographics are among some of the main factors in its favour.

With domestic consumption being the main driver of Indonesia's economy, accounting for almost 58% of GDP, the country has a better chance for a balanced and long-term growth. He says if investments are continually being channelled into the right areas such as infrastructure, human capital and reform measures, Indonesia could grow at its potential rate of between 6.5% and 8%.

The next big thing: Indonesian labourers unload sacks of cement from a truck at a port in Jakarta. The country’s huge domestic consumption, low debt levels and young demographics are among some of the main favourable factors. — EPA
 

Genuine reform is key
Such sentiment is also reflected in the findings of HSBC Global Research. The division of HSBC Global Banking and Markets in its July report entitled, “The next big thing here comes Indonesia”, says the country has the potential of even surpassing an 8% growth rate by 2020. This would clearly make Indonesia one of the fastest-growing economies in the world. And as the international financial services provider argued, it would provide an enticing picture because in Asia, only China and India offer that kind of rapid growth rate.

“Should our optimistic scenario hold, by the late 2030s, Indonesia will enjoy living standards comparable to those of South Korea today,” it says.

Indonesia's resilience is evidenced by its economic performance during the global financial crisis three years ago. At a time when its neighbours, including Malaysia, Singapore and Thailand, saw their economies contracting, Indonesia continued to grow, albeit at a marginally slower pace of 4.6% year-on-year in 2009.

The International Monetary Fund (IMF) expects Indonesia's GDP to outperform its regional peers again and grow 6.4% this year and 6.3% in 2012. Despite the ongoing global economic uncertainties, the IMF believes the Indonesian economy will continue to be boosted by its strong consumer spending and investments.

Economists attribute Indonesia's successful transformation to the seeds of genuine (but painful) reforms that the country had sown in the past decade. The country, no doubt, is still plagued with age-old problems like corruption, bureaucracy and red tapes, but economists believe that continuous reform measures will keep the country on the right track to become the next economic superpower.

“It's really important that Indonesia keeps its key strengths,” Alex Thursby, Australia and New Zealand Banking Group Ltd CEO for Asia Pacific, Europe and America, told Jakarta Post over the week. He added that Indonesia, along with China and India, would not only create growth engines for their own economies, but would also become the source of growth and catalyst for sustainability for other countries in the region.

Regional integration

A recent BBC survey of more than 24,000 people across 24 countries put Indonesia as the best place for entrepreneurs to start a business. This was followed by the United States, Canada, India and Australia.

PT Northstar Pacific Capital co-founder and co-managing director Patrick Walujo tells StarBizWeek at the sidelines of the inaugural CIMB Asean Conference 2011 in Kuala Lumpur that such findings are not surprising, as Indonesia is a very liberal market, with relatively fewer restrictions imposed on businesses.

Walujo, however, concedes that amid the openness that the country practises, there are potential risks associated with public sentiment, when foreign businesses establish their presence in Indonesia. What's essential to pacify the locals in this regard, Walujo says, is to ensure that there is reciprocity in terms of benefits to the local economy and businesses.

Undoubtedly, Indonesia provides a huge market potential that many corporations, especially those from its neighbouring countries, including Malaysia, covet. The country's market opportunities are so vast that many of its own local corporations find it unnecessary to go overseas for business expansion yet.

In his presentation at a plenary session at the CIMB Asean Conference, Walujo explains that most Indonesian corporations today are still generally less inclined to expand overseas because, not only is the local market huge enough for them, but it could also provide very attractive profit margins for their operations.

“When foreign companies enter our market, they are generally seen as competing with local businesses,” he says.

On Indonesia's readiness for Asean integration, Walujo says political issues remain a challenge at the prospects of foreign companies freely stepping into a domain of local players. It's time to evaluate what's in it for Indonesia, he explains.

Asean, comprising Indonesia, Thailand, Malaysia, Singapore, Brunei, Cambodia, Vietnam, the Philippines, Laos and Myanmar, is expected to be an integrated economy with the formation of the Asean Economic Community (AEC) by 2015. As stated in the master plan, the AEC is a vision for a single market and production base and a highly competitive economic region that's fully integrated into the global economy and one that could ensure equitable economic development among member countries.

“You have to have scale in order to deliver the pricing, quality and range of products and services that the global customers demand,” CIMB group chief executive Datuk Seri Nazir Razak says at the CIMB Asean Conference.

Collectively, Asean has a population of 600 million and a combined GDP of US$2 trillion. This gives the region strength to compete and achieve even faster economic growth.

With Indonesia being the largest economy in the region, there are certainly expectations for it to lead in this movement.


By CECILIA KOK, cecilia_kok@thestar.com.my