James Castle, a Michigan native who founded the CastleAsia consulting firm, has been doing business in Jakarta for more than 30 years and has more than 100 multinational clients, including Citigroup, Siemens and Shell. Mr. Castle spoke in an interview this month about why the Indonesian market was starting to get the recognition it deserved.

Q. What are some of the pleasures and pitfalls of doing business in Indonesia?

A. The real pleasure is that it’s a good place to make money. Companies tend to be quite profitable here. The pitfalls are that it is highly bureaucratic, regulations can be confusing and sometimes implementation can be inconsistent. These things can be intimidating, especially for new-to-market people. But it’s also a very practical country where most problems get worked out, and not in a corrupt manner; most multinationals can do business here consistent with other codes of conduct around the world.

It has a stereotype of not being a very efficient manufacturing economy, but that’s not true. There are exporters here, aside from the normal natural resource and commodity exporters, who are gaining market share and are reasonably competitive.

Q. Has it become easier to do business here as Indonesia’s political system has stabilized into a relatively solid democracy?

A. We’ve had pretty stable politics here for a decade now, since ’99. That’s certainly a big plus and one reason companies are profitable. Because the democracy is young, you do get a lot of bureaucratic uncertainty. People aren’t quite sure where the political power lies. But our regulatory uncertainty is not political instability. In terms of law, order and safety, it’s a very good place to operate.

Q. You have survived two separate terrorist blasts in Jakarta, one of which took place just last July. How real is the threat of terrorism in Indonesia? Should it scare off investors?

A. That last blast was the first attack in several years. It’s part of the global trend in political terrorism we see around the world, and it’s a tragedy. But as I’ve said before, more people die of dengue fever than die of terrorist activity here.

I think it does deter some businesspeople, but not too many. Indonesia, because of its performance economically and because it’s one of the faster-growing members of the G-20, has got a lot more interest at headquarters. I think most companies, if they don’t have a position on Indonesia, want to have one.

Q. Do you think Indonesia should be a contender for the BRIC club (the group of powerful emerging economies named after Brazil, Russia, India and China)?

I think BRIC is a catchy term, but the countries in the group are so different. What’s the common denominator of a BRIC? That said, the world is changing, countries that were low-income are able to move up, a variety of political and social systems can make that happen. I would say that the long-term stability ones are India, Indonesia and Brazil. I think both China and Russia have tremendous political obstacles to overcome, though meanwhile they both can be very good places to do business. Large companies will have the resources to go into all these countries if they want to. So it’s really just a question of, ‘Is that particular market ready for us right now?’

Q. Does Indonesia get forgotten by the global business community amidst all the attention lavished on India and China?

A. After ’98 and the Asian financial crisis, Indonesia just got ignored. Now it’s in the discussion. Some companies may for very good reasons decide that now is not the right time for them to come here, but they will have made a conscious decision. Indonesia can no longer be ignored. If you’re a global company, and you’re not in Indonesia, you really have to ask yourself why, or why not.

It’s really starting to get the attention it deserves, and that I attribute to its visibility in the G-20 and the fact that it was one of the high-growth countries in the slowdown of the last 18 months. Most big companies are looking at Indonesia and trying to find opportunities here.

And if they’re not, they should.

Q. What important changes does the government need to implement to improve the country’s business climate?

A. Where the government has made some progress is the anti-corruption movement. I’ve been here a long time, and this is the first government that’s made a real, noncynical attack. But they’re still not halfway there, whether you’re talking about judicial reforms or bureaucratic reforms.

The other area where the government is being too slow is in all the regulations that are preventing infrastructure investment, whether public or private sector. They ought to be able to forge a political consensus on how to move ahead. That we haven’t had more infrastructure investment and that Indonesia’s been unable to create the policy environment to make that happen has been the big disappointment of the last number of years. It’s been a huge loss to the country.

Q. Do you have any advice for newcomers to the market?

A. If you think there’s a market for your product here, there’s a legal way to get into the market. It just may take more time and energy. Indonesia’s what I call a ‘management intensive market.’ It takes a lot more senior management time. If you’re confused, there are plenty of lawyers and accounting firms and consultants here who can give you advice and help you through the thicket. The Investment Coordinating Board has a new chairman now, Gita Wirjawan, who is very much pro-business. We’ve never had a head who has understood the private sector as much as he has and he’s instilled that spirit through the board.

You can’t do something here overnight. You can’t fly into town, set up a company and be operating in 48 hours like you can in some countries.

Singapore is friendly in that way. So are some of the Middle Eastern countries. But they don’t have the market.

Study the market very carefully. Don’t come in with a very short-term objective of getting something going in three to six months. Don’t cut corners, don’t get frustrated by the bureaucracy, because you will get through it.

One of the reasons a lot of the new investment here is coming from people already in the market is because some new-to-market companies give up too soon. Indonesia is a little harder than some of the other markets to get into. But it’s worth the effort.

[Source / image credit: Digirain]

The report, “Indonesia: Rising Competition to Spur Telecom Revenue Growth,” reveals that there’s a marked under-penetration of most telecom services in this vast, fragmented country of more than 240 million people.

But rapid service uptake, driven by increased competition and rising disposable income, is expected, with the Pyramid team predicting that, while China and India are still set for significant expansion, Indonesia will become the fastest-growing telecom market in Asia/Pacific during the 2009-2014 period, with overall revenues from communications services growing by a staggering 80 percent.

In the mobile sector, subscription penetration stood at 63.7 percent in 2009 — below the global average of 68 percent — and actual user penetration at 38.6 percent. There has already been some growth -– in 2006 subscription penetration was just 28 percent –- but the report’s authors believe there will be much more in the coming years, with penetration set to exceed 93 percent by the end of 2014. In revenue terms, the report predicts that this will translate to a compound annual growth rate (CAGR) of 11.4 percent for the mobile sector to 2014.

Broadband of any kind has yet to reach 1 percent of the population, but mobile broadband is on the march, claiming 2.4 million connections in 2009, compared with only 1.6 million on fixed broadband. This is partly explained by the archipelago nature of the country: The population is spread across more than 6,000 of Indonesia’s 17,000 islands, which makes wireless technology more suitable for broadband rollout. And in a country where only 5 percent of the population owns a PC, mobile phones look set to be the standard platform for Internet access.

PT Telekomunikasi Selular (Telkomsel) , the mobile arm of fixed incumbent PT Telekomunikasi Indonesia Tbk. (Telkom) , will probably be the main beneficiary of this growth, and will likely still dominate the market with a market share of more than 50 percent in 2014. (See Telkomsel Plans Capex Hike.)

But it’s not just a mobile story. The report predicts that fixed-line revenue growth will outstrip that of the mobile sector during the coming five years. Indeed, Pyramid projects that total fixed-line revenue will increase at a CAGR of 13.6 percent to the end of 2014. The main driver of this will be the continued popularity of limited mobility services — or fixed-wireless access (FWA) — throughout the archipelago. FWA already accounts for three quarters of all fixed connections in the country. (See Indonesian Operator Soars With FWA.)

The popularity of FWA, says the report, will mean that the fixed space will predominantly serve the need for voice services, while broadband data needs are met by 3G platforms. This, it adds, is “in stark contrast to other markets.” Perhaps surprisingly, WiMax looks set to remain a niche technology in Indonesia.

The simple fact is that while Indonesia is the fourth most populous country in the world, it ranks only seventh in Asia/Pacific in terms of telecom revenue. And in terms of telecom revenue as a percentage of GDP, Indonesia stands at 1.7 percent, compared with Vietnam on 5.3 percent and Thailand at 3.3 percent.

For Indonesia, the only way, it seems, is up.

(source)

The decree said the government will allow foreigners to hold up to a 49% stake in individual companies in the staple food plantation industry. Previously, only domestic investors have been allowed to enter this area.

The government is also raising the ceiling for foreign ownership in hospitals to 67% and is opening doors to facilities across the country. Previously, foreigners could hold up to 65% of hospitals in certain major provinces only.

Indonesia, however, is still retaining a ban on foreign investment in telecommunication towers despite strong interest from overseas investors.

The sprawling archipelago has drawn more investment interest of late because of its strong growth prospects and relatively stable government. Some investors have tipped Indonesia to rank beside the burgeoning BRIC countries of Brazil, Russia, India and China due to its big market potential and rich natural resources.

However, bureaucratic red tape, corruption and overlapping regulations have hobbled foreign investment. In 2009, actual foreign direct investment in Indonesia dropped about 20%, to $10 billion, from a year earlier amid the global economic crisis.

The Bin Laden Group from the Middle East last year cancelled a plan to invest around $1 billion in a food estate project in Papua province because the government planned to cap its share of ownership in the project at 49%.

The opening up of the hospital sector could pave way for some regional health-care providers, such as Parkway Holdings Ltd. of Singapore, to enter the world’s fourth most populous country, analysts said.

The decree is effective immediately, but detailed rules haven’t yet been set.

(source)

This unexpected and dramatic development has not been due to the vigour of the Chinese economy or the BRIC (Brazil, Russia, India, China) economies as a whole, but the emergence of a major new force in the global economy – the 10 middle-income emergent countries.

These emergent economies are becoming, with remarkable speed, a whole new motor for the global economy.

The 10 biggest are Mexico, South Korea, Turkey, Poland, Indonesia, Saudi Arabia, Taiwan, Iran, Argentina and Thailand. In 2008 they had a collective nominal gross domestic product of $5.6 trillion in 2008, according to the IMF, larger than the GDPs of Japan or China.

In purchasing power parity (PPP), their collective GDP was $8.8 trillion, larger than the economies of Japan and Germany combined. Indeed, these 10 non-BRIC countries constitute the world’s third-largest economic group, after the European Union and the United States.

Considered in this light, the global economy takes on an interesting new shape with five dominant components: Trade among emergent nations, sometimes called South-South trade, is now the most dynamic component of the global economy.

This is not simply a factor of the BRIC countries – Brazil, India and Russia accounted for just 5.8% of China’s trade. The most striking development is China’s impact on other emergent markets. Indeed, these markets helped rescue the Chinese economy from its 2008 nosedive. Taking the year-on-year export figures for November 2009, while Chinese exports to the EU fell by 8%, and its exports to the US fell by 1.7%, China’s exports to the Asean nations rose by a dramatic 20.8%, and China’s imports rose by 45%.

Within this decade, current trading trends suggest that South-South trade could overtake trade among the G7 nations, and should also exceed North-South trade. Fuelled by rising populations and increased amounts of foreign direct investment, the non-G7 economies are likely to produce more than half of the world’s GDP. The G7 economies currently account for 57% of nominal global GDP.

A host of new competitors: Of course, the G7 nations will remain far richer, both as a group and individually, and are likely to continue to enjoy the fruits of their traditional dominance of higher education and technological innovation, among other things. But the large advantage the G7 nations long enjoyed – of comprising the world’s biggest, richest and most attractive consumer market – is being eroded with remarkable and unexpected speed. That means that their consumer tastes and habits will no longer be the global norm. New products are less likely to be developed and launched with Western consumers in mind. Research funds and projects are less likely to be predicated on a Western consumer base. The long tradition of Western cultural dominance, and the political influence and soft power that it generated, is likely to face increasing challenges.

The significance of the growth of “The Ten” as a new locomotive force for the global economy is that there will be no single rival to Western culture, but a host of competitors. Brazilian music, Mexican singers, Turkish literature, Argentine dance, Thai sports, Polish architecture, Saudi calligraphy and Indonesian design will all jostle together in the vast new marketplace, alongside Bollywood movies, Russian space tourism and Chinese manufacturers.

The new world order in the wake of the recession is going to be much less predictable, much more culturally eclectic and even chaotic. Some will find it an uncomfortable Babel, others will thrill to the rich excitement of choice and diversity.

Most should be relieved that some gloomy recent suggestions of an inevitable clash of civilisations between China and the West are likely to give way to something more confused.

The really good news is that when China’s growth rate slows, as it is likely to do this decade as the labour force peaks and the number of retirees soars, there are now new candidates for future growth ready to take China’s place and maintain global demand.

Martin Walker is senior director of A.T. Kearney’s Global Business Policy Council based in Washington, D.C. Teerin Ratanapinyowong is a principal and country manager of A.T. Kearney Thailand. teerin.ratanapinyowong@atkearney.com

The recent landslide re-election of Indonesian President Susilo Bambang Yudhoyono has revived talk that Southeast Asia’s largest economy belongs with the BRICs, that elite club of emerging market heavyweights that are expected to drive global growth for decades to come. Even if treating Brazil, Russia, India and China as a coherent bloc doesn’t make much sense, Indonesia has earned a place among the most promising developing economies. The resilience of Indonesia’s currency and markets in the face of the terrorist attacks underscores the quiet confidence investors have developed towards Indonesia.

Yet, there is good reason for optimism that the reform picture will improve, given the strong mandate that Yudhoyono earned at the polls last week. At the top of his agenda will be overhaul of the bloated bureaucracy and a streamlining of Indonesia’s labyrinthine investment procedures. We can also expect genuine efforts to reform the judiciary and the police.

In addition, when he was first elected in 2004, his relatively narrow margin of victory forced him to give the patronage-driven Golkar party several key cabinet positions. Winning this election without a runoff will allow Yudhoyono to consolidate power in both the executive and legislative branches, and to avoid the need to trade cabinet posts for second-round support. That will give him the freedom to bestow top economic posts on technocrats and reform-minded ministers. With Yudhoyono’s Democrat Party nearly tripling its share of seats in the Indonesian People’s Representative Council from 10% to 27%, he will begin his second term with a lot more political clout.

There are still political roadblocks to overcome. Long-standing ties between key players among the political and business elites will continue to skew economic decision-making. The president’s coalition partners include the same Islamist parties that have traditionally adopted a parochial attitude toward foreign investment. He may sometimes have to accommodate them, though he will try to limit political appointments to non-economic portfolios.

Another potential worry: Indonesia’s economic resilience has generated a wave of national pride that could create obstacles for much-needed foreign investment. Indonesia still lacks a mature domestic capital market and local expertise in many sectors, and Yudhoyono must make a compelling case that foreign investors are crucial for Indonesia’s future. He must also summon the political courage to make unpopular decisions on the growth of wages and inflation.

That should now be easier, since Indonesia’s constitution frees him of any thought of seeking a third term. But this brings us to the key question for Indonesia’s future: Will the country’s next president forge ahead along the same path? The older generation of leaders (like former presidents Megawati Sukarnoputri and Abdurrahman Wahid) will likely give way to a younger generation before the next presidential election in 2014. Can Yudhoyono build political consensus in favor of economic liberalization and improved governance over the next five years?

There is cause for cautious confidence. Legislative elections in April demonstrated that Indonesians will abandon incumbents who perform poorly or abuse their positions for personal gain in favor of those who promise competence and reform. Direct elections for Indonesia’s powerful provincial governorships in 2008 revealed the same pattern.

Indonesia still has far to travel. Friday’s bombings demonstrate that terrorism remains a threat. Its economy remains less than half the size of any of the BRIC countries. But its increasingly robust democracy, its abundant natural resources and its demographic dividend suggest that its greatest attraction may be that it has plenty of room to grow.

Ian Bremmer is president of Eurasia Group and co-author of The Fat Tail: The Power of Political Knowledge for Strategic Investing. David Kiu is a Southeast Asia analyst with Eurasia Group. (forbes.com)

]]> http://goodnewsfromindonesia.org/2009/07/20/a-terrorist-attack-cant-derail-indonesias-booming-economy/feed/ 0 http://goodnewsfromindonesia.org/2009/07/12/indonesia-in-rising-power-club/ http://goodnewsfromindonesia.org/2009/07/12/indonesia-in-rising-power-club/#comments Sun, 12 Jul 2009 08:29:09 +0000 Akhyari http://goodnewsfromindonesia.org/?p=1222 Indonesia, an emerging market, is becoming one of the world’s top performers.

Morgan Stanley recently suggested the country could be included among the likes of Brazil, Russia, India and China, which together make up the BRIC group of fast-growing economies in the developing world. And nobody really disagreed.

Whether BRIC will become BRICI anytime soon is yet to be seen. But the fact is that Indonesia has maneuvered through the economic crisis with a deftness unmatched elsewhere in the region – and the international community has noticed.

It has a relatively healthy economy, with a growth rate of just under 5 percent, far higher than anyone predicted considering the state of the world economy. That economic growth, coupled with Indonesia’s remarkably stable democracy, bodes well for the world’s fourth most-populous country.

This week, Indonesia will hold its second-ever direct presidential elections. In all likelihood they will be peaceful, and President Susilo Bambang Yudhoyono, the market-friendly reformer, will be re-elected. This stands in stark contrast to the political upheaval elsewhere in Southeast Asia, particularly in Thailand and Malaysia.

It’s an impressive feat for a country that just 10 years ago was the major victim of a debilitating banking crisis and was embroiled in a revolution that saw four presidents in four years.

Now, Indonesia is the third-fastest growing economy in the region, behind India and China. In dollar terms, Jakarta’s main stock index is up more than 72 percent since March, and up 67 percent year-to-date.

Yudhoyono’s reformist agenda is often credited with this jump in fortunes, and it is his current minister of finance, Sri Mulyani, who set the ball rolling.

“I think we will come out of this crisis with a better perception of our economic strength from abroad,” Mulyani said in an interview with GlobalPost. “Our role in the G20 put the country on the spot. And our role within ASEAN, as the biggest economy in Southeast Asia, which makes us the de facto leader, has elevated our international role.”

A lot has been said about the importance of foreign investment here. Mulyani quickly revamped the tax and customs offices to help attract more investment. Other major reforms are in the works.

But it is the strength of the country’s domestic markets that carried it through the worst of the crisis. When the world’s economies collapsed and international investors pulled out of Asia late last year, Indonesia did not go into a tailspin – unlike, say, Singapore, which is almost wholly dependent on foreign investment.

Foreign direct investment accounts for only about 25 percent of gross domestic product here. And so it’s the country’s 240 million consumers who are driving the economy.

Bank Indonesia, which dramatically raised rates last year to fight inflation, has since continuously slashed them. Analysts believe there will be more cuts as inflation eases. Rates could be cut to less than 6 percent within months, bolstering even further the all-important domestic consumption.

In a twist of fate, it is the nation’s status as still developing that is contributing to its success. Half of the population lives on less than $2 a day and only a tiny sliver could be considered wealthy. As a result, Mulyani’s tax breaks – the central part of her $6 billion stimulus plan passed in December – quickly moved from people’s pockets back into the market.

Chatib Basri, an Indonesian economist and adviser to the president, said the country’s young population also helped.

“These factors mean cash moves very quickly through the Indonesian economy. Poorer Indonesians don’t stow their money away; neither do young people. So the large tax breaks offered by the finance ministry helped a great deal to prop up the economy during this crisis,” he said.

In another important move, the country offered its first-ever Islamic bond sale in April, raising $650 million and attracting almost $4 billion in bids, further strengthening government reserves.

Despite being the world’s largest Muslim-majority country, Indonesia had always lagged far behind Malaysia and the Middle East in the Islamic finance market. But not for long, according to Mulyani.

Islamic finance is governed by a series of Islamic laws – such as the prohibition on paying interest, gambling with derivatives and investing in industries considered haram, such as pornography and pork. It is a sector that’s growing more than 10 percent annually.

“I think the potential is very big. Certainly we see that linking with Malaysia and the Middle East is very important,” Mulyani said. “And especially with our very successful Islamic bonds issuance earlier this year gives us a lot of confidence. It presented us as potentially one of the major players in the world in terms of Islamic finance.”

Going into the crisis, Indonesia suffered more from negative perceptions than it did from struggling fundamentals. Now, as the country emerges from the crisis, it is bringing with it a new reputation.

“There is still a lot to do to support this reputation. But the recognition is there from the international community and it will help create more energy and more momentum for even stronger changes,” Mulyani said.