Good News From Indonesia

A fertile archipelago of 17,500 islands, and one of the world’s most populous countries, Indonesia is enjoying an unprecedented consumer and resource-driven boom. In April, the International Monetary Fund predicted that its $514 billion economy, the biggest in Southeast Asia, would grow 6 percent this year, up from 4.5 percent in 2009.

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]

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Indonesia’s credit rating outlook was raised to positive by Moody’s Investors Service, highlighting the strength of Asia’s emerging economies amid soaring debt burdens in developed nations from Greece to Japan.

The outlook on Indonesia’s Ba2 local-and foreign-currency sovereign ratings was changed from stable, Moody’s said in a statement today, three months after Standard & Poor’s raised the country’s credit rating to a 12-year high. Moody’s last upgraded Indonesia’s debt, to two levels below investment grade, in September 2009.

“The core of Indonesia’s growth story is driven by a large domestic market that is appropriately managed by a well-tested economic policy framework,” Aninda Mitra, Moody’s vice-president and its lead sovereign analyst for Indonesia, said in the statement.

The rupiah has risen 15 percent against the dollar in the past 12 months, the biggest gainer in Asia, as investors poured money into an economy that expanded even as the global financial crisis pushed Japan, the U.S. and Europe into recession. Southeast Asia’s largest economy is less reliant on exports than its neighbors, and the re-election of President Susilo Bambang Yudhoyono to a second term last year boosted confidence.

“In the eyes of the international investor, the Indonesian story is a good one,” Fauzi Ichsan, a Jakarta-based senior economist at Standard Chartered Plc, said in a telephone interview today. “In Asia, after China and India, where can investors go?”

Stocks, Rupiah
The benchmark Jakarta stock index rose 1.5 percent to 2,973.36 at noon local time, exceeding its April 30 record close. The rupiah gained 0.9 percent to 9,013 per dollar as at 12:23 p.m.

Moody’s said it expects Indonesia to post “sustained strong growth” and further improvements in the government’s financial and debt position. External disturbances such as the “instability in several European sovereign debt markets” have had no serious implications on Indonesia’s “improving” credit fundamentals, Mitra said.

S&P raised Indonesia’s sovereign credit rating to BB from BB- on March 12, with a positive outlook. S&P and Moody’s both rank Indonesia two levels below investment grade, while Fitch Ratings on Jan. 25 raised its rating to one step below investment.

Race to Raise
Improvements in the level and composition of the government’s debt, along with sustained gains in the country’s external position or a deepening of domestic markets, would be the most likely triggers for a rating upgrade, Moody’s said.

“The three houses are racing in raising Indonesia’s” ratings, said Ichsan. “If the government’s fiscal policy stays conservative and stable with a budget deficit below 3 percent of the gross domestic product, investors will be more convinced that from a fiscal perspective the Indonesian government is prudent.”

Indonesia’s central bank unveiled measures last week to encourage investors to keep their money in the economy longer and reduce volatility in capital flows and the rupiah. The move is “ratings neutral as it does not fundamentally restrict the timely and comprehensive servicing of credit obligations,” Mitra said today.

In the past five weeks, President Yudhoyono has moved to fill a yearlong leadership vacuum at the central bank by nominating Bank Indonesia Acting Governor Darmin Nasution to take the job permanently. He also named Agus Martowardojo as finance minister to replace Sri Mulyani Indrawati, who joins the World Bank as one of three managing directors this month.

“Recent appointments and nominations at the finance ministry and at the central bank are supportive of policy continuity and institutional credibility,” Moody’s said. “The increase in Indonesia’s foreign currency reserves is also notable, while better prospects for foreign direct investment could sustain further improvements in the overall external position in line with its sovereign ratings peers.”

(source)

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Indonesia has raised the foreign ownership limit on certain sectors, such as agriculture and health care, in a bid to lure investments, according to a presidential decree.

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.

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