The Indonesian economy is considered one of the emerging markets of the world, and one of the factors driving the current Asian growth story, but does this mean that doing business in Indonesia is worth it? It has certainly come a long way since World War 2, when the Indonesian islands were devastated by war and famine. For the longest time after WW2, the Indonesian economy floundered under dictatorship and poor governance. However, since the late 1980s, Indonesia has made significant changes to its regulatory framework to encourage economic growth. This growth was financed largely from private investment, both foreign and domestic. As a result, the Indonesian economy has shown better economic growth over the past few decades, with the country as the largest economy in Southeast Asia and a member of the G-20 major economies.
Business in Indonesia – The Markets and Economy
As of 28 June 2010, the Indonesia Stock Exchange had 341 listed companies with a combined market capitalization of $269.9 billion, according to Bloomberg. Efforts are further being made to improve the business and investment environment. Within the World Bank’s Doing Business Survey, Indonesia rose to 122 out of 178 countries in 2010, from 129 in the previous year. Despite these efforts, the rank is still below regional peers and an unfavourable investment climate persists. For example, potential foreign investors and their executive staff cannot maintain own bank accounts in Indonesia, unless they are tax-paying local residents (the Indonesian tax regime requires paying tax on worldwide income). Agriculture continues to play a major role in economy and produces major export products such as rice, cassava (tapioca), peanuts, rubber, cocoa, coffee, palm oil, copra; poultry, beef, pork, and eggs. According to the CIA World Fact Book, Indonesia has extensive natural resources, including crude oil, natural gas, tin, copper, and gold. Indonesia’s major imports include machinery and equipment, chemicals, fuels, and foodstuffs and the country’s major export commodities include oil and gas, electrical appliances, plywood, rubber, and textiles.
Clearly there is a diverse number of industries that foreign businesses could do business in. Indonesia’s large population and relatively vibrant democracy will also insure that the economy will continue to grow at healthy rate for the next few years. In December 2011, Fitch Rating raised Indonesia’s long-term and local currency debt rating to BBB- from BB+ with both ratings at stable. Fitch also predicted that economy will grow at least 6.0 percent on average per year through 2013, despite a less conducive global economic climate. Thus, signaling the resilience of the Indonesian economy.
However, many people tend to think of Indonesia as one country both geographically and economically. But there are areas of Indonesia, which have progressed greater economically and are more conducive to foreign businesses. In 2009, the Indonesian government published statistics which illustrated which parts of the country were growing the fastest. You will want to check these areas out if you’re interested in doing business in Indonesia.
Based on the regional administration implementation performance evaluation of 2009, by an order the best performance were:
- 3 Provinces: North Sulawesi, South Sulawesi and Central Java
- 10 Districts: Jombang and Bojonegoro in East Java Province, Sragen and Pacitan in Central Java, Boalemo in Gorontalo, Enrekang in South Sulawesi, Buleleng in Bali, Luwu Utara in South Sulawesi, Karanganyar in Central Java and Kulon Progo in Yogyakarta
- 10 Cities: Surakarta and Semarang in Central Java, Banjar in West Java, Yogyakarta city in Yogyakarta, Cimahi in West Java, Sawahlunto in West Sumatra, Probolinggo andMojokerto in East java, Sukabumi and Bogor in West Java
For all these positive advantages, the Indonesian economy still faces many economic challenges. During the economic recovery and growth in recent years, the government has been trying to decline the inflation rate. However, it seems that Indonesian inflation has been affected by the global fluctuation and domestic market competition. According to the World Bank, as of 2010, the inflation rate was approximately 7%, when its economic growth was 6% (Note that economic growth rates already take inflation into account, so this comparison by no means implies economic reduction). To date, inflation is affecting Indonesian lower middle class, especially those who can’t afford food after price hikes. As a result, it might be harder for foreign businesses to sell into the local market. Plus, according to Transparency International, Indonesia has ranked below 100 in its Corruption Perceptions Index with a score of 2.8 in 2010. A score of 0 is for highly corrupt countries, whereas a score of 10 is for countries that have little or no corruption. Then there is also the question of political instability, due to uneven growth across the country. According to National Encyclopedia, the poverty rate has since been higher in the outer islands. Economic disparity and the flow of natural resource profits to Jakarta has led to discontent and even contributed to separatist movements in areas such as Aceh and Irian Jaya. Geographically, the poorest fifth regions account for just 8% of consumption, while the richest fifth account for 45%. As a result, there has been greater cases of political instability in the outer islands.
Overall, Indonesia holds a lot of economic potential for the future. But there are clearly challenges that the country faces in translating that potential into economic success. Foreign business can clearly gain a lot from investing in Indonesia, providing they go about doing business the right way. Since, there are clearly challenges in terms of corruption that businesses face.