: Super User; Indonesia; 11 November 2011; Hits: 1146

Indonesia's Turn to have its Moment

Talk to business leaders and management gurus nowadays and chances are they will tell you that Indonesia is the place to go. In some respects, this is not really surprising. With much of the world still struggling economically, it is natural for commentators to search for a silver lining. And Indonesia seems a likely candidate.

Noting that local companies are reporting stellar profits and economists are predicting continued strong growth, there are even those who argue that Indonesia could eventually rival China as an economic powerhouse.

Like all fads, such assessments probably need to be treated with some caution. Even so, it seems churlish not to give the country its due. Indonesia is one of the few economies that have continued to experience robust growth despite the negative impact of the global economic downturn.

Latest available gross domestic product (GDP) figures show that the economy grew 6.5 per cent in the third quarter of this year, on the back of strong domestic consumption and rapid growth of exports and investment. Household spending remains robust, amid low inflation and low private-sector debt. The official unemployment figure is the lowest it has been in a decade.

This strong third-quarter performance is in marked contrast to that of other economies which have published third-quarter data. Singapore, South Korea and Taiwan have all reported weak figures.

Writing in the Jakarta Post yesterday, Bahana Securities economist Harry Su pointed out that the biggest contribution to GDP growth in the third quarter stemmed from exports. This export support may weaken in the coming months as global demand slows. Even so, Indonesia should continue to have one of the fastest-growing economies in the region next year.

Domestic demand constitutes about 70 per cent of Indonesia’s GDP – a factor that has helped cushion the economy from the impact of the global crisis.

Recently announced corporate profits have underlined this point. On Oct 31, Astra International, the country’s largest auto distributor, reported a 30 per cent increase in net income to 13.4 trillion rupiah (S$1.9 billion) for the first nine months of this year. On the same day, Bank Mandiri, Indonesia’s largest lender, joined a slew of other banks announcing solid earnings. Net interest income, or interest earned on loans after deducting interest paid out to depositors, rose to 18.72 trillion rupiah.

The retail sector is also doing well. Matahari Putra Prima, the country’s biggest home-grown department store, reported a 77 per cent year-on-year increase in its nine-month operating profit. Despite an ongoing battle with the Health Ministry, cigarette maker Gudang Garam is also enjoying solid growth. It reported a 26 per cent rise in profit to 3.8 trillion rupiah as of September. Its net sales during the nine-month period were up 11 per cent to 30.57 trillion rupiah.

The local stock market is also faring much better than those of other countries in the region.

Earlier this year, prominent United States political scientist George Friedman began trumpeting Indonesia’s virtues, pointing in particular to its huge domestic market.

Speaking at a conference on futurology at the Shangri-La Hotel in Jakarta in July, Mr Friedman argued that China’s position as the current leading Asian economy would not last long. Its overdependence upon the US and Europe for its economic growth was one weakness. Another was the fact that China’s workers were becoming increasingly expensive compared with their counterparts in countries such as Pakistan, the Philippines and Indonesia.

“As countries like the Philippines and others have trouble accommodating investments, Indonesia has become a stable platform for international corporations to grow.” His projection? The Indonesian economy will equal those of Asian giants Japan and South Korea in the next 20 years. This, of course, depends on Indonesia maintaining its current state of political and financial stability.

Well-known management guru Kenichi Ohmae has also declared himself a fan. Visiting the country in September, he said: “I think it’s a mistake for Japan not to pay attention to the domestic market of Indonesia.” Japanese companies, he believed, should “change the pace” of investing in the country.

Mr Ohmae acknowledged that Indonesia’s infrastructure deficiencies could hobble growth. But he also pointed out that Indonesian consumers were hungry for quality products and services, and noted that its large and young population of about 230 million people offered great opportunities.

Will this enthusiasm for Indonesia fade when the rest of the world finally gets back on its feet? Or will such upbeat predictions lull political leaders into complacency?

Policymakers in Jakarta may not be able to do much about changing international fads. But they can ensure that the country strengthens its infrastructure and continues to carry out the sort of administrative reforms that will ensure continued foreign investor interest.

For Indonesia’s sake, let us hope that they do.

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Key Political Risks

Asia is the fastest growing region in the world, and is likely to remain so in 2013. However, a number of risks cloud the picture.

The good news is that domestic demand in the region remains strong and should continue to cushion the impact of weaker external demand on overall economic growth. The completion of national elections in Japan and South Korea in December 2012 should also help reduce political uncertainties.

But Asian governments will need to guard against the adverse impact of prolonged easy financial conditions on inflation.

Rising inequality also continues to threaten social stability. Ethnic and religious rivalries remain just below the surface in many countries. When combined with government corruption and (in some countries) high youth unemployment, this could become a deadly mix. This seems particularly true of China.

Territorial disputes also require close monitoring. Much diplomatic activity in the new year is likely to be centered on finding ways to reduce tensions over resource-rich islands in the South China Sea, where Beijing's claims overlap with those of Japan, Vietnam and other Southeast Asian states. South Korea and Japan also have rival territorial claims.

North Korea remains the wild card. Inclined to believe its own propaganda, Pyongyang's new leadership could miscalculate, making belligerent moves that plunge the region into a military conflict that nobody wants.