Indonesia, the awakening of a giant

Despite the unquestionable appeal of Indonesia, the tremendous strength of other major Asian markets has for some time diverted attention from its enormous potential. Its demographic progression, natural resources and growth make it an emerging power.

There are many different ways of describing the Indonesian market: the main economy of Southeast Asia is also the fourth most populated country in the world (255 million inhabitants) and its largest archipelago, with more than 17,000 islands and 1.9 million km2. A giant with an enormous availability of natural resources, ranging from oil, gas, coal, nickel or bauxite, to palm oil (of which it is the world’s leading producer and exporter), rubber, cocoa, coffee, tea, rice…

“It is an economy that over the years has been very focused on the exploitation of raw materials,” confirms Carlos Gastón, BBVA’s representative in Indonesia. Now that the Asian crisis of the late nineties has been overcome, the export of these commodities, together with the strength of domestic demand and investment, has enabled it to make notable progress in its levels of development.

This has been reflected in growth rates of close to 6%, an improvement in per capita income – in 2015 it stood at $3,377, compared to $807 in 2000 – and the emergence of the middle class, which is especially visible in large cities such as the capital, Jakarta.

“You notice the change even in the way they dress. The average age is around 29-30 years; those young people who have come out to the market, who are better educated, constitute an urban middle class with an enormous dynamism, and that dynamism is what is going to change this country. Tourism is growing because of its demand; shopping centres live off local consumption; more than a million vehicles are sold every year…”, explains Gaston.

Great challenges for a great market

Despite these developments and the undeniable potential, the scenario for Indonesia is not without its challenges. Since 2014, the pace of its economy has been moderated by the contraction of exports, which have been affected by the fall in the price of raw materials and Chinese demand.

“It has been a slight slowdown; it has gone from an average rate of 6% to 4.8% in 2015, so it is still a respectable growth,” says Francisco Javier Álvarez Casanova, economic and commercial advisor to the Spanish Embassy in Jakarta. The Executive, presided over by Joko Widodo, has set itself the goal of strengthening the foundations for a solid and sustained economic development over time, which will allow for increases in GDP of more than 7% by the end of the term.

The list of tasks for the Indonesian authorities is long; among the most pressing are resolving the country’s infrastructure deficit, diversifying the economy and improving the efficiency of the productive sector.

Infrastructure, a lever for change

In an archipelago the size of Indonesia, the lack of infrastructure “is a major challenge from a logistical point of view. It is something that the government wants to tackle with important investments, with its own funds and with a large amount of multilateral funds and bilateral donors,” says the advisor to Ofecomes in Jakarta (see section ‘From Ofecomes’).

The long-term framework for the actions considered a priority by the government is the Plan for Accelerating and Expanding Indonesia’s Economic Development 2011-2025. In line with its objectives, the current government has approved the National Medium-Term Development Plan 2015-2019, which includes a public allocation of 162 billion dollars and in which infrastructure plays an absolutely central role.

Indonesia, the awakening of a giant

“The strategic plans are mainly aimed at the development of energy plants and transmission lines, that is one of the main axes, and also at transport infrastructures such as ports, airports, roads…”, explains Rodrigo Martinez, commercial representative of Centunión company in Indonesia.

Water and waste management completes the three preferential sectors for the Government, which, with 2019 as a time horizon, aims to provide access to running water and sanitation to 100% of the population and to extend the coverage of urban solid waste management to 80% of the population.

A key factor in the implementation of these plans will be the boost given to public-private partnership (PPP) projects, a formula which, to date, has hardly been used by the country.

Manufacturing sector in renovation

Another of the guidelines in the Government’s economic policy is the development of the manufacturing industry, which is currently characterized by a low and medium-low level of intensity, with a majority participation of SMEs.

Similarly, “Indonesia is a country where the public sector still plays a predominant role in many areas. The large construction companies are state-owned, the aeronautical industries, information technology, defense, shipyards… However, there is a growing desire to give more weight to private initiative,” says Francisco Javier Álvarez Casanova.

Given the shortcomings of the productive sector, he continues, “it is trying to ensure that its natural resources are not exported raw as they have been until now, but rather that they remain in the country and are transformed, so that they generate greater added value and employment and income.

“On the other hand, with a large, young and growing population and a booming middle class, Indonesia is trying to develop all kinds of industries for consumer goods, food and certain materials for industry,” he concludes.

An awakening that creates opportunities

The progressive development of its manufacturing “brings with it a greater need for machinery of a certain sophistication, which Indonesia does not produce and has to import. Spain is competitive in agricultural, packaging and auxiliary machinery for mining …”, stressed the counselor in Jakarta. The possibilities also extend to the automotive sector and components, machine tools, and medical and laboratory equipment, among others.

Other attractive areas for our exports are those related to private consumption, driven by the growing middle class: textiles, footwear, food and beverages, pharmaceuticals, or chemicals and cosmetics.

Market access presents certain obstacles derived from regulatory changes and legal uncertainty, and from non-tariff barriers. In the country with the largest Muslim population in the world, the Halal Act of 2014 is in force, making this seal compulsory for all consumer products and for the distribution chain within five years.

Indonesia, the awakening of a giant

As far as investment is concerned, the opportunities are mainly linked to the ambitious infrastructure plans already mentioned. So far, however, Indonesia has not had the most propitious framework: “The weight of bureaucracy is tremendous, both central and provincial or local, really is an important handicap for the establishment of companies,” reflects Carlos Gaston. “The current government has set itself the task of solving or facilitating all administrative processes,” he continues.

Some areas of activity also maintain restrictions on the participation of foreign capital, included in the so-called negative list of investments. “An enormous effort has also been made to limit this list as much as possible and to open up certain segments of the economy. But it’s not going to be easy for some sectors to have large foreign investments that are not distorted by the effect of state intervention on them,” says Gastón.

Indonesia, a market that must be a priority

“The Spanish presence in Asia is relatively recent. Initially, apart from the more developed markets such as Japan, South Korea or Singapore, in the first years of Spanish internationalization China attracted attention in that area of the world,” says Francisco Javier Álvarez Casanova. For this reason, Indonesia, like the rest of Southeast Asia, was then left off our companies’ radar.

However, the strong growth experienced by the country has gradually led them to turn their attention to it. In 2013, moreover, the Secretary of State for Trade included Indonesia in the Integral Market Development Plans (PIDM), considering it a priority destination for Spanish trade policy.

In recent years, our exports to the Indonesian market have been increasing, although they are still far from their potential level and the bilateral balance continues to be in deficit for Spain.

On the other hand, “the presence of companies is increasing, we have around 50 registered in the Commercial Office established in different legal forms, both with subsidiaries, representative offices and through franchises”, indicates Francisco Javier Álvarez Casanova from Ofecomes in Jakarta. Oil and gas, the aeronautics industry, the ceramic sector, the chemical and pharmaceutical industry, etc. are the fields in which this presence is most visible.