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Indonesia: An Asian showcase for UK business

WHEN INDONESIA is in the news, it’s usually for an ambivalent attitude to logging in its pristine rainforests, or ethnic conflict. But under the leadership of president Susilo Bambang Yudhoyono and finance minister Hatta Rajasa, the country has become a showcase for Asian economic reform and growth. The fourth most populous country on earth, Indonesia has become a target trading partner that is attractive for its burgeoning middle class, its rapidly expanding economy and a business sector hungry for imports.

Alluring as the country has become, recent events have prompted some uncertainty about its future direction. Naysayers accuse it of being protectionist. Advocates say there is much still to value in an Indonesia which has so far been welcoming to overseas goods and services.

No surprises
That UK business should find Indonesia an attractive location for goods and services should come as no surprise. It is the largest economy in south east Asia with a population standing at 240 million and is reported to include a middle class that is 45 million strong across 300 ethnic groups. The UK Trade and Investment (UKTI) office lists Indonesia as one of 17 high-growth markets. In 2010 (the most recent figures available), UK exports to Indonesia stood at £438.9m, 25% up on the previous year, though this figure could be much larger as many goods are shipped via Singapore and rarely registered as Indonesia-bound.

What’s more is the fact that the Indonesian economy has been growing at an impressive rate for some time. In 2012, GDP climbed by an enviable 6.2%, while 2013 is widely expected to be better, with forecasts placing growth at about 6.8%. Recent news has questioned whether the economy will in fact achieve that, but growth is still expected to be far in excess of anything possible in Europe. Indeed, when growth of 6.1% was reported for the fourth quarter of last year, it marked nine consecutive quarters with growth above the 6% line.

What heightens the anticipation about Indonesia as a destination for exports is its trade balances. Last year saw Indonesia post a trade deficit, the first in a little more than 40 years. The previous year had seen a surplus of $26bn (£16.4bn) – the latest in a series that goes back to the late 1960s.

The current account too has moved into deficit, for the first time in 14 years. And with foreign reserves leaving the country at a considerable rate, some even worry that Indonesia could be facing a currency crisis in the future. The country is now buying in more than it’s sending out, an unsettling development for many, with even the World Bank recognising that the imbalance is an issue. Reporting in March this year, the bank said that any gains in exports made in the last quarter of 2012 were offset by the growth in imports, amounting to a rise of 9.5%, quarter on quarter, a rebound from a relatively subdued third quarter.

All that said, the British government’s business body, UKTI, sees Indonesia, with its obvious buying power, as a trading partner that has great potential. Politicians have recognised it too. In March, a trade mission made up of businessmen and members of parliament flew into Jakarta to promote better trade relations. This time around, it was education and infrastructure that took centre stage, largely because the region is expected to be the fourth largest market in the world by 2030.

Lord Green, the trade and investment minister, said the relationship between the two countries had potential: “The relationship has always been good but both sides see the potential to grow it further and this trade mission established the platform to do just that.”

Margot James, a Conservative MP on the junket, told Financial Director that the trip was about giving British companies access to markets that were burgeoning, adding it was part of the UK’s growth agenda. Which is perhaps more pertinent because warnings about the prospects of Britain’s economy – even though it appears to be improving – are laced with concern about the troubles in the eurozone and the implied need for Britain to build its profile in other, more far-flung markets.

According to James, Indonesia is attractive because of its rate of growth and because it recovered well from the Asian economic crisis through democratic reform and by taking the advice of the International Monetary Fund. The substantial middle class is also an attraction. “That’s the kind of opportunity British business wants to hear about – for all kinds of sectors,” James says.

Protectionism
There is an issue, however, that looms over any contemplation of doing business with Indonesia, which James is willing to acknowledge – an issue that many commentators have observed and described as the country’s “creeping protectionism”. A series of measures have been put in place over recent years, playing to a nationalist agenda as the country heads toward presidential elections in 2014.

Foreign mine owners have been limited to a stake of just 49% ownership; new rules tightened which farm produce could be imported, prompting a complaint from Washington to the WTO that they constituted a “serious impediment” to US exporters; live cattle imports were cut by a third, causing jitters and then grumbling among Australian beefs producers; and the export of raw rattan was banned in a bid to bring down the price for domestic furniture makers.

Observers worry that the protectionism creates a market with shaky foundations for exporters. Margot James says: “You very often find protectionism crops up when approaching an election” – but she insists this should not be enough to deter UK business. Others see matters differently, believing the erratic stance on imports creates enough uncertainty to make Indonesia a difficult market to approach.

According to Kevin O’Rourke, a consultant, former bank analyst and author of Reformasi: The Struggle for Power in Post-Soeharto Indonesia, Indonesia possesses enormous potential given its size, relatively stable economic environment and natural resources. But, he believes, the issue is corruption.

“The problem has always been corruption, and corruption is a centuries-old patronage style of political system which emphasises rent-seeking and generating resources that political figures can use and dispense as largesse, and buy loyalty. It affects the economy because it creates all sorts of inefficiencies and conflicts of interest,” he says.

O’Rourke says that Indonesian politicians have been too quick to respond to the demands of local business interests seeking to manipulate trade rules in order to protect their own tactical relationships. Ironically, he believes the situation may have stabilised, for the time being, because GDP is suffering and the country’s leadership has begun to reap the rewards of toying with the economy.

Meanwhile, future stability depends on who wins the presidential elections in 2014. The great hope among many is that the new leader will be Joko Widodo, the business-minded and reformist governor of Jakarta. Widodo built a reputation as a modernist while he was the directly elected mayor of Surakarta on Java, where he instigated changes which were said to be influenced by his travels in Europe as a businessman. But if Widodo, or Jokowi, as he prefers to be called, is to become the next president, he will need the nomination of his party, the IDP. However, to do that he may have to beat former president Megawati Sukarnoputri, thought to be considering another tilt at the leadership. The political future is as yet uncertain.
O’Rourke adds that Indonesia has been a “huge success” in democratising over the last ten to fifteen years, but says the people running the current regime have become their own “vested interest group”.

“There’s been real stagnation in the type of policy necessary to accelerate growth and transform the economy from a poor country to a more prosperous, economically stable one,” he says.

Therefore, the environment favours long-standing exporters to Indonesia with strong existing links to industry and established local representatives, while newcomers sometimes struggle.

The protectionism reached something of a highpoint in 2010 with the creation of the Negative Investment List – known locally as the DNI – which details what sectors are open to foreign investment and how much foreign ownership is permitted. The DNI provides a first-stop checklist before would-be investors and exporters make moves to become involved in Indonesia.

There has been some debate about whether the list is in fact “ad-hoc” or fixed, but news emerged in February this year that the DNI was up for review by Jakarta’s Investment Coordinating Board. The board’s chairman, M. Chatib Basri, was quoted in the Jakarta Post saying: “We must continue to improve our investment climate and promote the image of Indonesia as an investor-friendly nation.”

Key facts: Indonesia

indonesia-2Population: 246 million
GDP: $878bn (£55bn)
GDP growth: 6.2%
Inflation: 4.2%
Market opportunities: Ports, airports, railway, life sciences, infrastructure, financial services, oil & gas, power generation, renewable energies, mining, environment, creative & media, ICT
Primary UK exports: Pulp and waste paper, machinery and equipment, organic chemicals, essential oils and perfume materials
Gateways: Jakarta’s economy is based on trading, industries (food and beverage, cigarette, textile, chemical and craft) and services (property, banking, insurance and telecommunication). Surabaya’s economy centres on services and trading industries; Bandung is well known as a centre for textile and garment manufacturing; the oil & gas, natural gas and mining industries are largely centred on Kalimantan
Market entry and start-up considerations: It is not possible for a PMA company (Indonesian companies with foreign shareholdings) or other foreign entities to import on an unrestricted basis into Indonesia. Domestic companies may only import if they obtain an import license.
Foreign companies based outside Indonesia that export to Indonesia will need to establish a relationship with a local import and distribution company.
Intellectual property rights: It is difficult to protect against product imitations. Although Indonesia subscribes to the International Convention for the Protection of Industrial Property (the Paris Union), it still has limited patent law and limited copyright protection

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