by Prema Nakra, Ph.D.

 
 
The Republic of Indonesia is the largest and most populous economy in Southeast Asia with 240 million people, making it the fourth largest country in the world. Located in the heart of the economic growth in Southeast Asia, it is a vast polyglot nation that stretches more than 5,000 kilometers across the equator and is made up of more than 17,000 islands.
 
In my first two articles in this series, I provided an overview of Indonesia and the investment opportunities that exist. In this article I discuss the country's value proposition.
 
INDONESIA'S VALUE PROPOSITION
 
Indonesia has come a long way from a poor, authoritarian country to a modern democracy with a vibrant economy. The country has undergone a political transformation since the upheaval of 1998 that saw the fall of General Suharto after 30 years of authoritarian rule and a collapse of the Rupiah. U.S. government officials, scholars on Indonesia, and human rights activists widely praise Indonesia for successfully transitioning to democracy.
 
The country's value proposition reflects its diverse and abundant natural resources, favorable demographics, sophisticated financial sector, technology infrastructure, and modern retailing infrastructure.
 
Natural Resources
 
Indonesia is endowed with diverse and abundant renewable (agriculture) and non-renewable (mining and minerals) natural resources. It is one of the largest producers of steel, natural rubber, coal, palm oil, timber, cocoa and tin. In energy and mining, Indonesia is the world's leading thermal coal exporter and home to vast deposits of precious metals such as gold, silver and copper.
 
The country also has the world's richest reservoirs of underground steam and hot water used to make geothermal power. Hundreds of volcanoes bring heat from the earth's core close to the surface, leading some scientists to estimate that Indonesia could generate more than 28,000 megawatts of power per year. Companies including India's Tata Group, Chevron Corporation, CVZ, and General Electric are eager to invest in Indonesia's geothermal potential, which stems from the same seismic forces that curse the Indonesian archipelago with volcanoes, earthquakes and tidal waves.
 
Favorable Demographics
 
Indonesia's lower-middle-income population continue to realize their consumer aspirations off the back of expanding consumer credit and rising incomes. Their GDP per capita reached $4,200 at purchasing power parity by the end of 2010. A growing middle class that is poised to reach 150 million people by 2014 is opening up the scale and scope of the consumer market.
 
More than 50% of the population is below the age of 30, is highly adaptive to new technology, and has a low dependency ratio among its workforce. In 2010, 53% of Indonesia's population lived in urban areas. It is predicted that by 2025, the population in urban areas will reach 65%. Approximately 65% of Indonesia's population of 240 million constitutes a labor force that is available at a cost that is lower than that of China and Vietnam.
 
Sophisticated Financial Sector
 
The liberalization of rules on foreign ownership allowing up to 99% ownership in the finance sector in the past decade has encouraged foreign players to enter the market with 10 majority foreign owned banks including HSBC, ANZ and Rabobank as well as 28 foreign joint venture banks. Indonesia was the pioneer in commercial micro finance in Southeast Asia. The state-owned bank BRI began micro lending facilities in 1978 and had outstanding micro loans valued at $7.4 billion at the end of 2010.
 
The consumer lending side is where Shariah banks have been the most successful in the past. Consumer financing made up 32.4% of all the Shariah compliant loans issued in 2010, according to Bank Indonesia. Auto financing, in particular, is increasingly popular with approximately 80% of all car purchases in Indonesia being made through loans.
 
Technology Infrastructure
 
The Indonesian government has targeted the development of the National Broadband Network for the period 2010-2015. This is in line with the 2009 World Bank study that states that for developing countries, every 10% increase in broadband penetration can enhance economic growth by 1.38%. Currently, except for Maluku and Papua, all major cities in Java and other main islands have been connected by fiber-optic network.
 
Modern Retailing Sector
 
Indonesia's modern retail sector holds huge potential for future growth, particularly in the hypermarket sector as well as department stores and specialty outlets. Supermarkets have appeared in major urban centers in Indonesia during the past three decades. At the onset of the liberalization of the retail sector in 1998, foreign supermarket operations began entering the country, sparking a fierce competition with local operators.
 
Since 1998, foreign companies have been allowed to enter Indonesia's retailing sector. Modern retailers including French multinational retailer Carrefour, Dairy Farm Group, Makro, Matahari, Ranch Market, Lottemart, Sogo and Food Hall are expanding rapidly. The modern retail sector now accounts for approximately 40% of the sector's sales. In Jakarta, at the center of the capital, the huge Grand Indonesia mall opened in 2007 and expanded during the global downturn, adding theme areas with mockups of New York, Japan, the Arabian Peninsula and Paris, complete with a miniature spinning Moulin Rouge windmill.
 
While Indonesia offers an attractive value proposition, it has not reached its full potential due to significant non-tariff barriers. These barriers can be classified as regulatory, environmental and operational barriers. I will discuss these barriers in more detail in my next two articles. ( Vivian )12 Dec,2012

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