As the Al-Kautsar Mosque broadcasts its call to prayer, the traffic on Gatot Subroto Road in Jakarta slows to a crawl. But the congestion is not a result of the mosque’s religious calls, rather the city’s creaking infrastructure, which has been unable to keep up with the rapid pace of growth in Indonesia’s capital.

Although just 10% of Indonesians own a car, long queues of traffic have become just as ubiquitous in Jakarta as the city’s many mosques. “In terms of the ease of doing business in Indonesia, the quality of infrastructure has not improved significantly,” says Himawan Hariyoga, deputy chairman for investment promotion at Indonesia’s investment coordinating board BKPM. “Just look at the traffic jams.”

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Indonesia’s GDP growth, which averaged 6.3% between 2010 and 2012 before slowing to 5.7% last year, according to the Asian Development Bank, lifted millions of Indonesians out of poverty, enabling the country to become the 16th largest economy in the world and earning it a place among the G20 countries. Although growth in Indonesia’s GDP has slowed, partly due to infrastructure and bureaucratic bottlenecks, Mr Hariyoga is confident that ongoing efforts by the government to reform the business environment mean Indonesia will remain one of the most attractive investment destinations in south-east Asia.

“Indonesia is still an extremely attractive location because of the size of its economy and the strength of its domestic consumer class,” says Mr Hariyoga. “Investors’ decisions to enter a country are influenced by its growth prospects. When they look at Indonesia’s fundamentals – 57% of its population is middle class and it currently has the highest Consumer Confidence Index rating out of all the G20 countries – businesses can rest assured that if they invest in Indonesia, they will get the market for their products and they can achieve economies of scale.”

Booming economy

Indonesia is the world’s largest archipelago and the fourth most populous country in the world, with a population of 248 million people. Although FDI has historically been attracted to Indonesia’s natural resources sector, the government has made efforts to diversify into the manufacturing, automotives and retail sectors in recent years.

Between 2003 and 2013, Indonesia’s coal, oil and natural gas sector attracted the most greenfield FDI, accounting for 10% of capital investments, according to greenfield investment database fDi Markets. Yet BKPM’s efforts in offering investment incentives to firms interested in other sectors mean the food sector, as well as financial services and the automotive original equipment manufacturing (OEM) sectors, will be prominent drivers of growth. The food and tobacco sector ranks second for attracting FDI, accounting for 8% of FDI projects between 2003 and 2013, according to fDi Markets, followed by the metals, financial services and automotives OEM sectors.

Indonesia has also worked to promote its large domestic market. “Domestic consumption has been one of the key pillars of our economy,” says Indra Darmawan, head of education and training at BKPM. “Adopting the World Bank’s definition as our yardstick, we define the middle class as those who spend between $2 and $20 [as disposable income] a day. When you consider the Indonesian population, that is about 110 million people. Thus they have a huge purchasing power.”

Indeed, consultancy McKinsey estimates that consumer spending in Indonesia could be worth $1000bn by 2030 if consumption patterns continue on their current trajectory. 

US tapering woes

Yet for all Indonesia’s achievements, some are asking whether the country has become too dependent on cheap credit from the US. When in 2013 then chairman Ben Bernanke signalled the US Federal Reserve would start tapering its $85bn-a-month bond-buying programme, Indonesia was one of the most prominent casualties. The rupiah fell significantly in response to the announcement, prompting critics to question whether Indonesia’s growth was an unsustainable short-term spurt, fuelled by cheap credit and investors seeking safe havens outside the US and EU.

“The US tapering programme has been one of the short-term challenges for us,” admits Mr Darmawan. “Over three years [before 2013], liquidity was high and capital from around the world was seeking profitable places to invest, with Indonesia being one of the top choices. When the Federal Reserve announced that it would increase the interest rate by 1%, Indonesia was really affected.”

Others are asking what impact the economic integration of the Association of South-east Asian Nations (Asean) in 2015 will have on Indonesia’s competitive edge. As south-east Asia’s largest economy, Indonesia has benefited from its large market and relatively cheap labour force. Yet while locations such as Myanmar and Laos could attract investors seeking even cheaper labour, following integration Indonesia could also find it difficult to compete with well developed smaller countries such as Singapore, whose world-class infrastructure would benefit from even greater economies of scale.

Moreover, while president Susilo Bambang Yudhoyono’s outgoing government drew up plans to improve Indonesia’s infrastructure, including the development of Jakarta’s new Mass Rapid Transit subway, concerns have been raised as to whether there will be policy continuity following the election of his successor in presidential elections this July.

Star performer

Yet local business leaders maintain that, far from being disruptive, the elections will be a boon for Indonesia’s economy. Additionally the Asean economic integration will do more to entrench Indonesia’s status as one of the region’s leading economies.

“Historically speaking, elections in Indonesia have actually boosted the economy,” says Anton Gunawan, executive vice-president and chief economist at Bank Danamon Indonesia. “Indonesia is a huge archipelago so when politicians stage an election campaign, the amount they spend on their campaign trail makes elections a big business. Additionally, the Asean integration will be more about the free movement of goods and services, and the movement of labour will still be relatively restricted. So Indonesia’s unique selling points will not be wiped out in 2015.” 

Comparing the FDI performance of Asean countries, Indonesia is second only to Vietnam in terms of attracting capital. According to fDi Markets, between 2003 and 2013 Indonesia attracted $182bn in FDI, which was 21% of greenfield FDI into the Asean region during that period, while Vietnam attracted FDI worth $241bn. Mr Gunawan remains confident that Indonesia’s macroeconomic fundamentals will enable it to remain one of Asean’s most attractive locations.

“We are cautiously optimistic when we look at Indonesia’s prospects,” says Mr Gunawan. “The elections will likely usher in a stronger leadership and investors expect a positive change. The weakening of the rupiah and the significant rise in inflation last year was due to a mix of domestic challenges, including the government’s decision to reduce its fuel subsidies and a deterioration in Indonesia’s current account deficit, as well as international challenges. While other parts of Asean, such as Thailand, are experiencing political turmoil, Indonesia is still growing and I am positive about the coming year.”