There is a subdued mood in Jakarta right now. In a recent Ease of Doing Business survey by the British Chamber of Commerce in Indonesia, the country’s score fell by 15% to 50% and confidence in the investment climate from 69% to 31%.

GDP growth has slipped almost a percentage point from 2012: the World Bank forecasts overall growth of 5.62% for 2013 compared with 6.2% for 2012. Inflation has doubled to more than 8% and Indonesia’s financial markets and exchange rate have suffered too. With a presidential election due in 2014 bringing with it the potential for upheaval, the immediate prospects are not so good either.

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Yet this is all new. In its most recent World Investment Report for 2012, the United Nations Conference on Trade and Development rated Indonesia in its top 20 host economies for FDI alongside the BRIC countries – Brazil, Russia, India and China – and FDI regulars the US, France and the UK (with total investment inflows of $20bn). This was despite an overall decrease in developing Asia of about 7% for that year.

After the boom

Indonesia has seen a consumer boom and an influx of foreign capital. There was an estimated $7bn of Chinese investment into larger infrastructure projects such as Huadian Corporation’s electricity generators; the company invested $630m in the first phase of a power plant in Bali.

But could the country's FDI ascent be in peril? Indonesia is increasingly suspicion of overseas capital and has made more stringent rules on foreign ownership, such as in mining where rules changed in mid-2013. There are also concerns about continued corruption, which recently spread as far as Indonesia’s constitutional court when its chief justice was arrested for alleged bribery.

Stephen Williams is managing director of the Antique Wine Company, which distributes exclusive wines globally (the company once sold the most expensive bottle of wine in the world: $117,000 for a bottle of 1811 Chateau d’Yquem to a sommelier in Bali). He has outlets in Hong Kong and the Philippines as well as a headquarters in London, but says: “To operate in Indonesia, you have to be familiar with its logistical complexities.” 

But for Mr Williams’ business, the problems are outweighed by the gains. “Last year we did about £1m [$1.64m] of business to Indonesian clients,” he says. “We believe we can generate about £5m of business within two years now that we have a presence there. Emerging markets are great opportunities despite these barriers. If you can find a way to work with or through those barriers then you are ahead of your competitors in the market.”

Growth potential

This optimism may not benefit all sectors but Indonesia does still have strong domestic market growth potential (the main reason for investing in Indonesia, according to fDi Markets data) as one might expect from an Asian developing economy.

Dr Indra Darmawan, head of the education and training centre at BKPM, Indonesia’s investment promotion agency, says it is partly a question of demographics. “Half of our 240 million people are aged 29 or younger. So we have a young population which is a good sign for consumer sectors: they want everything,” he says. In line with this, the British Chamber of Commerce’s survey shows that sectors such as retail and consumer goods (as well as hotels and tourism) are still fairly bullish. Indonesia must hope that macroeconomic conditions do not impinge on its nascent domestic market.