As focus has shifted from the West to the East and from developed to emerging economies, the Asian 'tiger' economies of Hong Kong, Singapore, South Korea and Taiwan have all witnessed high levels of investor interest, while the fast pace of growth in both India and China – potential future economic superpowers – has further bolstered Asia's position on the investment map. The development of these countries has somewhat overshadowed the more modest yet still significant growth story of Indonesia.     

This looked set to change in 2011, however, when HSBC announced the launch of a new fund focused on investments in Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa, or the 'Civets'. The Civets investment fund is suggestive of the economies that the bank foresees as areas of future growth, and Indonesia's inclusion highlights the dynamic developments already under way in the country, which are increasingly strengthening its investment case.

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Stick to the masterplan

The Indonesian government’s masterplan for the acceleration and expansion of the country's economic development, dubbed MP3EI, is the latest high-profile move to bring the country back into the spotlight. Keen to distinguish itself as Asia’s next boom market, Indonesia’s new economic roadmap aims to enable it to keep pace with neighbouring high-growth economies.

Designed to transform Indonesia into a major economic power by 2025, MP3EI aims to accelerate the country’s economic growth to average 7% annually between 2011 and 2025. The committee for the acceleration and expansion of Indonesia’s economic development (KP3EI), formed in September 2011, was tasked with implementing MP3EI by developing the country’s infrastructure and economic regions.

“The government is very keen to accelerate and expand the [Indonesian] economy,” says Edib Muslim, head of the division for public communications and promotion at KP3EI. “We have achieved a buoyant growth rate of 6.5% in 2011, and [predict] 6.3% [growth] in 2012.”

Raj Kannan, managing director of south-east Asian advisory firm Tusk Advisory, says: “Indonesia is the 16th largest economy in the world based on purchasing power parity. The target of MP3EI is [that] by 2025 Indonesia will be the ninth largest economy in the world, with a GDP per capita of $15,000.”

As the fourth most populous country in the world, Indonesia’s economic gravitas is well recognised. The country holds membership in the Association of South-East Asian Nations and is the only south-east Asian member of the G-20. Indonesia has sustained a robust average GDP growth of 6% in the past three years, according to emerging markets consultant group Oxford Business Group. Nonetheless, Indonesia’s potential to achieve even more rapid growth remains constrained by key factors, which MP3EI aims to address.

Three-pronged approach

The issue of connectivity between and within the Indonesian archipelago of 17,000 islands forms a central pillar of MP3EI, which is based on three strategies. The first is focused on the development of six economic corridors, the second on the strengthening of national connectivity across the islands, and the third on the acceleration of technological as well as R&D capacity. MP3EI principally aims to combine sectoral and regional approaches to development within the six identified economic corridors, namely Sumatra, Java, Kalimantan, Sulawesi, Bali and Nusa Tenggara, and Papua and Maluku.

“We have six corridors and we will develop them through [various] strategic pillars,” says Mr Muslim. “To develop the respective corridors, we will first invest in the [human] potential, as this is the crucial growth centre. Also, there are a dynamic of interactions inside the corridors, so investments [will be] geared not only to create profit, but also to create employers and employment.”

MP3EI considers the government as the regulator and facilitator for new investments, with its role primarily focused on attracting the private sector, state-owned enterprises (SOEs) and foreign capital to increase investments in key sectors. Investments will be guided into eight areas, which are further sub-divided into 22 economic activities. These areas include tourism, palm oil, coal, food and beverages, and machinery, all of which will be geographically concentrated along the six regional corridors.

Lauded by the World Bank as a credible economic map for Indonesia, MP3EI highlights the economic sectors that each of the six corridors can develop their respective regional economies faster, through specialising in the activities that they have a comparative advantage in. “The growth centre inside the corridors [will be] specifically related to the region’s potential,” says Mr Muslim. “For example, Sumatra will capitalise on technology, as well as its palm oil and coal, [while] Kalimantan will capitalise on minerals.”

Funding pools

The formulation of MP3EI was based on a series of consultations with key stakeholders in the economy. The Indonesian government is keen to improve the country's investment climate by collaborating with business partners in both the public and private sector.

“Tusk Advisory has been a strategic adviser to the KP3EI secretariat since its inception in September 2011,” says Mr Kannan. “Our role within MP3EI is to work with the leadership of the secretariat to find ways to implement the masterplan in a manner that will achieve higher traction, in terms of infrastructure delivery on the ground, as well as the other key programmes included within [the MP3EI], namely increased human capital and reduced regulatory bottlenecks.” 

Investments worth $400bn are being targeted by MP3EI for six identified regions, with 55% of these investments envisaged to fund the productive sectors and 45% expected to bankroll the country’s infrastructure. According to the government’s report, private sector investment is targeted as the key driver, predicted to cover 51% of the total share of investments, with SOEs expected to contribute 18%. The government is expected to contribute 10% to basic infrastructure provision, with the remaining 21% provided through a mix of funds including FDI and public-private partnerships.

Strengths and weaknesses

When rating agency Standard & Poor’s raised Indonesia’s long-term foreign currency rating from BB to BB+ in 2011, it commended the government’s prudent economic management, and Indonesia’s prospects seemed bright. Nevertheless, while MP3EI highlights a proactive governmental approach to development, it also reveals Indonesia’s shortcomings.

Standard & Poor’s maintained its BB+ rating for 2012, keeping it one level below investment grade, citing Indonesia's low per capita income, its relatively high inflation and existing structural impediments as factors preventing it from attaining higher economic growth. Despite the government’s approach to addressing infrastructural issues in the country, Standard & Poor’s maintained that completing the MP3EI’s structural and institutional reforms will take a considerable length of time.

Moreover, despite the government’s pledge to improve its infrastructure provision, the implementation risks involved, including creating the necessary legal architecture and attracting sufficient private sector funds, continue to cast doubts on MP3EI’s ability to attain its goals. Yet the government remains confident that Indonesia’s unique selling points will enable it to attract sufficient levels of capital to meet the requirements of MP3EI.

“First of all we have the geography,” says Mr Muslim. “We possess the requisite space the world needs to meet its requirements, [ranging from] marines, to food security, land space and energy [reserves]. The water principle is also important. If you follow the situation in mainland China or India, for example, the UN climate change report states [there] is increasing water scarcity [there], whilst Indonesia has a water surplus.”

Mr Kannan points to Indonesia's other potential advantages, saying: “Among the intrinsic strengths of Indonesia is its young and productive population, abundant natural resources and the sheer size if its market of more than 240 million people. What MP3EI aims to do is harness these strengths and deliver the much-needed infrastructure connectivity within and between the six economic corridors, by ensuring the infrastructure projects are delivered in tandem with private sector investments in these six economic corridors."

As the world’s largest archipelago, rich in human and natural resources, Indonesia has managed to successfully establish an upward economic trajectory. But it remains to be seen whether MP3EI can help it to grow on the same scale as Asia's other emerging economies.