Indonesia: beyond the change, stability and opportunity

The world’s attention has been focussed on the drama and romance of Joko Widodo’s journey to president, but the transition is also another chapter in the evolution of Indonesia into a major economy.

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Source: Unleashing Indonesia's Potential (McKinsey Global Institute Report 2012).

Indonesia’s new president, Joko Widodo, was sworn in last week to confront what many outside Indonesia perceive as a period of uncertainty and political brinkmanship.

"I think we should really step back and appreciate an amazing demonstration of stability."
Joseph Abraham, President Director ANZ Indonesia

I agree – but not for the reasons many outside Indonesia may think. For me, this uncertainty and horse trading reflects Indonesia’s growing maturity as a democracy and indeed reinforces what I believe is the central and fundamental point we should appreciate about this nation: stability.

Just 15 years ago Indonesia was under autocratic military rule. This year Indonesia successfully conducted a peaceful election including 240 million people.

A complete outsider has defeated a member of the incumbent political elite, the result has been challenged in the Constitutional Court and the result upheld.

The military and security elements have remained apolitical and a two-term ex-military General President has stepped down after reaching the end of the constitutionally mandated maximum term to hand over power to the new President.

One has to just look at neighbouring Thailand or to Egypt to see what could have happened. I think we should really step back and appreciate an amazing demonstration of stability.

Interestingly, not many are aware the Indonesian economy, over the last 10 years, has had the second most stable growth rate in the world - after Australia and despite the Global Financial Crisis and other external impacts.

Indonesia’s reliance on domestic consumption (56 per cent of GDP) and size combined with the rising levels of income, consumer confidence and consumption has insulated it from some of these shocks.

There is a huge, complex transformation going on as Indonesia emerges in the world. In a decade, Indonesia will have the global and economic clout of India. It is then wholly understandable Indonesians want to be recognised for their stature in the world. What some would see as 'nationalism' I would say is rather this emerging sense of a truly significant nation.

In all democracies, the period after an election is a period for negotiation. The parties make large claims. This is something Pak Jokowi must deal with and I am optimistic he will. The president has come through the era of decentralised government in Indonesia and this brings both pluses and minuses. But it means he is comfortable negotiating.

I would also argue there is opportunity in this period of negotiation. Pak Jokowi has shown an ability to adjust and adapt to the situation. And in emerging market democracies you tend to find good policy can happen in a difficult situation.

At the moment everyone is aware of a certain fragility stemming from monetary policy in the US and the cost of Indonesia’s fuel subsidies. There’s a general awareness the fuel subsidy is something that needs to be sorted out.

That is a positive: now is the time for action and most people realise this has got to be done. I’m sure there will be noise. But it is still a good environment for good policy making.

The fuel subsidy is directly connected with what is Indonesia’s great challenge, infrastructure. According to the World Bank, 20 per cent of GDP  is spent on fuel subsidies and ironically the fuel subsidies disproportionately benefit the car owning affluent. These subsidies are starving the country of the investment needed to kick-start the economy.

Indonesia’s poor infrastructure is reflected in the high cost of logistics. The cost of logistics is about 27 per cent of the GDP whereas it is probably half that in some other neighbouring countries and even lower in, say, Singapore.

If Indonesia is to reach its potential as a manufacturing hub, as a transport hub or even – as Pak Jokowi has spoken – a maritime axis, all of this requires infrastructure. This is definitely the area where money has to be spent, both sea and airports, the roads to connect them and then, of course, power, electricity. These are the key areas.

Along with fuel subsidies, another key sector for reform is agriculture. Agriculture is a huge opportunity for Indonesia but the agricultural sector is very inefficient. Agriculture employs 35 per cent of the population but produces just 15 per cent of GDP. Indonesia is already a major player in global agriculture but it could be much bigger.

These are policy challenges but the huge opportunity Indonesia has is its demographic dividend, the young, growing population. To realise that, investment in health and education is needed.

Again I see positive signs in Pak Jokowi’s history as Governor of Solo and Jakarta. The Mass Rapid Transit (MRT) in Jakarta has been talked about for years but in the last two years of his term as mayor we’ve seen excavations begin.

The improvement of the flood barriers in Jakarta is another example of visible actions taking place. It may be chaotic but you can see implementation happening.

One of the chapters of the Indonesia story that is often overlooked is the nation has very good technocrats. I have a lot of faith in their abilities. Whether they are in health, education or industry, I believe they will deal with their challenge. And that means, for countries like Australia, opportunities will emerge.

Pak Jokowi has been a very strong believer in meritocracy. He has appointed non-muslims, women, a diverse range of people, and this shows he is not beholden to particular groups.

In some ways Australia is a bit late to the realisation of Indonesia’s potential. The headlines still tend to be dominated by the same themes of boats, Bali or beef. The emergence of Indonesia as a stable political and economic opportunity is often overlooked. But Japan and Korea are already in Indonesia. In three years Japan has gone from Indonesia’s fifth biggest to largest foreign investor.

Australia’s brand is well regarded in terms of governance, in terms of quality, in terms of delivery. Fortunately we have found in building up the ANZ brand in Indonesia there is very positive recognition and feeling towards the brand and that’s something reflected in the Indonesian feeling towards Australian products and services and education quality as well. It is often mentioned that many Indonesian leaders have been educated in Australia and it does create goodwill towards Australia.

I have been in Indonesia for six years and in that period the world has recognised Indonesia: both its scale and size and its economic potential. Moreover, Indonesia has recognised its own increasing political and economic clout.

There is a growing sense of Indonesia’s place in the world. It is the only ASEAN member of the G20. It represents almost 40 per cent of the ASEAN economy and is bigger than Thailand and Malaysia combined. 

India and China have a much higher visibility on the Australian business radar but I believe Indonesia offers an equal level of opportunity which Australian business needs to capitalise on - I’m pleased to say ANZ has led the way and in the space of six years has established itself as one of the leading international banks in Indonesia. Other Australian business can do the same.

Over the next 15 years Indonesia will become one of the top 10 economies in the world. This needs to be recognised and the opportunity capitalised on now: not being in Indonesia will, in another 10 years, be viewed as a strategic opportunity missed.

Joseph Abraham is President Director ANZ Indonesia.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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