Article

By: Rod Morehouse, Austrade Senior Trade Commissioner, Jakarta
Date: 1 November 2006

James Castle of Castle Asia, one of the most influential and knowledgeable observers of Indonesia, believes, “ the next twelve months are the crucial moment for the SBY Government and no doubt Indonesia.  The road forks with good strategic, technical and economic policy decisions will to lead a period of unprecedented growth and prosperity.

Castle’s observation is spot on and failure is not a condition any of us, Indonesians or foreigners alike, want to consider.

The Government is well aware of the opportunities that it faces, and the risks.  But a bit like turning one of the world’s great super tankers, it all takes time, trust and a fair degree of patience as, like the super tankers, Indonesia has grown accustomed to the course it has been on these past years.

To help steer the economy to new directions the SBY Government is forging forward on several fronts simultaneously.

A new taxation bill has been submitted to the Congress following the appointment earlier in the year of Sri Mulyani as Minister of Finance.  One of her first actions was to replace the Taxation Commissioner so that the new bill could be developed.  Most thought she would have been unsuccessful in this but, without significant headlines or comments aboard, she was successful in her endeavours – a true step forward as the tiller of our super tanker moved a degree or so.

A rethink of Indonesia’s outdated manpower or labour laws also occurred.  New laws were drafted demonstrating the SBY Government’s preparedness to take on difficult issues – albeit in a deliberate studies manner aimed at achieving consensus where possible.

The draft laws are receiving criticism in the Congress and most observers had anticipated this.  However the Government’s hand is still on the tiller and change, perhaps in a modified form, is anticipated.

Foreign investment laws are also being revised.  Two key areas of improvement seem to be the proposed decision to apply equal treatment in law (and hopefully in practise) to foreign investments as it applies to domestic, and the reduction in the number of restricted areas a foreigner can invest in.

And infrastructure development issues are being carefully examined by the new Ministry for the Coordination of the National Economy, Dr Boediono.  Already some change has been announced such as the Government’s willingness to look at letters of comfort to foreign financers concerned about their ability to predict returns on investments.  Local lands acquisition, always a thorny issue,  is also being addressed.

The Government will be mounting an international conferences on Infrastructure later in November this year where it is hoped several more initiatives will be announced and truly marketable projects presented.

All in all, these are major measures which, once fully implemented, will help shape Indonesia’s economic future.  But they still have to be passed by Congress where the Government is in the minority and, once passed, they need to be fully and consistently implemented.

In the interim, while pressure is being exerted on the tiller of change, the domestic economy is starting to pick up from the economic shock that occurred last October when fuel subsidies were significantly reduced.

Monthly inflation rates are falling from  a November 2005 high of 18%.  Interest rates are starting to be clawed back to 11.75% and economic growth of 5.8% to 6.0% is anticipated for calendar year 2006.

Over current indications growth of 6.3% for 2007, due principally to planned increase Government spending by both national and regional agreements of approximately 8% or Rp746.5 trillion seems realistic.

If FDI and infrastructure investment back off as a result of the changes started, economic growth could be more substantial potential in the future.  But a degree of healthy scepticism by foreign investors and political time lags are likely to conspired to delay significant new growth for the immediate future.

Looking through the crystal ball therefore one can say that further considerations and fine tuning in 2007 still need to occur with our super tanker expected to be pointing in a more proactive direction by 2008.  Put another way, 2007 is the year Australian investors and exporters need to be firmly positioning themselves in this market if they wish to be enjoying the potential rewards that are expected to be generated from 2008 on.

Can it all go wrong?  Yes.

Tsunamis, earthquakes, avian flu and other equally negative issues confront Indonesia and its Government daily; monthly, annually.  But Australian business with Indonesian grew last year in spite of all the obstacles placed in its path.  The commercial relationship between the two countries is strong and standing up to the tests of time extremely well.

The nation’s total imports dropped slightly in 2005 whilst our exports to Indonesia grew by 2%.  Perhaps more importantly our office saw more and more Australian companies express interest in this market than they had done so in the past 8 years.   There is a change occurring,  albeit quietly and cautiously.

Our commodity exports are holding up well overall.  Wheat, live cattle, cotton, dairy and meat exports, flour and food and beverage.  Automotive parts and components suffered due to the negative effects on automotive sales following the substantial reduction in of domestic fuel subsidies last October but fashion and services (banking, legal, accounting, engineering and financial) are continued to be prospect.  Building and construction services boomed as more and more cranes appeared on Indonesian skylines and the country has now become Australia’s 7th largest market for this sector.

With a market where there are more than 22 million people capable of spending at least US$1500  month on food and non essentials,  lifestyle related products and services are else in high demand.  This is bigger purchasing power than the whole of Australia and Singapore put together and is why we will be targeting this sector more aggressively from March next year when we launch our Australia Living Expo in Jakarta!

My personal advice.  This is not a market for the faint hearted.  It can be difficult.  It takes time to research and develop and most importantly you must have the right connections But with half of the population under 25 years of age it is open to new products, new brands, new technologies and new concepts.  From Australia we have a geography advantage we can exploit.

But you have to look passed the mornings’ headlines and visit the market to determine whether or not your own firm has what it takes to be successful here.  And we want to help you make it.  So talk to us about giving it a shot.  Last year over 400 companies did and they all making successful business today.

Jump onto this super tanker today and throughout 2007, if you wish to be aboard when it changes its direction and starts picking up pace.  Next year, when everyone else is keen to jump aboard, the cost of your entry may have become too expensive.

Indonesia, the third partner in the trilogy of abnormal growth ad potential along with China and India – but not yet as well understood and known.