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Indonesia: An Emerging Phenomenon

World Cement,


Remarkable or Incredible?

As many countries in the Eurozone struggle to tackle overwhelming debt problems, they must stand in awe of China, India and Indonesia, the only members of the G20 to have recorded positive growth during the global economic crisis. More remarkable is that the economy of Indonesia, a country spread across 17 500 islands, with a population of over 220 million, and described by commentators as ‘Asia’s latest emerging star’, grew at the fastest rate in over a year during the first quarter of this year as low interest rates boosted consumer spending and exports and investments recovered. In fact, Indonesia’s exports, which are said to account for 29% of GDP, surged 54% to US$ 35.4 billion in the first quarter of 2010 from US$ 23.03 billion a year earlier

Is “Remarkable Indonesia” the new “Incredible India” for investors?’ asks American technology journalist and author, Sarah Lacy, in her latest article for TechCrunch, a weblog dedicated to profiling and reviewing new internet products and companies. Is she right? Very likely, because even back in September 2009, the business world recognized that the strongest stock market in the Asia-Pacific region in global terms was not China, as one would have expected, but Indonesia.

Arfan Karniody who helps to manage PT Batavia Prosperindo Asset Management in Jakarta is also upbeat. “ Just when other economies are beginning to recover, Indonesia’s economy is already showing signs of expansion. It shouldn’t take long before growth once again reaches its highest level since the 1998 financial crisis.” Rudyanto Somawihardja, president director of PT Sinar Mitra Sepaden Finance, a financing company in Jakarta, supports this view: “A more and more positive story is coming from Indonesia. Car sales are rising, cement sales are picking up, signaling an increase in purchasing power.” Sinar Mitra predicts that revenue will double to 3.7 trillion rupiah this year from 1.7 trillion rupiah in 2009.

Infrastructure Improvement

Readers will remember the infamous earthquake and tsunami in December 2004 that killed one third of PT Lafarge Cement Indonesia’s workforce and two thirds of the company’s cement plant in Aceh, as well as devastating the west coast of the region. Since then, the company has invested US$ 300 million in rehabilitating the plant, and this year production is expected to reach 1.6 million t, i.e. 20% higher than before the tsunami struck. It has also built a 30 MW coal-fired power plant to meet the power requirements of the company’s facilities. The revitalised plant will help to meet part of the country’s cement requirements. The Indonesian cement industry has been expanding by some 7 to 8% per annum, but to keep pace with growing demand it will need to increase capacity from the current 45 million tpa to almost 60 million t by 2015. This has stimulated Holcim’s plans to invest US$ 450 million in building a new 1.6 million tpa plant in the eastern part of the main island of Java near the city of Tuban. As Holcim’s existing cement plants are situated in west and central Java, the new facility will help optimise logistics and open up cost efficient markets in East Java, Kalimantan, and the country’s eastern islands. The new operation will include open sea loading and unloading facilities.

“ Just when other economies are beginning to recover, Indonesia’s economy is already showing signs of expansion. It shouldn’t take long before growth once again reaches its highest level since the 1998 financial crisis.”

Improving logistics and infrastructure in Indonesia are two major challenges, among many others, that the government faces. A typical problem is highlighted in an article in the April issue of World Coal, in which it describes how Indonesia’s main coal-producing islands of Kalimantan, Sulawesi and Sumatra lack industrial infrastructure, in part because of an historical lack of investment. Sumatra, for example, has few road links to its prime mining areas and limited navigable rivers, while much of Kalimantan has poor roads. Natural harbours are few and far between. But help is on the way! President Susilo Bambang Yudhoyono, who won re-election for a second term last year, has pledged to double spending on roads and airports to US$ 140 billion over the next five years as he aims to deliver average economic growth of 6.6% over the remainder of his term, ending in 2014. An official from Indonesia’s state-owned Enterprise Ministry is reported to have said that the total capital expenditure for ports and airports will be US$ 1.1 billion in 2010. This will be disbursed for projects at 66 ports and 25 airports around the country.

Investment Challenges

At a recent forum in Singapore, Gita Wirjawan, chairman of the Investment Coordination Board of Indonesia confirmed that southeast Asia’s largest economy plans to deregulate its property industry by the end of the first half of the year. He expects investments to come from Indonesia’s neighbours, with the country targeting the Middle East, China and India. As he says, “Those are the guys who are hungry for investments in Indonesia. The English, the Europeans and the Americans are the toughest bunch because of what they’ve gone through in the last 15 months and they see Indonesia as a basket case. It’s off their radar”. As if to reinforce Wirjawan's comments, in February 2010, Hong Kong's Prosperity International Holdings reported that it plans to invest up to US$ 1 billion in Indonesia's coal, steel and cement industries and to create up to 5000 jobs. The Group is known to be interested in the country's rich natural resources and big market, and has said it could invest in cement especially where there are currently no cement plants and demand is rising fast, such as in East Kalimantan, Maluku and Papua. Prosperity chairman David BK Wong confirmed that the Prosperity Group is looking for further investment opportunities and suggesting that the government provide attractive incentives to encouragemore investment.

Back to Sarah Lacy, who notes that although there is a web audience of around 30 to 40 million people in Indonesia, not including the surging mobile web, she finds it curious how little venture capital is going after this market, given that in the first quarter of this year nearly US$ 1 billion in US-start up funding flowed to India, China and Israel, with each country reporting surges in capital from 20% to more than 100% over the last year. By contrast, South Africa, India and China are rapidly expanding mobile and web services in Indonesia. This leads Lacy to ask, “In this age of globalization and outsourcing, how many markets this big have so few multinational jobs driving up employment and developer costs?”

Indonesia remains the world’s largest exporter of steam coal; it has the greatest proven reserves of natural gas in the Asia-Pacific region; it is the major producer of palm oil, and has huge resources of copper, nickel and gold.  On the other hand it has had to deal with a succession of territorial/breakaway problems involving East Timor, Aceh, Papua/Irian, as well as racial and religious tensions, and the rise of fundamentalism. Nevertheless, as MoneyWeek points out, Indonesia is becoming more stable socially, especially as President Susilo Bambang Yudhoyono secured 60% of the total vote last year; affirmation that he is the right person to be in charge. It is no secret that foreign investors have been discouraged by the dead weight of bureaucracy, a corrupt legal system, and poor infrastructure system. However, as in other Asian countries, the middle class is expanding rapidly. The proportion of Indonesians living in cities has doubled since 1975 and is expected to double again by 2025, which means that there is plenty of potential for domestic growth, especially with consumer spending growing at 10% per year. This scenario is attracting the interest of foreign companies that are eager to acquire coal deposits, expand production of palm oil and buy into the supply of consumer goods. With the economy in sound shape and a president with the power to deal with Islamic militancy and corruption, and committed to improving the efficiency of the economy by selling stakes in state-owned enterprises to private business, Indonesia will continue to be truly  ‘remarkable’ and ‘incredible’.


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