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Indonesia in Focus

Indonesia continues to post significant economic growth with the country’s economy baseline outlook expected to increase from 6.0 percent in 2012 to 6.4 percent this year.

14 April 2015

Indonesia in Focus

The country’s proximity to the new powerhouse economies in East Asia and South East Asia provides a huge opportunity for Indonesia to become a developed country in its own right and play a prominent role in future global trade.

With its high levels of oil and gas reserves and its ability to position itself as the next low cost option for the manufacture of goods such as clothing and footwear, companies are quickly recognising the benefits of investing in Indonesia and neighbouring regions including Vietnam and Malaysia.  

Despite such positive economic conditions, significant challenges remain and Indonesian businesses have identified labour, transport infrastructure (both sea and rail) and general regulatory reforms as critical factors to overcome in order to increase investment.  Noteworthy is the significant drop in the number of new infrastructure projects following the 1997 Asian financial crisis and a lack of adequate infrastructure is now the main constraint to Indonesia’s growth potential.

Infrastructure in itself has a very broad spectrum.  Made up of over 17,000 islands, with approximately 13,000 of those inhabited, the people of Indonesia rely heavily on effective transport infrastructure in order to obtain raw materials.  Therefore, connectivity between regions needs to be further developed to accelerate and expand economic development.  Such provision of infrastructure will help to reduce transportation and logistics costs and in turn, improve product competitiveness.

Equally, the opportunity to provide goods further afield also requires huge commitment from the maritime transport sector.  The Government is indeed responding to this and as a result, has set aside, as part of its Master Plan for Acceleration and Expansion of Indonesia’s Economy (MP3EI), US$ 12.75 billion for major transportation projects aimed at developing the country’s sea ports over the next 10 years.  The recent deregulation of the port regulatory function and operations is also providing a step in the right direction.  However, clarification on other important regulations related to acquisition of land/land use rights and taxes are still proving to be a contentious issue and continue to hamper progress.  Challenges such as these needs to be overcome sooner rather than later before port investors will put pen to paper and sign off on multi-million dollar investments.

Detailed market studies including economic analysis and investment planning must be conducted, as well as in-depth technical studies to better understand the surrounding environmental conditions and wider social impact of a proposed site development.  Specifically, harsher weather conditions such as typhoons, tropical cyclones and tsunamis places ever greater emphasis on ensuring that companies looking to invest in Indonesia effectively assess the environmental impact of their proposed infrastructure and fulfil the local regulatory requirements – in this case, the AMDAL (Analisis Mengenai Dampak Lingkungan).

The development of new infrastructure, whether it is a new port or terminal, a new rail network or an offshore oil and gas platform takes time.  Stakeholders including investors and local Government must work together to appreciate the opportunities and challenges – only then will Indonesia be able to grab the potential economic growth with both hands and ensure that the country is recognised as a significant player in the future of global trade.

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