State of the market
Indonesia has the largest economy in South-East Asia. Over the past five years it has enjoyed average annual Gross Domestic Product (GDP) of six percent, and the World Bank predicts that may reach 6.4 percent in 2013. Recent reforms from President Susilo Bambang Yudhoyono may in the longer term deliver GDP of seven percent – and if they do, Indonesia could be the world’s seventh-largest economy by 2025.

The archipelago benefits from an abundance of natural resources, a large and young population, and a strategic location straddling the sea-lanes between trading markets India and China. Domestic consumption is strong, as is foreign direct investment, and this helped Indonesia become one of a handful of G20 members to record some economic growth during the global financial crises of 2008 and 2009. In 2012 it was placed 25th out of 139 countries in the World Economic Forum rankings of macroeconomic stability – in 2007 it was 89th.

Reports suggest political corruption is rife, and parliamentary and presidential elections set for 2014 are a distraction from economic efforts. Inflation is high for the region, 4.57 percent in January 2013, and the rupiah continues to depreciate at close to half a percent a month against the US dollar.

Strengths 
Indonesia is the world’s largest producer and exporter of palm oil, and the second-largest producer of cocoa and tin. It has extensive reserves of nickel and bauxite, and large reserves of crude oil and natural gas. Mining, oil, and gas account for 11 percent of the country’s GDP before adjustments for inflation.

Consumers are the biggest driver of growth. In a population of 250 million, half are under 30, and sales of cars, motorbikes, smartphones and computers have been impressive. In the automotive sector, sales were up 25 percent in 2012, and total spend on IT reached US$9.2bn in 2010 – the highest in South-East Asia. Retail sales excluding food are expected to grow 10 percent a year from 2011 to 2015, says the Economist Intelligence Unit.

In 2011, rating agencies Fitch and Moody’s returned Indonesia to ‘investment’ level for the first time since the Asian financial crisis. Moody’s said the country’s economic strength was built on “investment spending, improved prospects for infrastructure development following key policy reforms, and a well-managed financial system”.

Weaknesses 
The business environment in Indonesia is challenging – despite high expectations for the region and growing interest from key trading partners Japan, Singapore and the US. Inflexible labor laws and corruption contribute to the World Bank ranking Indonesia 128 out of 183 for ease of doing business. Logistics costs in Indonesia are among the highest in the world, with cement manufacturer Semen Padang claiming they account for 40 percent of their sale prices.

The World Bank marks infrastructure as a barrier to growth, with inefficient connections between islands hitting the internal economy and exports. Even though US$650m has already been invested in infrastructure, it is not enough in this booming consumer-led economy.

Sectors to watch
Indonesia has about 40 percent of the world’s geothermal resources, but less than 4 percent is harnessed to produce power. A project funded by the International Bank for Reconstruction and Development is spending US$175m to generate 150MW from this natural resource. That’s a small fraction of the total potential, and the power is very clean at about an eighth of the carbon cost of coal. The project will help a government-owned corporation develop geothermal power in two fields on the islands of Sumatra and Sulawesi. If fields on other islands are added to the project, this will help spread economic activity away from the commercial center of Jakarta and increase stability.

Local players
Poor infrastructure and high costs have hindered local providers of logistics and deterred external organizations, but the government is stepping in with its Master Plan for Acceleration and Expansion of Indonesian Economic Development (MP3EI).

This program aims to strengthen connections on and between islands – and with other countries – by expanding old ports and building new ones, improving port management and laying train track. The private sector will add financial support and help develop and run the improved infrastructure. Six islands/areas are targeted for development: Sumatra, Java, Kalimantan, Sulawesi, Bali/Nusa Tenggara, and Papua/Maluku.

The final phase will grow Indonesia’s science and technology sectors in support of the main goal of making goods and people more mobile.

Source: DHL