Indonesia back on investors' radar screen

Michael Vatikiotis, The Straits Times, Asia News Network, Singapore

The fact that foreign investment is coming back to Indonesia and its economy is showing real signs of recovery is not just good news for Southeast Asia's largest economy - it is excellent news for the region as a whole.

For Indonesia is as important to Southeast Asia's future as China is. If Indonesia prospers, the rest of the region prospers.

Investment in the first quarter of this year grew nearly 15 per cent from a year earlier, according to official statistics, whereas exports rose 13 per cent. Local economists say there is a sense of optimism that the government's 5.4 per cent growth target for the year is achievable and that Indonesia's growth will no longer rely on domestic consumption.

As much as Thailand and Malaysia would like to see their economies as pivotal to the region, they are not. Indonesia's vast market of almost 220 million people, its natural resources and demand for infrastructure make it a far more attractive destination for foreign direct investment.

With sustained stability and security, Indonesia's economy becomes a wellspring of opportunity for neighbouring states.

Singapore stands to gain from offering financial and other services. Malaysian companies can find room to grow beyond the confines of a rather small domestic market. In Thailand, large multinationals like Charoen Pokphand Group can apply proven techniques of advanced agronomy and animal husbandry in a sizable market that is far more friendly than China.

MUCH of the angst that China's rise has generated in the region has been felt more acutely because Indonesia was missing in action.

Foreign investment that was fleeing the region to China was propelled out of Southeast Asia at a faster rate because Indonesia's cheap labour pool was just not attractive enough for investors worried about anti-government riots, Islamic extremism and terrorist attacks.

The first sign of a sea change came with the election of Dr Susilo Bambang Yudhoyono as President last year. The region's overseas Chinese community felt that Indonesia was a safe place to do business again. Some of the estimated US$50 billion (S$82 billion) in funds parked offshore by Indonesia's ethnic Chinese community also started coming back.

Malaysian and Singaporean corporate players were early-bird investors. Some, like Singapore's Cycle & Carriage and Malaysia's Guthries, placed bets even before the political situations stabilised. Malaysia's YTL Corporation invested in Indonesia's power sector at a time when all the big international players were dumping their stakes.

But the advantage regional players have had will soon erode if the big multinationals feel that it is safe to come back to Indonesia.

Key to making this happen will be the resolution of high- profile disputes with major multinationals and, more generally, fair and reliable legal protection for investors. There are signs that this is already happening.

Economics Minister Aburizal Bakrie has said the government is close to resolving disputes with Exxon Mobil Corp and Mexican cement producer CemexSA.

The government also wants to reach an out-of-court settlement over a US$133 million civil suit filed against Newmont Mining Corp for alleged pollution in eastern Indonesia.

If the global business community senses a safer legal environment in Indonesia, there will be an avalanche of investment. The government has advertised the need for US$150 billion in infrastructure alone.

Therefore, regional players should position themselves as reliable partners for multinationals going into Indonesia. Regional corporate players must also detach themselves completely from the narrow-minded national mindset that has held the creation of an effective single market in Asean.

They must lobby their governments to enhance bilateral ties with Indonesia and not let petty squabbles and political issues stand in the way. They must see Indonesia, as they see China, as an economic lodestone.

IT is also incumbent on Indonesians to embrace the region and shed their tendency to be inward looking and parochial.

As the conditions for investment improve, more private-sector players should go out and look for business rather than wait for business to come their way. It would be good to see more private equity deals and corporate tie-ups fashioned by Indonesian brokers to build confidence in the local business community.

Right now, a slew of corruption scandals is reinforcing the global view that Indonesia is one of the most corrupt places to do business.

Much therefore hinges on the government's ability to crack down on corruption. Despite the rosy investment figures, Indonesia is ranked by Transparency International as the fifth most corrupt place in the world to do business.

The writer is a visiting research fellow at the Institute of Southeast Asian Studies.