Indonesia back on investors' radar screen

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.