Indonesia: The Case For Adding An Extra “I” Into BRIC Has Never Been Stronger

Via The Financial Times, a look at Indonesia’s economic growth:

During the last decade, while the world has looked to the Bric countries to deliver growth and China and India have been the main focus of attention in Asia, Indonesia has largely slipped under the radar.

Were it not for China and India, though, Indonesia would be a stand-out performer and the focus of a frenzy of foreign direct investment. And yet, with some exceptions, foreign investment has been relatively muted. What is holding the country back?

Indonesia has a powerful economy, a large population (nearly 250m) and vast future growth potential. It has been promoted to investment grade by two of the big credit rating agencies it the past year. It has consistently achieved GDP growth of between 4.5 and 6.5 per cent a year over the last 10 years. It ranks above India and Brazil in terms of macroeconomic stability, it has a rapidly growing middle class, creating a strong domestic market, and it has an abundance of natural resources including oil and gas, coal, tin, gold and crude palm oil.

When we speak to foreign investors having cold feet about Indonesia, issues often cited include its antiquated and inefficient legal system, perceived corruption in the courts and in local and central government, poor infrastructure and inadequate power generation. Ironically, and in common with India, the fact that Indonesia is a democracy is often cited as a hindrance to foreign investment. The pace of legislative reform and liberalization, essential ingredients to attract foreign investment in most emerging markets, is slow. Key new laws and regulations are often stuck for years in parliament and can be held hostage by special interest or nationalist groups. Added to this is a recent trend towards resource nationalism and protectionism, as evidenced by laws and regulations in the mining and banking industries which limit foreign ownership.

The sectors with the highest level of risk for foreign investment are generally regarded to be mining and agriculture. The extent of the respective powers of local and central government is often unclear, causing uncertainty for foreign investors. It is not uncommon for both a mining and an agricultural concession to have been granted in respect of the same land, either through corruption or because it is sometimes difficult to prove land title in Indonesia. This has dragged foreign investors into lengthy, costly and often inconclusive litigation.

Yet despite these obstacles it would be foolish to write off the country from an investment perspective. According to a recent report by the McKinsey Global Institute, the number of consumers in Indonesia will grow from 45m today to 135m by 2030, by when Indonesia could be the 7th largest economy in the world, overtaking Germany and the UK. Some issues currently seen as obstacles to investment, such as poor infrastructure and inadequate power generation, are already becoming investment opportunities. With good professional advice and careful due diligence, many of the current obstacles facing foreign investment can at least be mitigated, if not avoided altogether.

The case for adding an extra “I” into the Bric acronym has never been stronger.

This entry was posted on Tuesday, October 16th, 2012 at 4:38 am and is filed under Indonesia.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.