Wake up to Indonesia's investment potential
As a fellow democracy with the
world’s largest Islamic population, with 253 million people spread across an
archipelago of 17,000-18,000 islands, and an economy growing 6 per cent a year,
Indonesia is the waking giant only 800 kilometres beyond Australia’s northern
border.
With burgeoning cities in clear need
of greater infrastructure development, the time is right for Australian
institutional investors to establish a foothold in this market through vehicles
such as superannuation. A growing middle class presents tremendous opportunity
for established Australian businesses and ambitious entrepreneurs who want to
expand their operations beyond our borders into exciting frontiers.
With a GDP per capita of $US4,271
and a middle class expected to double to 140m by 2020, it is no surprise our
key competitors have awoken to the potential of this market which is expected
to overtake Australia’s GDP by 2022, on a steady path to becoming the world's
fourth biggest economy by 2040. However some Australian investors appear asleep
at the wheel, with sections of our business and investment community seemingly
indifferent to the need for an enduring two-way relationship.
Following his election victory on
September 7 it is no surprise Tony Abbott made his first overseas trip to Jakarta,
where accompanied by a delegation of 20 prominent business leaders he held
bilateral talks with Indonesian President Susilo Bambang Yudhoyono. Pushing a
message that “Australia is open for business”, the Prime Minister was keen
revive momentum toward two-way trade and investment between both nations.
Indonesia is only our 21th largest
trading partner (2.4 per cent of our total trade, or $14.6 billion in 2012),
despite being our closest neighbour and despite other nations -- Japan, China,
United Kingdom, United States, Singapore and Korea -- all having established
stronger economic relationships. Foreign direct investment might as well have
been another topic on Mr. Abbott's agenda during his discussions with Mr.
Yudhoyono, with a recent DFAT report revealing Australian businesses invested
only $6.8bn into the rapidly developing Indonesian economy in 2012 (1.33 per
cent of our total outward FDI), compared to $55.9bn with the United States in
2011.
Paul Keating made clear that
Indonesia is Australia’s most important relationship. John Howard demonstrated
our credentials as a neighbour with Australia’s tsunami assistance and aid.
While the Abbott government and our political leaders are very aware of the
strategic importance of the Australia-Indonesia relationship, the question
remains: Why don’t Australian investors see Indonesia in the same strategic way
as our political leaders? Where are our super funds and institutional
investors? Despite notable exceptions such as banks like ANZ and CBA, why are
Australian businesses and investors still reluctant to invest in this waking
giant in our midst?
A young country like Australia,
Indonesia gained independence from the Netherlands in 1949 following a
four-year struggle. Being a neighbour, what happens in Indonesian politics is
noticed by Australia’s business leaders and investors. It is an election year
in Indonesia and political events in Indonesia have helped shape Australian
investment thinking. Attitudes and perceptions have built up over decades and
the two neighbours have very different histories.
Perhaps it is time for investors to
rethink these perceptions. Australians followed Indonesian independence and
watched founding President Sukarno deposed in a 1967 military coup led by
General Suharto who ruled over a time of rapid yet uneven economic growth.
Popular dissent led to Suharto’s downfall and the birth of Indonesian democracy
in May 1998. Stories of corruption and geopolitical crises in West Papua in
1970 and East Timor in 1975 entrenched some negative views towards Indonesia.
That’s a long time ago. Knowing the
importance of Indonesia and against the prevailing trends of the time, Paul
Keating actively courted Suharto towards the end of his reign, laying the
groundwork for APEC and the East Asia Summit, which endure to this day.
A consumer driven destiny: Why Indonesia’s growing middle class means
business for Australian investorsThe immense opportunities the rapid economic rise this nation of 253 million presents for Australian business and investors are significant.
Our competitors are already beating us in the FDI game. Firstly, with demographics being destiny, Indonesia has the vast population it requires to sustain a growing economy and build a formidable consumer class. While the capital city Jakarta (population 10.1m) is the centre of economic activity, the nation’s second cities such as Surabaya (population 2.8m) have been growing at an even faster rate -- with a McKinsey report predicting an additional 72m Indonesians will be urbanised by 2030. This presents a tremendous opportunity for institutional infrastructure investment, especially for Australia’s $1.5 trillion Superannuation sector. It presents opportunities to invest in leading companies on the Jakarta Stock Exchange.
Secondly, Indonesia now has in place the framework of democratic institutions and the public policy required for sustained growth to flourish. Flourishing it is, having risen by an average 6 per cent per annum over the past decade, despite the Global Financial Crisis. The world’s sixteenth largest economy today (GDP $894bn), it is expected to leap-frog into tenth place by 2022 (GDP $2,568 trillion) and fourth place by 2040 when its GDP will be 3 to 4 times larger than Australia’s.
Thirdly, and perhaps most promisingly, Indonesia’s rapid economic growth has given rise to a large consumer class whose incomes are rising steadily from an average per capita figure of $US4,000 today. Numbering 74m as of July 2012, and expected to double to 120m by 2020, Indonesia’s consumer class are responsible for a staggering 65 per cent of all GDP growth, compared to Thailand’s 29 per cent and Malaysia’s 6 per cent.
This middle-income population is rising by an average 7m a year.
With an awakening giant on our doorstep, Indonesia our neighbor is also undoubtedly our greatest opportunity. What are we waiting for?
John Donovan is the Managing Director of AFM Investment Partners, representing Mandiri Investasi in Australia, the investment arm of Indonesia’s largest bank, Bank Mandiri. John is the founder of the annual Investing in Asia conference held by the Australian Centre for Financial Studies to promote dialogue between Australian institutional investors and regulators and Asian investment managers and regulators. In April, John is hosting the Indonesian Pension Fund Association’s first visit to Australia.
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