Indonesia looks to have achieved a rare thing: a virtuous cycle in its economy.
A combination of key factors has created conditions ripe not just for heightened domestic demand, but also for local and international investment. That investment is improving Indonesians’ living conditions, boosting confidence and building stability – which in turn is attracting yet more investment.
Exports are rising at double-digit rates, tourist arrivals were 25 percent higher in 2017 than the previous year, and the all-important communication and information services sector has been growing at close to 10 percent, not every year but every quarter.
The fact that Indonesia came to the telecoms sector late by world standards means it has been able to leapfrog the need to install what is now largely obsolete infrastructure, and go straight to mobile.
This has led to the rise of digital startups – not just the now-famous unicorns such as Traveloka, Go-Jek and Tokopedia, but also a plethora of smaller businesses: the likes of handyman service Klik Tukang, restaurant booking app Chope, KliknKlin for laundry, and Happy Fresh for grocery delivery. Connected consumers have rapidly made technology part of every aspect of their lives; the use of electronic money has almost quadrupled in the past year.
Indonesia’s digital prowess now puts the country on track to be the biggest digital economy in Southeast Asia, with an estimated 215 million users by 2020.
The digital boom is delivering not just hot meals, transport and freshly pressed laundry to Indonesians; it’s also providing jobs. Go-Jek alone claims to have 250,000 partner drivers in the country, and competitor Grab has “hundreds of thousands”.
At the same time, the government has established special economic zones, is promoting tourism destinations beyond Bali, and is investing in hundreds of new infrastructure schemes, including key road and rail upgrades, improved electricity connections and energy projects. This year alone, infrastructure projects worth over $30 billion are being funded.
The effect of all this, alongside stable inflation, a recovery in commodities, and rising exports, is to create strong foundations on which further growth can be built.
The world is taking note. Ratings agency Standard & Poor’s in late 2017 upgraded its position on Indonesia to investment grade; on the World Bank’s Ease of Doing Business Index, Indonesia has risen 18 places in a year. The country is now ranked as the ninth-most-attractive destination in the world for foreign direct investment. And on the World Economic Forum’s Global Competitiveness Index 2017-18, Indonesia ranks 36th out of 137 countries.
Investment from the European Union in Indonesia has risen 20 percent in the past 12 months, and foreign investment in the country’s digital economy was around $4.8 billion in 2017. China’s e-commerce giant Alibaba has invested in Tokopedia; Google and JD.com have both taken a stake in Go-Jek.
The benefits of Indonesia’s development have not been evenly spread, however. The income gap between the country’s rich and poor remains significant despite narrowing slightly in recent years.
And for brands, growth has been largely sector-specific. Much of the increased consumer expenditure on technology, phone services, entertainment and travel has come from a rise in household incomes. But some of this extra spending has diverted funds that would previously have gone towards fast-moving consumer goods. The amount of money being spent on FMCG brands is still rising, but only as a result of higher prices; volume sales have been suffering.
The pressure is now on for affected brands to innovate and win back their share of householders’ wallets. No longer can they count on rising incomes floating all boats; they must engineer their own conditions for growth.
Naturally, uncertainties remain. While the vast number of young people in Indonesia is the envy of aging markets to the north and west, there is a risk that Indonesia’s demographic advantage will not yield dividends sufficiently quickly, and that the country will get old before it gets rich. There are also risks to continued growth over which Indonesia has little control: volatility in demand from China, and geopolitical tension in the region.
The market for businesses and brands is, therefore, not without challenges. But these challenges are balanced by highly exciting opportunities, and investment conditions that have global appeal.