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Potential and risks of investing in Indonesia

Posted 25.04. 2014 by Michal Wasserbauer / Last update on 6.04. 2017

Potential and risks of investing in Indonesia Review by Michal Wasserbauer on 25. 4. 2014 Company Registration in Indonesia, Market Research in Indonesia, Work Permit in Indonesia, Product Registration in Indonesia, Local Partner Selection in Indonesia, Trade Mission in Indonesia, Company Formation in Indonesia, Company Establishment in Indonesia, Company Set Up in Indonesia, Payroll Outsourcing in Indonesia, Tax Reporting in Indonesia, Medical Product Registration in Indonesia, Medical Device Registration in Indonesia, Cosmetic Registration in Indonesia, Food Supplement Registration in Indonesia.
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Indonesia is an attractive destination for investment because it has a large market, stability, relatively low labor costs and the availability of raw materials.

 There are many investors who have invested in Indonesia, just based on the factors of low labor cost and  raw materials availability.  They make Indonesia a location for intensive activity by using local distributors and partners, while still making strategic decisions in other countries like Mexico and China.

Indonesia is considered as “Asia’s next big opportunity,” as its fast-growing economy (up 6.2% last year, forecast to grow 6.8% in 2013) and favorable demographics. Over 60 per cent of the population is between 20-65, which gives the country a large bank of earners and not too many old people for workers to support.

Recently, a business model that is growing in Indonesia is one not limited to contracts or consignment manufacturing plans. Instead,  development has been focused on a capital-intensive business model that does not rely solely on Indonesian labor in some industries such as consumer goods, cosmetics, automotive and components. Today many plans involve joint ventures with local representation in Indonesia in making business decisions such as investments, determining target markets, making capital expenditures, financing and many more.

Oil and gas sector

Oil and gas resources are estimated about 87.22 billion barrels and 594.43 TSCF spread throughout Indonesia, making the country an attractive investment destination in the oil and gas sector. Geologically, Indonesia still has the great potential availability of hydrocarbon resources. The government’s plan to maintain oil production at a rate of 1 million barrels per day will certainly provide great investment opportunities in the upstream oil and gas sector.

The success ratio of exploration activities on average reached 38%, while the success of the well bet (wild cat) average was higher than 10%. Among existing locations of exploration sites are those around the islands of Sulawesi Offshore, Nusa Tenggara Offshore, Halmahera and Maluku, and Papua Offshore.

Non-Oil and Gas Sectors

National investment growth of the non-oil sector is predicted to continue being driven by the manufacturing sector. Manufacturing outperformed the other three sectors, namely plantations, mining and services. This will encourage more Indonesian suppliers to support the manufacturing sector. Manufacturing investment value is estimated to reach Rp. 225 trillion or 50% of the estimated total investment of Rp 450 trillion. Currently, manufacturing investment is longer centers on labor-intensive industries, but rather on capital intensive industry. Investments are flowing into the automotive sector, steel, and chemicals. The investment in labor-intensive industries such as textiles and footwear are predicted to be low. A ban on the export of raw mineral will continue to fuel the surge in manufacturing investment.

Property

As a 4th most populous country in the world. Indonesia definitely requires a rapid development to fullfill demand for living place, workplace and entertainment. These opportunity are bundled into the Property develompment area. Which has saw a rapid develompment in the past few years and already predicted as one of promising investment form in Indonesia. Indonesia’s residential property price index (14 major cities) rose by 7.88% during the year to end-Q2 2014. Although foreign property ownership is not allowed in Indonesia, there are several ways which foreigners can consider like buying property through PMA, Local PT or buy buying shelf company in Indonesia.

Transportation

Transportation sector in Indonesia is among promising investment sectors which foreigners. Since Indonesians nowadays are among the most mobile society in the world. However, the high demand of transportation in Indonesia are still lack from a proper transportation mode. This transportation opprtunities ranges from Land mode transportation such as Railway Road, Bus mode, MRT. And the most promising of all is Airlines business since Indonesia has been a fastes-growing market for airlines and still lack of airlines competition inside. Not to mention Indonesia nature as a vas archipelago country which still have many places to explore.

Internet and Telecommunications

Following the global rapid current of Telecommunication and Internet technology which also made their impact to Indonesia. Indonesian people is now among the most Internet-reliance in the world. They are also amog the most connected society. Indonesia has been flooded with the rapid development of IT, Telco and Internet technologies over the last decade particularly from outside such as US and China. This circumstances has made Indonesians nowadays are highly dependent to Telecommunication and Internet in their daily activities. The opportunities lies here is that Indonesian still some steps behind in regards to Internet speeds and Telco infrastructure compared to other negighboring countries like Singapore and Malaysia. Indonesia still needs a big improvement through investment for this sector. Until recently, there weren’t any giant internet companies coming out of Indonesia, but that looks to be changing, as Japan’s SoftBank and India’s Sequoia Capital recently invested a whopping US$100 million in Indonesia’s online marketplace website Tokopedia. It’s a big bet, to say the least. The announcement came immediately after the inauguration ceremony of the country’s new president, Joko “Jokowi” Widodo, who has promised to make his nation friendlier to foreign investors.

Renewable Energy Sector

Indonesia is one of large energy consumer in the world. And now has become Asia’s largest emitter for greenhouse gasses. And given it’s enormous populations and vast region. Indonesia still facing energy crisis particularly in remote area and outside Java. This maybe because indonesia still relied on conventional power plant such as Coal, Diesel, Steam. Some already use Water plant as well but still not maximized. When there’s many other environtment-frendly and renewable options like Solar panel plant and Windmill which is very suitable considering Indonesian geographic as Tropical country and have long coastlines. Currently there are no single solar and windmill plant in Indonesia. Hence There’s a big opportunity for Investment to bring this technology to be applied by Indonesia. Which will lead to solve Indonesian energy crisis now and in the future.

Medical sector

Indonesia seeks to continuously improve health sector development by improving the quality of the  infrastructure so that the healthcare industry will continue to grow, especially with foreign investment. Indonesia has more than 222 manufacturers of medical equipment and 90% are SMEs, according to the Joint Health Tools and Laboratory Indonesia. To harness the potential of the Indonesian health industry, cooperation must be enhances at the level of government to government and and business to business.  The Ministry of Health invites foreign investors to enter into the health sector in order to support the development of the health sector, especially medical equipment products.

Pharmacy industry

The Indonesian pharmaceutical market growth is higher than other ASEAN countries. The pharmaceutical industry market in Indonesia is driven by the growing population aged 65 years and older and also by Social Security (Social Security System). Currently there are approximately 208 pharmaceutical companies in Indonesia

Investments this year are expected to reach around 300 trillion. Investment opportunities in the country are still very promising. Previous data from the Pharmaceutical Association stated that national pharmaceutical industry sales could reach about US$4.9 billion. Based on contributions, multinational companies expected to make up about 23-24% of the US$4.9 billion. The Indonesian pharmaceutical industry market share is estimated at about or 0.4-0.5% of the world market share,  which reached US$800 billion.

The potential market in Indonesia is 243.7 million people with per capita expenditure on health amounting to US$108 per year (2014 figure). Meanwhile, Indonesia imports medical equipment amounting to US$748 million annually and has the potential to import  US$1.7 billion.

Food industry

Prospects for the food and beverage industry, as well as retail trade, seem difficult because trends change lifestyles and the productive age group, as well as the middle class, is increasing as is the average income. Finally, the advertising media industry is still stretched thin, because it is supported by additional ad revenue from the elections.

Taking into account the above overview, investors are expected to be more careful in negotiating the direction of  stock market movement. To that end, investors should remain focused on stocks of their prospective industry for long-term investment and not easily be swayed by short-term turmoil.

 

Investment risks in Indonesia

In addition to holding huge investment potential, Indonesia also has investment risks that need to be calculated for potential investors, including:

1. Demonstration

Demonstrations, which are a hallmark of a democratic society, take place every day in Indonesia, although they are usually on a small scale. Protests focus on a range of political, economic issues and social issues.

2. Corruption

Corruption in Indonesia has not improved impressively on the annual Corruption Perception Index, which shows the level of corruption in the countries of the world. Indonesia number 118 out of a total of 176 countries, however its performance has showed a steady increase since the beginning of 2004.

3. Goverment and Beuraucracy

Indonesian Government and Beauraucracy systems is still considered as the most complicated among other countries. It is very likely for investors to face some hurdles and obstacles in doing business and invest in Indonesia. The important investment process like Company registration, Work permit, are still facing many difficulties and far from easiness. And since the new goverment implemented a stricter rules of investment this doesnt make the situations any better. However the goverment through investment coordinating board already make commitments to reform their beauraucracy to ease the investment flow and process.

4. Infrastructure

A lack of quality and quantity of infrastructure in Indonesia could hinder economic growth. The government realizes the importance of  major investments in this area such as the construction of roads, bridges, ports, etc., but until now it has not been maximized, thereby reducing investment appeal.

5. Natural Disasters

Natural disasters in Indonesia such as earthquakes, tsunamis, volcanic eruptions, and floods often made headlines in the Indonesian media and cause casualties and damage to infrastructure. Indonesia’s location is in the Pacific Ring of Fire and its geographic area consists mostly of sea water. Both these reasons make Indonesia prone to natural disasters.

6. The risk of a volatile exchange rate leading to inflation

Inflation in early 2014 soared by 1.07% due to food inflation and a weak exchange rate, which currently has reached more than 12.000/US$. If the value of the rupiah is not stable, then the cost of production will be difficult to predict and the sale price of the product in the market is less competitive. When the dollars is likely to weaken, production cost will be greater and result in losses for investors who invest in the manufacturing industry. We recommend that investors seek Indonesian distributors as partners for foreign companies to establish business cooperation in Indonesia.

7. The risk of changes in global liquidity

We must understand the high risk that the economic situation will face in 2014 and leads to a slowdown in growth. Indonesia’s economic indicators still show a good condition, although there is a change in direction of the current global liquidity due to stimulus plan funding restrictions of the Fed.

The Fed’s move to tighten stimulus funds totaling U.S. $ 85 billion for the purchase of bonds each month was considered aiming to reduce the amount of money circulating in the community. The tightening of global liquidity is very different from the situation of 1997/1998 and also 2008. Tapering off when this occurred had not been triggered by the collapse of the financial sector, but because of the recovery. It shows Indonesian economy is ready to face the liquidity posture changes. Global liquidity is one of the four risk factors in the face of 2014. The other three are world oil prices, food prices, and domestic politics.

 

Conclusion

In The end, the world is watching Indonesia as one of the “fragile five” emerging economies. One of the main reasons investors become attracted to Indonesia in the first place is that there are so many problems that need to be solved, and therein lies a bundle of opportunities to back ventures that will solve these problems.



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