Indonesia: The emerging superpower

Sumit Mukherjee

Director

Asia

Indonesia aims to become Asia’s next superpower. To achieve this it has set in motion an ambitious plan to connect its islands and attract foreign direct investment.

The world’s largest archipelago, is moving ‘maju’ (forward) at a rapid pace. Under the government of its president, Joko Widodo, or Jokowi as he is referred to, the country of more than 17,000 islands is bidding to become a new superpower in Asia.

In his first term, Jokowi embarked on an ambitious strategy to make Indonesia more accessible by building and upgrading airports, ports and road networks. He also focused on the repatriation of money back into the country, which enabled the government to self-fund programmes for health, education, as well as financial reforms.

The window of opportunity

After elections earlier this year, Jokowi and his coalition allies secured a mandate to implement the next phase of its vision, further connecting its islands and improving the ease of doing business for investors.

Time is pressing though.

Not only is Jokowi limited to just five more years in office but the median age of the population is rising, giving a brief window to engage the country’s youth and make the most of this opportunity.  

Success is also not guaranteed. Achieving the goal of G20 parity, let alone G5, will be a mammoth task.

Jokowi appointed several new members to his new cabinet in October and they have been directed to innovate, channeling the ‘maju’ ethos and avoid reliance on old habits.

Up to 2024, the Indonesian Government’s priorities will be to develop human capital through education, accessibility, expand internet across the archipelago, to deliver the right kind of infrastructure to support social growth and to encourage foreign direct investment (FDI).

Ease of doing business

When Jokowi came to power in 2014 the country ranked 114 in the World Bank’s Doing Business report of 2015. Today it sits at 73 in the 2019 edition. Whilst this is impressive on face value, there has been no recorded improvement in ranking in the last three years.

Inward investors remain wary of the barriers to market entry. Australia, China, Japan, Korea, Singapore, the GCC states and parts of Europe are all now investing, but the challenge is attracting investment quick enough to match the scale of the country’s ambition.

Some concerns remain which the government is looking to address. Foreign ownership of companies, particularly in the industry sectors that are most in need of foreign capital, is one of these. Making these sectors attractive for big money investments from foreign partners is a policy for Badan Koordinasi Penanaman Modal (BKPM), Indonesia’s investment board.

There is also scepticism among investors about the quality of talent in service industries.

In the past, Indonesians have developed their talent locally before moving abroad where higher pay scales and more lucrative career opportunities are on offer. Jokowi is trying to reverse this trend and critical to this is enthusing the country’s youth about his ambitious plans.  

In an uncertain global market where foreign investors tend towards caution, opportunities in Indonesia are growing year on year.

There are more reasons to bet on Indonesia than ever before.

Capital investment

One of the government’s successes has been the reforms to the country’s construction law. Passed in 2017, this has helped encourage the use of local companies, ensuring profits and skills are kept in the country.

It has also provided clarity on banking and insurance processes in big projects and helped to professionalise commercial contracts. The result is that consultants and contractors are now more commercially and contractually aware than they have ever been. With such big projects in the pipeline this is critical.

The biggest of which is the decision to move the country’s capital over 1,000km from Jakarta on the island of Java to Kalimantan on the island of Borneo. At an estimated cost of nearly US$33bn the project includes developing government buildings, social infrastructure, residential and commercial buildings on a plot of over 40,000 hectares.

The relocation of the capital is designed to push strategic investment throughout the archipelago and distribute the development potential of the country more equitably.

Opportunities abound

The projects don’t stop there. With 60 percent of the archipelago still inaccessible, there is a major focus on improving connectivity through airports, ports and roads, as well as social infrastructure such as hospitals, schools and low-cost housing. The burgeoning middle class gives rise to a lucrative retail market and opportunities in high-tech and manufacturing abound.

To succeed in Indonesia businesses need to embrace the market, its opportunities and localise their offer.

They also need to consider what role they can play in developing human capital and helping the country achieve its ambitious vision by maintaining the forward momentum. Indonesia’s future is unquestionably now.

Why is Indonesia moving its capital to Kalimantan?

Dense population

Jakarta and the island of Java is home to more than 60 percent of the country’s population.

Kalimantan on the island of Borneo is almost four times bigger, therefore can accommodate Indonesia’s growing population.

Jokowi says that the relocation will help to address inequality in the country and relieve some of the pressures on Jakarta.

Strategic location

Kalimantan is central in Indonesia’s archipelago of 17,000 islands and is close to urban areas.

Environmental impacts

Jakarta is prone to floods and areas are sinking at an estimated 25cm a year, due to subsidence. Air quality has also decreased, recording conditions worse than polluted cities such as Beijing and Delhi.

Embracing change

Although challenges can arise from relocating capital cities, more than 30 other countries have succeeded. According to Jokowi:

A capital city is not just a symbol of national identity, but also a representation of the progress of the nation.

For further information contact:

Sumit Mukherjee
Director

t: +62 21 2963 4124
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