Tigor Siahaan, chief country officer for Citi in Indonesia, got a taste of the country’s new direction when he met Jakarta’s deputy governor in February.
When he and Basuki Tjahaja Purnama spoke in his office, Siahaan noticed they were being watched; not by handlers or bureaucrats but by a video camera.
“He records everything. Everything goes on YouTube so the people can see. Every meeting is transparent,” Siahaan told FinanceAsia.
Siahaan’s anecdote reflects a heightened desire to stamp out corruption in a country foreign investors perceive as beset by graft and governed by inconsistent regulations.
The issue confronted Joko “Jokowi” Widodo, Indonesia’s president, even before he got his feet under the table, with eight of his cabinet nominees rejected by the country’s anti-graft agency.
New cabinet
Widodo’s approved cabinet, announced on Sunday, highlights further this new direction, containing as it does technocrats and business figures, reflecting a desire to boost the investment climate.
Retno Lestari Marsudi, the country’s first female foreign minister, has been tasked with ensuring foreign diplomats are active in boosting trade linkages between local and foreign businesses, according to Wellian Wiranto, economist, treasury research and strategy, global treasury at OCBC Bank.
New trade minister Rahmat Gobel, meanwhile, is being touted by analysts as positive for foreign direct investment due to his background as head of the manufacturing and technology-focused Gobel group, which he built using his connections with large Japanese businesses.
Ignasius Jonan, transportation minister, was chief executive of local securities firm Bahana and was also a managing director at Citi. Rini Soemarno, state-owned enterprises minister, was CEO of diversified Indonesian conglomerate Astra and on the board of the Jakarta Stock Exchange.
The moves underline Indonesia’s need for investment and foreign capital to improve its standing on the global stage at a time when commodities prices have dropped, threatening the country’s biggest exports.
As part of this, Widodo met Facebook founder Mark Zuckerberg in October to discuss ways the US social network group could help Indonesia's economy and small businesses. Indonesia is one of the world's biggest users of social media.
“We need to change the paradigm; the resource boom is over and Indonesia needs to move onto something else,” Muhamuad Chatib Basri, Indonesia’s finance minister, told a large group of foreign investors at a CLSA forum in Hong Kong in September.
Furthermore, the country is under pressure to shore up its finances ahead of the inevitable lifting of US interest rates and potential capital outflows. To that end, it raised $6.8 billion from the bond markets this year.
Meanwhile, it is also in desperate need of capital to improve its infrastructure, which is in a parlous state and in need of $545 billion over the next five years.
Foreign capital’s hits and misses
Foreign investors have been attracted to Indonesia for some time due to the economy’s impressive growth rate: 4% to 7% over the past 10 years. It is now 5.1% but Widodo is aiming for a return to 7% growth by 2019.
Asean’s biggest economy by GDP has attracted about $4.4 billion in quarterly FDI for about a decade, second only to Singapore.
Carmakers such as Toyota and Honda assemble vehicles in the country, global banks are serving an increasing middle class and private equity groups such as KKR, TPG and Carlyle all are making investments.
Last year alone saw Singapore’s Gallant Venture buy a 52% stake in Indomobil Sukses Internasional for $1.6 billion, and Japan’s Sumitomo Mitsui Banking Corp buy 40% of Bank Tabungan Pensiunan Nasional for $1.5 billion, a transaction that was completed in March 2014.
However, deal making in the country has a chequered history, with successful investments matched by some high-profile failures.
Singapore’s DBS saw its $6.5 billion bid for Bank Danamon fall through last year due to the Indonesian government imposing restrictions on foreign ownership. Jakarta’s demands for reciprocity in terms of access to the Singaporean market were also a factor.
Foreign miners have also come unstuck in the country after export taxes on certain raw materials were imposed in an effort to develop domestic smelters.
“When we talk with foreign investors about the country they are all very bullish,” Kunardy Lie, chief country officer at Deutsche Bank, told FinanceAsia. “[But] what foreigners want to see more of going forward is clear and consistent regulation.”
Much more acrimonious was UK-based financier Nat Rothschild’s turbulent relationship with the influential Bakrie family following a complicated deal in 2010 that saw their Indonesian mining assets listed in London via a vehicle he set up.
The deal quickly turned sour amid claims of email hacking, accounting irregularities and fraud, which culminated in the Bakries buying back a stake from Rothschild this year.
Getting better
Corruption, or the perception of corruption, is an issue that most investors cite when discussing Indonesia. At the CLSA conference, Luhut Binsar Pandjaitan, senior adviser to Widodo and former four-star general in Indonesia’s army, admitted he had paid bribes in the past to get things done.
According to Transparency International’s corruption perception index, Indonesia ranks 114 out of 177 countries – as a guide, the UK is ranked 14.
But things are improving. Tender processes, for example, have been streamlined over the past year to speed up contracts and reduce the likelihood of officials taking bribes.
“When I first started here in 2009 a contract was re-tendered four times. Now it is e-procurement. You bid and you know straight away whether you are in or out,” Arno Hendriks, chief executive of MAXpower, a gas-to-electricity company, told FinanceAsia. “No more hanky-panky”.
With such moves aimed not only at Indonesians but foreign investors, Widodo could provide the spark to boost confidence and take the country to the next level of growth.
Nurul Ichwan, deputy director for manufacturing industry promotion at the Investment Coordinating Board of Indonesia, told FinanceAsia the country was now in a position to select which foreign investors it dealt with.
“We are insisting more on the transfer of technology. [Many foreign companies] don’t have serious intentions of helping us become sophisticated in terms of skills,” said Ichwan, who is responsible for attracting foreign investment into the country’s manufacturing industry.
The sentiment is not new. Chinese companies have demanded the transfer of skills and technology knowhow for years, often to the chagrin of foreign companies and governments.
But business leaders, politicians and analysts in Indonesia agree that, if the country is to fulfill its oft-touted potential, it needs to offer more than merely a platform for others to produce cheaper goods.
Of course, Thailand, the Philippines and Vietnam – most developing countries in fact – have had similar ambitions and all have largely remained a mere rung in the supply chain.
“The 250 million Indonesians cannot become rich by planting more palm oil, pumping more natural gas, digging more coal or selling more copper,” Wijayanto Samirin (Wija), a policy adviser to Widodo, told FinanceAsia.
“Indonesia needs to step up the ladder of the global supply chain by producing more value-added products.”
One challenge is how Indonesia redefines its relationships, and redraws contracts, with foreign groups operating in the country.
Part of that, Ichwan said, is to lessen the dependence on Japanese companies such as SMFG and Toyota; the country last year overtook Singapore as the largest source of FDI into Indonesia.
“We need to ensure they not only bring their products but that they also produce from A-Z,” Ichwan said.
Japanese FDI totaled $4.7 billion in 2013, 60% of which was in the automotive industry; while 775 such projects are slated for Indonesia in the near future, according to Ichwan.
Portents
In spite of the bullishness, challenges remain. Firstly, Widodo, on whom so much hope rests, faces a battle to unite a somewhat divided electorate: 46.85% voted for his presidential rival Prabowo Subianto (pictured left) in the election.
Perhaps more importantly, Widodo must deal with about 580 local governments to push through his plans for development, which is by no means an easy feat.
This task was made harder in September after Indonesia’s parliament voted to abandon direct elections for local governments and mayoral positions, effectively removing freedom of choice for the electorate and increasing the risk of graft.
Attracting more foreign investment and negotiating fair contracts also has not been easy for Indonesia, as seen in the handling of the taxes on raw material exports imposed this year.
The taxes hit foreign miners hardest, especially US firms Newmont Mining and Freeport McMoRan. That has paralysed shipments and forced pit closures.
Long-held licenses were redrawn, argued over and revoked, prompting a wave of negativity that didn’t exactly improve the country’s reputation as a difficult place to do business.
Decentralisation may be creating a more level playing field within the country but it’s been difficult for multinationals, which can no longer just grease a few wheels in Jakarta to get things done.
Nor is decentralisation the only challenge: the centre is also constantly in flux, with new foreign-investment rules being re-imagined every two years. The most recent set of rules came out in April and was positive for power companies, port facility providers and healthcare groups but tightened restrictions on oil, gas and trading groups.
Another signifier of trouble is that non-performing loans are rising in the key areas of construction, mining, trade and social services.
At least the issue does not appear to be a threat to Indonesia’s banking system, with the central bank quick to tout the relative health of the country’s banks: loan-loss coverage is also high, at 500%, according to Bank Indonesia.
But, add this to the obvious need for bank consolidation in the country and it is clear Indonesia has many balls to juggle.
Furthermore, the Asian Development Bank in September trimmed its 2014 and 2015 growth forecast for Southeast Asia, citing factors including falling commodity prices in Indonesia, reinforcing the country’s need to lessen its dependence on such exports.
At least the investment pipeline is healthy.
In the past month alone, Korea’s Samsung Electronics said it plans to make mobile phones locally next year, while the Philippines’ Jollibee said it would attempt to re-enter the market it pulled out of during the Asian financial crisis.
Meanwhile, Germany’s VW plans to open its first plant in the country by 2017 and Mitsubishi Motors said it would invest $600 million in building a factory.
Whether such investments are the kind Indonesia needs to force its way up the value chain is debatable but it is clear the desire exists to make itself more attractive.
“There is now confidence coming back to the market,” said Patrick Walujo, co-founder of Singapore-headquartered private equity firm Northstar, affiliated with TPG and which invests its dollar-denominated funds mainly in Indonesia.
“We’ve been in a number of discussions with big Indonesian groups and they’re now ready to invest,” he added.
