16 October 2018

Indonesia: A Rising Asian Financial Powerhouse

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Indonesia’s growth trajectory is universally accepted. Its economy is poised to expand sustainably for the long-term while its young population and dynamic private sector are contributing to the development of the digital sector. Sumit Dutta, President Director of PT HSBC Indonesia discusses the country’s economic potential and why he is bullish on the country.

By Shoeb Kagda, Founder of Indonesia Economic Forum

 

Indonesia is a nation on the move. It’s young, dynamic and productive population is driving growth and innovation. Its financial sector is robust and healthy, in the process enabling economic expansion. The country’s corporate sector is also transforming itself to be in line with the new digital economy.

According to the Creative Economy Agency (Bekraf), Indonesia’s creative industry will grow exponentially in the coming years. Going forward, the creative industry is expected to become a new economic driver, supported by strong government policies and the growth of the digital economy.

In 2017, the creative industry contributed Rp 990.4 trillion to Indonesia’s GDP, a trend which started in 2014. According the BEKRAF, the creative industry today provides 16.4 million jobs, about 17% of total jobs in the country. With the rapid expansion of e-commerce, ride hailing companies, Fintech, Edutech and other sectors, the digital economy is poised to transform Indonesia’s economy.

These three trends are working in harmony to propel Indonesia forward and into becoming an Asian financial powerhouse, according to Sumit Dutta, president director of HSBC Indonesia.

“We believe Indonesia is one of the most promising countries for investment over the medium to long term. Within Asia, Indonesia occupies a very prominent position on account of its demographics it’s the largest country in the ASEAN contributing to 35 % of ASEAN GDP, 40 % of ASEAN population,” Dutta noted. “ The macroeconomic environment in Indonesia is extremely favorable. Inflation has come down to almost 3%, interest rate has come down to single digits. The Indonesian Rupiah has been relatively stable against the USD for the last couple of years.”

“Indonesia’s monetary policy has been extremely conservative so Indonesia’s debt to GDP ratio is amongst the lowest of any country in Asia, so it makes it a stable country for investment. When we talk to our customers outside of Indonesia many of them have a desire to invest in Indonesia,” he added.

“And we ourselves, HSBC believe Indonesia is a country which is right for further investment. Going forward, we believe that there are a couple of factors that will aid to making Indonesia even more attractive,” he said.

“We believe that for Indonesian companies, the willingness to go outside of Indonesia will further help make Indonesia a more competitive place and linked to that allowing other Asian companies to come in and invest in Indonesia will make for more open boundaries, a more free economy and it will enable Indonesian companies to compete with and to win against other top class competition in the Asian space.”

EMERGING GROWTH CENTERS

Indonesia’s growth story is also enfolding in the provinces where new growth sectors are emerging. Across the vast archipelago, new investments, infrastructure and consumer demand are creating new economic opportunities for entrepreneurs and businesses.

HSBC Indonesia, through its vast network, is not only empowering development, it is instrumental in helping Indonesia realize its dream of becoming an Asian financial powerhouse. The bank, the first international financial institution to be locally incorporated, has a vast network that spans the length and breadth of Indonesia.

“Indonesia is a vast country spanning thousands of kilometers from East to West and even from North to South. To sustain GDP growth for a country as large as Indonesia, the country needs to have many economic hubs apart from just growing in Jakarta,” notes Dutta. “HSBC is fortunate enough to be present in 29 cities across the length and breadth of Indonesia. We see that growth in Indonesia over the next decade and beyond will be focused outside of just Jakarta and even maybe outside Java like Kalimantan, Sulawesi and Sumatra. We believe economic activity will grow at a faster pace in these outlying islands compared to just Java or Jakarta.”

He added that the Indonesian government is heavily focused on growing the economy outside Java Island in particular its extensive infrastructure development plan. President Joko Widodo’s administration has earmarked billions of dollars to build infrastructure that will facilitate the movement of goods and peoples and open up the country to new ideas.

“For a country like Indonesia which spans so many islands, to be able to harness the power of this country you’ve got to link the country together, so the plan which the government has, in terms of connecting the country, using $400 billion of infrastructure spend using seaports, airports, high speed rail, toll roads just to link the country, we think is extremely powerful and we think the value of this of this will really come through in the years to come,” says Dutta.

With so much investments being poured into the provinces, Dutta believes that new hubs will emerge in Sumatra, Kalimantan, Sulawesi and eastern Indonesia. Some of these provinces, such as South Sumatra and South Sulawesi, have economies that are growing much faster than the nation economy.

“As we look at what the government is doing in Indonesia and the infrastructure spend it’s embarking on, we are seeing that the government is trying to create economic zones in Sumatra, in Sulawesi in Kalimantan, in different areas, and we believe these economic zones, and these economic hubs are going to drive a lot of industrial activity. We are also seeing a lot of investment coming in from outside countries. So for Malaysia, for Korea, for Japan, for China, for many of these countries, North Kalimantan, North Sulawesi, North Sumatra, may actually be a lot more central to them than investing in Java,” notes Dutta.

“So we believe that over the next few years as these industrial zones, these economic zones come into being, this will spawn activity and growth of their own and you will have the mega cities like Jakarta that being created in these industrial hubs,” he adds.

Greater connectivity will not only reduce logistics costs for businesses and consumers, it will foster greater economic efficiencies in terms of new industries being created to take advantage of Indonesia’s rich natural resources. Indonesia is a major exporter of commodities, which makeup 60% of total exports, but its processing and value added industries have not been able to develop due to high transportation costs.

That is about to change, according to Dutta. Cities such as Palembang in South Sumatra are emerging as hubs for fertilizer and rubber production while Makassar in South Sulawesi has the potential to develop into a food processing and manufacturing hub.

“Indonesia today is a trillion dollar economy and that is a privilege and an attribute not many countries can lay claim to. In addition if you look at what the world thinks of Indonesia today for the first time in quite a while, Indonesia is rated as investment grade by all the three major rating agencies which just demonstrates the vast potential Indonesia has which has been recognized not just in Indonesia alone but globally,” says Dutta. “So HSBC believes that Indonesia today being a stable democracy, economy, strong conservative macroeconomic policies, very strong demographics, over 250 million people, educated, internet literate, it’s a recipe for a vast success story.”

“We believe Indonesia is poised to become a financial superpower in Asia and globally in the next decade. One of the things which will help in this journey for Indonesia to become a financial superpower is for Indonesia to continue to focus on education. Indonesia needs more engineers, more people in the research and development space, more people in finance, because Indonesia is going to lift its growth from 5% or even 10% per annum.

“It needs more skilled labor, more technicians, more engineers, doctors, more scientists. Indonesia has the raw materials available, so the government has already been putting a lot of focus on education. I think that’s absolutely the right thing to do, and if we continue this focus and we get larger numbers of educated people coming up through the college system, we think it will benefit Indonesia’s growth in the medium to long term.”

LINKING INDONESIA TO THE WORLD

If Indonesia is to turn its potential into reality, it will need to not only improve its domestic economy but also broaden and widen its links to international investors and markets. With its global connections, HSBC is well positioned to play a strategic role as a conduit.

Dutta notes that the bank works closely with the Indonesia Investment Coordinating Board and its chairman Tom Lembong to attract investments to Indonesia by linking investors to opportunities in the country. “We are making a long-term investment in Indonesia. As a global bank, we want to invest in countries that are sustainable and that give us growth,” he notes. “Our job is to build the foundation for the bank that will allow it to prosper and flourish for the next 50 years when Indonesia will come into its own.”

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