Indonesia stands strong amid global uncertainty

Published: Mar 2023

Indonesia’s economy has been performing well and the country has a bright future as it embraces digitalisation – and tech unicorns – as well as environment, social and governance (ESG) issues. For multinationals, however, there are a number of challenges that remain when it comes to doing business in the country.

Rising commodity prices have been the bane of many countries’ recent existence, but for Indonesia – as a major exporter – they have been a boon. This and other factors, such as being relatively-less connected to the global economy, means that Indonesia’s economy has performed well in recent months.

In fact, of the largest economies, Indonesia is one of the fastest-growing in the world. Denny Irawan, Head of Economics and Research at PwC Indonesia, says there are a number of reasons for this: consumption, investment, government spending and trade. He comments that consumption has been strong and there is a high level of confidence.

While the global economy has been in turmoil with rising commodity prices, Indonesia has been a beneficiary as it is the largest exporter of coal and palm oil. Because of this, the government has had a windfall from the tax and custom from these sales. This has in turn partially been used for subsidies to shield the purchasing power of the general economy in the face of rising inflation, explains Irawan. “The government has been providing fuel and electricity subsidies, and this has resulted in a manageable inflation level – at 4.4% for 2022 – which is much better than other economies,” Irawan tells Treasury Today Asia.

This in line with the economic outlook of the Asian Development Bank (ADB), which notes that developing Asia can expect faster growth and lower inflation than in other regions. And for Indonesia, inflation is projected to be 5.0% for 2023, which is slightly higher than its 4.8% projection for South-East Asia.

Meanwhile, Indonesia’s economic growth has continued despite volatility at the global level. The ADB notes that real GDP grew by 5.7% in the third quarter of 2022, and the development bank estimates this figure will be around 5.4% for the whole of 2022. This is impressive given the performance of other markets. For 2023, however, growth is expected to slow and is estimated to be 4.8% for the whole year.

The ADB’s economic outlook also notes that Indonesia’s export boom will continue because there remains a strong demand for primary commodities. Also, the export of services grew well as tourism – a major industry for Indonesia – recovered after the impact of the pandemic.

Record foreign investment

All this puts Indonesia in good stead, and are just some of the reasons that Indonesia has been attracting attention from the international community. Gopul Shah, Director, Corporate Treasury and Structured Trade Finance at Golden-Agri Resources, a company with extensive activities in Indonesia, has also observed this trend. There are a number of reasons for the attention, he says: demand for commodities and tourism, a highly-tech-savvy population, and an investment grade rating have all stimulated international trade, and foreign direct and institutional investments in Indonesia, Shah tells Treasury Today Asia.

In recent months there has been global uncertainty – amid rising inflation and relatively high interest rates – which has caused many businesses and countries to put their spending and investment decisions on hold. Despite the uncertainty, however, Indonesia’s foreign direct investment has hit new records, says PwC’s Irawan. The major contributors of this investment are Singapore, China, Japan, Hong Kong and Malaysia. This is partly a bounce back after the effects of Covid, but more recently – Irawan points out – there has been growing awareness of the potential of electric vehicles and a rapidly-rising demand for nickel, of which Indonesia is a major producer.

Overall, Indonesia’s exports have also been performing well. Although there is expected to be a slowdown with the country’s major trading partners – US, Japan, India and Malaysia – it is likely to be mild. China, which has been Indonesia’s largest trading partner, is an exception and is expected to have accelerated growth in 2023 compared to 2022, says Irawan.

Managing FX volatility

While things are looking positive at a macro-economic level, there are specific issues that corporate treasurers in Indonesia are grappling with, and Yuliana Sudjonno, Risk Assurance Leader at PwC Indonesia, comments on the challenges that businesses are facing. Given the volatility in foreign exchange rates, many companies are expecting further fluctuations and putting hedging policies in place and analysing when the best time to hedge is. They are also looking at their current and savings accounts and doing more stress testing to anticipate volatility in the global markets. Additionally, she says, they are continually monitoring their investment portfolio and enriching their investment policy to ensure they are entering and exiting the market at the right price.

This mirrors the view of treasurers on the ground. For example, Chris Koemolontang, a corporate treasurer in Indonesia who spoke to Treasury Today Asia in a personal capacity, commented on how the economic environment has been improving, but there are some specific challenges he still experiences. This includes the quality of accounts receivables. “I spend more time on cash management nowadays as it is becoming more difficult to forecast cash flows as our business partners delay their payments,” he says.

Another issue for Koemolontang is the central bank interest rate hikes, which in turn increases his cost of funds. There are also liquidity issues as banks are more selective in providing working capital, he notes. Another issue has been the volatility in exchange rates – as Sudjonno already mentioned, and Koemolontang says this has caused particular headaches for companies that are buying their equipment and machinery from overseas.

The foreign exchange volatility, however, is lower than what it was, says Shah. “Financial markets and banks are currently stable as there is ample US dollar and IDR [Indonesia rupiah] liquidity in Indonesia. IDR rates are competitive, volatility on exchange rates is lower and cross border borrowing is easy,” says Shah.

Corporate strategies in Indonesia

There are many factors that are favourable for multinationals that are considering doing business in Indonesia, but there are different ways to go about this. Shah explains that corporates are increasingly seeking establishing operations in Indonesia and doing so by forming partnerships and exploring merger, acquisition, divestiture and joint venture (MADJV) opportunities. Many are also choosing to set up in special economic zones and specialised smart business cities, he adds.

Treasurers, says Shah, need to take a long-term view when doing business in Indonesia. This requires establishing local banking and financial institution relationships, developing a local credit rating, onshoring financing operations and risk management and localising talent management.

There are particular challenges for multinationals that do business in Indonesia, as the country has a number of unique features. Shah comments that the country’s sheer geographical size – with its sprawling archipelago of thousands of islands – creates particular challenges with the virtual (ie online connectivity) and physical infrastructure. It can be a struggle to access some parts of the country, and this has created a range of economic diversity in the country, which means there is not a one-size fits all consumer base for any corporate entering the country.

There are other issues for corporates, such as a scarcity of technically qualified and English speaking talent, the use of local language in documentation, and the civil code legal systems could create challenges, complexities, and additional costs of doing business for international companies, Shah comments. “The other challenges that businesses have to grapple is around complexity of markets, bureaucracy, red tape for seeking multiple permits and approvals, an elaborate tax system, and potential corruption,” he says. Also, he notes, there is fierce local competition, copyright infringements to contend with, and also the competition from Asian imports is a challenge for companies that are offering generic products, brands and services.

For such businesses there are also challenges with managing the local operations and balancing the local culture with that of the standards the corporate has come to expect. This is something that multinationals need to keep in check, says Shah, to ensure the Indonesian operations don’t veer off from the company norms. “In many cases within multinational corporations, diversity and inclusion gets diluted as these local employees hire like-minded or culturally similar colleagues. There is also a dilution of ‘global command, control and policies’ if full autonomy remains unchecked; this usually happens when the local management seeks full autonomy with reasons to achieve ‘unique localisation or managing unique cultural norms, customs or customer preferences’,” Shah comments. This, however, can come into conflict with the expectations of the culture of the head office in the corporate’s home market.

These are just some of the challenges for corporates doing business in Indonesia, which has its own unique culture and unique characteristics. The country, however, is very attractive especially as political stability has been achieved under the leadership of President Joko Widodo. During this time there has also been a shifting of the business landscape and the nature of the dominant industries.

Rise of the unicorns

Indonesia’s start-up scene has been lively, and has produced a number (start-ups with a valuation of over US$1bn) as the country – with its young population – has embraced digitalisation and innovation. This trend had already begun before the pandemic, with the emergence of unicorns such as Gojek, the multi-service platform, and Traveloka, a travel booking platform that is popular in South-East Asia. The pandemic and subsequent lockdowns only served to accelerate this trend with more companies becoming unicorns such as payments company Xendit and fintech Akulaku, which provides a range of financial services. During the pandemic, according to local news reports, Indonesia witnessed the rise of nine unicorns, which brought the country’s total to 13.

The first unicorn in Indonesia was Gojek, a ride-hailing app across South-East Asia expanded into an app for food delivery, logistics, payments and daily services. It was founded in 2010 and reached unicorn status at its funding round in 2016 when it was valued at US$1.3bn. It started out as a service with a fleet of motorcycle drivers who could give lifts, deliver food or other courier services, and its use exploded when it launched the app, which soon became a ‘super app’ and ecosystem of merchants, drivers and customers.

The explosion of Gojek onto the public consciousness as a unicorn was something of a watershed moment, or an inflection point, for Indonesia says Shah. Up until that point the commercial landscape had been very much dominated by family-owned conglomerates where there was a clear delineation of which sectors they were in. And then Gojek – an upstart that seemingly came from nowhere and was embracing and thriving in the new digital economy – both surprised and shocked the traditional business community, comments Shah. It was surprising because this stellar success and being thrust into the limelight came from a company that didn’t own any resources – something that was unusual for large corporations in Indonesia. “This was a massive shock to the conglomerate community – digitisation is something that happened in Indonesia without them,” says Shah.

Gojek’s Co-CEO commented, at an event held by its banking partner DBS, the company’s success comes from supporting the ‘little guy’. The platform started out as a social enterprise with a mission to improve the lives of local motorcycle taxis – or ojeks – and the platform has grown today to support many micro, small and medium-sized enterprises. According to DBS, of Gojek’s more than 400,000 merchant partners, 96% of them are SMEs and with its food delivery service, 80% of the transactions are with mom-and-pop stores.

And given the success of Gojek, there has also been plenty of investment in digital technologies, and in the hope of tapping the local market of a young tech-savvy population. With the rise of Gojek, whose success doesn’t rely on a traditional hierarchy of a well-established conglomerate, there is a growing appreciation of skills and professionalism as Indonesia shifts to a more digital, younger society.

Shifting to ESG

Gojek is an example of a company that had a specific social mission. And such issues – along with other ESG concerns – are top of mind for many Indonesian companies. Particularly as a major exporter of coal and palm oil, the country is having to make the shift away from its dependence on these commodities for its economic success. The country is well positioned to plan for a transition to clean energy, and the country is rich in resources and biodiversity, and its future could be in technologies such as wave energy – which captures energy from surface waves to generate electricity – which provides a good support to the transition to clean energy, notes Shah.

ESG issues remain a theme for all businesses in Indonesia. “Indonesia takes ESG very seriously,” says Sudjonno, giving the example of BRI’s recent issuance of a green bond, which was oversubscribed by more than four times. Meanwhile, another national bank is gearing up to issue green bonds and the asset management industry is also modifying its products to be sustainable. This feeds into a wider trend in Asia Pacific of an increase in sustainability assets under management and Indonesia is doing the work to ensure it has more sustainable products and funds in this area, says Sudjonno. Also, much attention is being paid to the governance and sustainability reporting to ensure there is no greenwashing, she adds.

On the ESG front, for those companies that are still in the coal business, they are finding that their options are limited for getting loans from international banks. For Indonesian corporates in the coal mining industry they are finding their options are limited and typically go to the Indonesian state-owned banks and local private banks.

Irawan comments that at a macro level the government has committed to achieving net zero by 2060, which has implications for its commodities industries. He says that Indonesia is undergoing a soft transition away from coal, and the targets to reduce its mix will be accelerated. “Indonesia will still rely on coal and palm oil but the transition away from them will be earlier than expected,” he explains.

Given this, the future is bright for Indonesia as it stands strong amid global volatility and continues to attract foreign investment. For companies that rush in, however, they would do well to remember Shah’s advice and take a long-term view so they can navigate the challenges of the country effectively.

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