Indonesia presents low-cost option for Thais

From a regional laggard, Indonesia has turned into a tremendous growth story

UMESH PANDEY, Bangkokpost.com

As industries in Thailand continue to face heavy pressure from the strong baht against the falling US dollar, higher oil prices and an influx of goods from lower-cost producing countries like China and Vietnam, Thai entrepreneurs are being encouraged to take the bold step of setting up plants in lower-cost countries such as Indonesia.

To most Thais, Indonesia is nothing more than a land full of problems, whether they be natural disasters, violent crimes or hate protests. But some companies have found a pot of gold in this land of opportunity, and others are being urged to dig in.

"This country is full of opportunities for foreign investors and Indonesia is a country that is ready to accept foreign investors very easily. To top these positive issues is the fact that the economic and political situation in the country has stabilised and there is going to be heavy spending coming through as the next election approaches in 2009," Chalit Tayjasanant, senior vice-president and general manager for Bangkok Bank's Jakarta branch, said at a recent seminar organised to help promote Thai investment into Indonesia.

Indonesia, he says, has given many companies a great deal of success. More could join the likes of the Charoen Pokphand Group, Banpu Plc and Siam Cement Plc, all of which have operations in Indonesia.

The country has undergone a major shift from a regional laggard after the economic crisis to a tremendous growth story thanks to rising mineral and crude oil prices.

"Indonesia is expected to be among the leading economic growth stories over the next year with the GDP expected to grow by 6.4%, only behind China, India and Vietnam among the various major Asian economies," said James Castle, board member of the American Chamber of Commerce in Indonesia and founder of CastleAsia, a business consulting company.

Indonesia, which saw its GDP shrink by 13.1% in 1998, will likely see its GDP rise beyond 6% this year after witnessing growth of 6% and 6.3% during the first two quarters of this year.

The government's debt-to-GDP ratio has also fallen tremendously from more than 100% in 1998-99 to around 39% this year and 36% expected in 2008. Now it is second only to Thailand (26%) and well ahead of other Asean nations including Malaysia and Philippines.

Indonesia produces about one million barrels of oil per day and has an economy of nearly four trillion rupiah ($1 equals 9,100 rupiah).

It is also looking to invest heavily in infrastructure, and plans to increase spending in the development of the transport sector by 64% and in various public works by 41%.

Thai companies can participate in these areas, Mr Castle said.

With a stable economy and a stable valuation of the rupiah of around 9,100 to the US dollar, the country has been able to handle inflation and interest rates. Inflation has dipped to 6.95% and rates are down to 8.25%, from 18.38% and 12.75% in mid-2005, respectively.

Apart from this, Indonesia is also in a similar stage as Thailand whereby its foreign exchange reserves are at an all-time high of nearly $53 billion (Thailand's are $81 billion) and its stock exchange is among the best-performing equity markets in the region.

But Mr Castle says that doing business in Indonesia is tricky. The momentum is gradually shifting away from Jakarta to suburban towns and cities that are still developing. Only 49.7% of bank deposits came from Jakarta as of June, down from 67.3% in 1997.

Indonesia, like most other parts of this region, is running heavily on domestic consumption. In the same way most of the bank credits are gradually moving toward lesser-developed regions of Sumatra, East Java, Banten and other areas.

"There is a sudden surge in the lending to consumers and this is creating a wealth effect that has not been seen in the country for a long time," he said.

In terms of using Indonesia as an export base, Mr Castle and Mr Chaikrit said that it had an abundance of domestic and export-oriented natural and human resources that Thai investors could utilise.

Indonesia mostly exports oil, but has seen non-oil exports rise by nearly 15% during the first quarter of this year while imports of capital goods for use as capital investments surged 16.3% during the first quarter of this year.

China continues to remain among the largest export markets for goods produced in Indonesia apart from the usual names of Japan, United States and Singapore.

All this has lead to a surge in investments by the government and the private sector.

Approvals for new investments are at all-time high since the onset of the economic crisis with a majority of local and foreign investors putting money in chemical, petrochemical, pulp and paper, transport and communication, utilities and food operations as the key areas.

"It is a good time to look at Indonesia if you are strong in these areas or others such as fishery, construction and mining," Mr Castle said.

Another key area that most Thai investors tend to overlook is the automotive sector, which is one of Thailand's inherent strengths with the "Detroit of the East" marketing campaign.

"Today Indonesia is the world's third largest motorcycle market after China and India and the four-wheeler market is growing at a rapid pace as well," Mr Castle said.

Motorcycle sales, which had slumped to less than a million units in 1998, have now reached close to 5 million, while sales of four-wheelers have reached 400,000 units from a low of less than 50,000 units during the peak of the economic crisis.

During the first half of this year sales have risen by nearly 17% year-on-year for motorcycles and 32% for cars.