Indonesia will offer investors an increasingly lucrative opportunity to cash in on its steadily expanding economy in coming years, especially for businesses able to meet the needs of a dramatically increasing consumer class, consultancy McKinsey & Co. said Tuesday.
McKinsey said in a report that Indonesia will offer private-sector businesses an opportunity to tap into $1.8 billion in business opportunities by 2030 in several sectors that are expanding at least as rapidly as the broader economy: consumer services, agriculture and fisheries, and resources.
Indonesia has been one of the bright spots in the global economy in recent years, with economic expansion hitting 6.5% last year, the country's highest since the Asian financial crisis of the late 1990s. The government has forecast growth of 6.1% to 6.5% this year, and said it could be slightly higher in 2013.
Southeast Asia's largest economy, which has been largely sheltered from the global downturn by its robust domestic consumption, could become the world's seventh-largest economy by 2030 from 16th at present.
The McKinsey report highlights Indonesia's expanding class of consumers with significant purchasing power, which it defines as people with net incomes exceeding $3,600 in purchasing power parity, at 2005 exchange rates. Such consumers could increase 90 million by 2030, from 45 million currently, if the country maintains annual growth rates of 5% to 6%.
"This growth in Indonesia's consuming class is stronger than in any economy of the world apart from China and India, a signal to international businesses and investors of considerable new opportunities," McKinsey said in the report. "Brazil, Egypt, Vietnam, and other fast-growing economies will each bring less than half of Indonesia's number into the consuming class in the same period."
Indonesia has proven its ability to draw increasing amounts of foreign investment in recent years, last year setting a record in foreign direct investment with almost $20 billion. This year the government hopes the number will rise to $28 billion.
Privately many industry leaders say the number could be even higher were it not for significant barriers to investment in the form of inadequate infrastructure and uncertain regulatory environments in sectors such as banking and mining.
"In terms of regulatory environment, we see Indonesia as having come a long way. It's not a broad-brush thing. There are several challenges that have to be addressed, and if they are addressed correctly, foreign investors will come in," Raoul Oberman, a McKinsey director and one of the report's authors, told Dow Jones Newswires.
"If you look at the successful foreign investors in China, South Korea and India, for example, the prize was big for the people who could look through the cycles. It's a huge opportunity for foreign investors."
Key among the challenges to maintain high rates of economic expansion include Indonesia's ability to increase productivity, which lags significantly behind that of its neighbors, to ensure inclusive economic growth, and to remove constraints on growth by building new infrastructure and ensuring access to resources, McKinsey said.
The report highlighted three sectors in which Indonesia could address such challenges, with consumer services topping the list. Services have the potential to yield 7.7% annual growth and create a $1.1 trillion business (in current dollars) by 2030 from $260 billion last year, expanding from 61% of gross domestic product to 65%.
Indonesia's underdeveloped banking sector means the greatest opportunity lies in financial services, the report said, noting that just 12% of businesses access bank credit, compared with nearly 80% in Thailand, and that most retail financial income today is derived from traditional interest.
"Indeed, Indonesia lags behind other Asian economies on every class of financial product," it said.
A number of foreign banks have sought to tap into the growing market. Singapore's DBS Group Holdings Ltd. (D05.SG) this year announced a $7.2 billion deal to acquire Bank Danamon Indonesia (BDNM.JK), Indonesia's sixth-largest bank by assets. The deal would be the largest ever acquisition in Indonesia.
Growing demand for food on the back of increasingly affluent populations both at home and across the region could expand the agriculture and fisheries sector by 6% a year, with overall business opportunity rising to $450 billion from $140 billion.
Annual domestic demand for energy could nearly triple by 2030, McKinsey said, increasing overall business opportunity to $270 billion by 2030 from $70 billion today and pushing Indonesia to develop its significant potential in alternative energy production.
"'Game-changing' forms of energy from unconventional sources could meet up to 20 percent of Indonesia's energy needs by 2030, reducing the country's dependence on oil and coal by almost 15 percent as well as lowering greenhouse gas emissions by almost 10 percent, compared with business as usual."
Indonesia is thought to be home to 40% of the world's total geothermal potential, but the sector remains underdeveloped.
The report cautions that the country's overall growth will be limited by its ability to meet the growing demand for millions of semi-skilled and skilled workers, which could increase from 55 million today to 113 million by 2030.
"There is a large opportunity in private education, demand for which could potentially increase four-fold from $10 billion a year to an estimated $40 billion in 2030," McKinsey said, projecting the number of students in private education to nearly double to 27 million by 2030. It added that current government spending of about 3% of GDP a year on public education could leave a gap of $8 billion a year by 2030 given expected demand.
The report also highlighted the need for businesses to consider investment in regions beyond Jakarta and Java, where smaller cities are growing more quickly.
"To capture these opportunities, businesses will need to rethink their geographical footprint in Indonesia given the shift toward middleweight cities and the rise of new, economically important regional centers," the report said.
The report underlined the misperception of Indonesia's economy as volatile, pointing out that its growth has been steadier than any member of the Organisation for Economic Cooperation and Development, or the BRICS countries of Brazil, Russia, India and China plus South Africa.
"Indonesia is not about boom and bust," said Arief Budiman, one of the report's authors. "It's about capturing the long-term significant opportunity."
The report is available at www.mckinsey.com/mgi.
Write to Ben Otto at email@example.com
Copyright © 2012 Dow Jones Newswires