Advantage Indonesia: Great Prospects, Significant Challenges

TEMPO.CO, Jakarta - Great prospects, significant challenges. And look for home-grown solutions 

The grim days of the Asian financial crisis back in the late 1990s are long gone. Last year Indonesia hosted the G20 meeting in Bali and in the next decade, the country will only become a more significant player on the world stage. Indonesia offers one of the best growth and investment stories across Asia. Its population is large, young, and growing, and Southeast Asia’s largest economy is set to make its mark on global consumer markets. On some measures, Indonesia will emerge as the fourth biggest consumer market on the planet by 2030. The middle class is growing rapidly and lifestyles are changing too – better education levels, more women at work, smaller families – and as a result consumers are increasingly demanding better quality products. E-commerce is also a big growth area.

However, Indonesia’s advantages extend far beyond demographics and consumption. Investment in roads and railways is making many islands more easily accessible, and while 55% of all Indonesians live on Java most growth is now in Sumatra and Sulawesi. 

The country is also hugely underbanked – great news for the banks – and it has a noticeably low credit card penetration of only 3%. This is a result of both demand (many people still don’t have bank accounts) and supply-side dynamics (banks’ risk aversion or the need for employment documentation which some people don’t have). Instead, digital finance companies and banks have provided buy now pay later products that use alternate data sources for credit scores and can be integrated with different parts of the online ecosystem, such as e-commerce and ride-hailing apps.

The e-commerce industry accounted for only 4% of Indonesia’s GDP in 2022, still far behind China’s 11%. But the same growth drivers that created the online boom in China are at work here – a low penetration rate for organized retail, a young population, rising urbanization, more internet users, and a digitally savvy population. We expect e-commerce to generate 6% of GDP by 2030e.

The rapid expansion of the electric vehicle (EV) industry is creating another growth hotspot. Indonesia’s nickel reserves, the largest in the world, have led to the emergence of the EV battery supply chain in the country. This comes with a number of spill-over effects. For example, it has increased demand for downstream logistics warehouses. Indonesia’s logistics warehouse sector grew at a rapid CAGR of 13% between 2018 and 2022, led by both the EV sector as well as e-commerce companies which have been expanding their geographical reach in Indonesia.

But there are challenges too, from income inequality to social issues and infrastructure. Top of the agenda is the need to reduce pressure on Jakarta. The capital can leave its mark on visitors in many ways – its sheer size, traffic jams, imposing landmarks, or the variety of its colonial architecture. Reading apocalyptic newspaper articles about floods, suffocating traffic congestion, or how Jakarta is slowly sinking into the mud, it is easy to wonder if the city has any future at all. This explains the rationale for a new capital, Nusantara, in Kalimantan. To have a future, Jakarta has to face up to the formidable challenges of flooding (“banjir”), subsidence that threatens northern parts of the city, and overpopulation. 

But how this city copes with these challenges may be instructive for the nation as a whole. The constant flooding, congestion, and subsidence have given birth to an awareness among residents that something needs to be done and that everybody needs to contribute. Grassroots green movements have sprung up and architects, city planners, constructors, journalists, artists, and financiers have joined in. And if there is anything Indonesia has in abundance, it is human ingenuity. To make their cities greener, Indonesians have initiated tree-planting projects; one is specifically focused on encouraging couples to plant a tree on their wedding day. Others use social media to shame companies that pollute rivers. Meanwhile, local community recycling projects collect organic waste to be sold elsewhere. 

In a country where coal is still king, another major challenge is the transition to renewable energy. Solar power offers a strong alternative narrative, especially as the price of solar panels continues to fall. There are plenty of large projects being built across the country but, again, we should not overlook what is happening at the grassroots level. For example, in Sumba, electronic waste is being repurposed to make small solar modules. The electricity generated allows local women to charge their phones, use home appliances, and keep the light on in their shops open for longer – all for free. It’s a big step up from candles and kerosene lanterns. 

Back in Jakarta, politicians, architects, bankers, and engineers must rise to the formidable challenges that the city faces. Subways, canals, roads, and tunnels will be needed. But equally important are the small improvements made by locals that, just like collecting pennies and dimes, can grow into something meaningful and valuable. Indonesians have an ingenuity and dexterity that has repeatedly enabled them to make a bad situation much better. Ultimately, that is what will determine the future of this nation.

Herald van der Linde is HSBC’s Chief Asia Equity Strategist and author of “Jakarta: History of a Misunderstood City”.

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