In the race to become Asia's next tiger, Indonesia's rulers thought they had a headstart: With a population of 190 million, the sprawling island nation dwarfs its neighbors. That should make it a natural for foreign investors in labor-intensive industries. But last year, foreign investment sank to $8.1 billion, down 21% from 1992. Alarm bells went off in Jakarta.
As a result, Indonesia is moving to open its long-protected economy. "Otherwise we are going to be left behind," says Sanyoto Sastrowardoyo, Jakarta's investment minister. Last month, the government released a deregulation package abolishing rules that banned foreigners from taking majority stakes in local subsidiaries. The package throws open once-closed sectors such as power, telecommunications, and airlines. It also slashes tariff and nontariff barriers 5% to 30%.
The deregulation comes amid signs of a political crackdown. In June, the government closed three magazines that had criticized its military spending. And Jakarta is continuing to harass labor leaders. That will likely create more tension with the U.S., which will announce next month whether it will renew Indonesia's privileges for duty-free textile exports.
"BRAVE MOVES." The new economic policies, however, are drawing praise from foreign investors. "These are brave moves," says Louis Clinton, CEO of Freeport-McMoRan Pacific Inc., a joint-venture partner in an Indonesian copper mine. Foreign investment in nonenergy sectors will amount to $12 billion this year, up by more than 50% from 1993, predicts Casey Hanson, head of research at H.G. Asia in Jakarta.
The first big winner is Hopewell Holdings Ltd., the Hong Kong construction group controlled by magnate Gordon Wu. In July, Hopewell won permission to build and own 100% of a $1.8 billion coal-fired power plant in Java. Another power project has attracted GE Capital, Mitsui, and Mission Energy.
For foreign companies that have weathered the vagaries of Indonesia's highly regulated economy, the new policies open up a range of options. Pfi-
zer Indonesia, which arrived in 1968, may now buy back 20% of its equity, which it was forced to list on the Jakarta Stock Exchange in 1984. Kodak recently established a joint venture to manufacture 35mm color film in Jakarta. Kodak hopes to move into distribution but remains cautious. "Indonesia is too important to pass up, but you have to be careful interpreting what they are trying to deregulate," says Thomas Chua, Kodak's manager of Indonesia operations.
Despite such concerns, investors from Taiwan are charging ahead. They accounted for 32% of direct foreign investments approved by the government this year. They are also responding to Indonesian efforts to pull Taiwan out of its diplomatic isolation. In an unprecedented move, Taiwanese President Lee Teng-hui met with Indonesian President Suharto in February during what both governments insisted was Lee's unofficial "vacation" in Indonesia.
The deregulatory fever is part of an ambitious five-year economic development plan. Pegged to annual economic growth of 6.2%, the plan depends on manufacturing to save Southeast Asia's sole OPEC member from the effects of wobbling oil prices. Nonoil exports are supposed to rise 17% a year, from $27 billion in 1993, but to achieve such a goal, Indonesia will have to attract more than $300 billion in private investment over the next five years. Much of the money will have to come from offshore, since 14% of Indonesians live in what the World Bank calls "absolute poverty." Average per capita income is only $670.
POWER DEFICIT. The new factories will need more electricity than Indonesia can supply now. Over the next 10 years, manufacturing will raise demand on the country's electrical grid by about 15% a year. The government wants foreign companies such as Hopewell, British Gas, Enron, Mission Energy, and ABB Asea Brown Boveri to supply half of the new power. Jakarta also says it plans to privatize the phone company, Indosat, and allow foreign companies to operate 5 million new phone lines, 2 million of which they have started to install.
Whatever the consequences, more deregulation is on the agenda. The government may soon allow companies to be wholly owned by foreigners. Brokers welcome the idea but wonder whether the Indonesians can pull it off without deflating share prices. "This is what everybody wants," says Richard Fischer, equity sales manager at Baring Securities Indonesia. With competition for capital intense throughout Asia, Jakarta wants to make sure that foreigners get what they want.