Photographer: Pacific Press/LightRocket via Getty Images

The Commodities Producer That Dodged a Bullet When China Slowed

  • Indonesia's diversified economy shields it from mining crunch
  • Nation leads growth among top 10 commodity exporters: BMI

As Mitsubishi Corp. becomes the latest player looking at quitting a major mining project in Indonesia, along with the likes of Newmont Corp. and BHP Billiton Ltd., it would seem the Southeast Asian nation’s economy is becoming another victim of the great commodity slump.

But it isn’t.

Almost unique among the big resource-exporting emerging markets, Indonesia seems to have dodged the bullet that struck Brazil, Russia, Venezuela and others as China’s growth slowed and the global resources boom waned.

While many of its rivals have slid into recession, the archipelago of 17,000 islands -- China’s biggest supplier of power-station coal and a major producer of tin, copper, nickel, palm oil and natural gas -- has managed to keep growth ticking along at around 5 percent. As Finance Minister Bambang Brodjonegoro put it recently at a media gathering: “We are not Brazil.”

“We have diversified our economy more compared with other countries,” Brodjonegoro said in an interview this week. “Growth has remained good and not really ugly. In general we can be an emerging economy showing a different color to other emerging nations due to the effect of lower commodity prices.”

Government reform has helped attract investment, and Indonesia has sidestepped the worst effects of the mineral meltdown via its history of self-sufficiency, a government bent on expanding manufacturing, and a jump in infrastructure spending by President Joko Widodo.


Photographer: Dimas Ardian/Bloomberg

Jokowi, as the former Jakarta governor is known, doesn’t come from Indonesia’s tight-knit political elite, rising to power in a groundswell of popular support from the country’s poor. Yet he’s managed to subdue his opponents in the past year, and avoid the corruption scandals and infighting that have dogged his counterparts in Brasilia and Johannesburg.

That has enabled him to focus on improving the country’s wretched transport networks and curb the bureaucracy that discouraged investment. As nations across the Americas, Europe and Asia grapple with political and social upheaval, Jokowi is even selling Indonesia, a nation with a history of military rule, as a haven of stability.

‘Keep Calm’

“It is clear that the world is currently facing a lot of challenges, starting from the economic transition in China, social and security challenges in Europe to the economic slowdown in various countries,” Jokowi told businessmen during a trip to London in April. “The solution is simple: keep calm and invest in Indonesia.”

During that U.K. visit, Jokowi attended the signing of $19 billion in deals, including with the Jardine Matheson Group, Rolls-Royce Holdings Plc and HSBC Holdings Plc. Indonesia’s foreign direct investment rose 3 percent last year in dollar terms to a record $29 billion. In Brazil, FDI slipped 22.5 percent, while in South Africa it plunged 64 percent.

Only 3 percent of Indonesia’s total FDI was in mining last quarter, compared with 17 percent in 2013. The lion’s share -- 78 percent -- was in manufacturing, up from 55 percent in 2013.

Ports, Roads

Indonesia is poised for rapid real GDP growth and will be the outperformer among 10 leading commodity exporters, including Russia, Brazil, Colombia, Nigeria and South Africa, BMI Research said in a report this week. This will be due to strong investment and government spending, supported by accommodative monetary policy, it said.

At home, Jokowi is spending on ports, industrial estates and roads, and much of the money is going to the less-developed east of the country, a collection of volcanic islands that stretches to the Pacific Ocean.

The change can be seen in Makassar, a port with 1.8 million people on the island of Sulawesi, which is about the size of Britain. A two-and-a-half hour plane ride from Jakarta, the city has been a trading hub for hundreds of years, with merchants dealing in pearls, camphor and spices, and more recently cocoa, coffee and nickel produced in the mountainous interior.

Now the economy is being driven by infrastructure development and tourism, said its mayor, Mohammad Ramdhan Pomanto.

On the waterfront, apartment blocks are rising and land is being reclaimed for a new $2.5 billion city center, including canals, offices and a mosque modeled on the Taj Mahal. Children escape the heat in one of the world’s biggest indoor theme parks, while motorbike dispatch riders ferry packages from online stores through the increasingly congested traffic.

Makassar waterfront

Photographer: Yermia Riezky Santiago/Pacific Press/LightRocket via Getty Images

“You can’t get this stuff in the shops here,” said Dhika, a local standing under a mango tree and paying cash for a handbag from Rocket Internet SE’s Zalora. In a country with a median age of 28 and more than 50 million smartphones, e-commerce is taking off.

“You go to Makassar, it’s really booming,” said Kartiko Wiroatmodjo, the chief executive of PT Bank Mandiri, Indonesia’s largest bank by assets.

Indonesia’s first new passenger train line since Dutch colonial times is being built out of Makassar, the city’s hotel occupancy rates are around 80 percent, and income per capita is twice the national average, Pomanto said. Economic growth in 2015 was above 7 percent in South Sulawesi province, and more than double that in Central Sulawesi.

Similar growth stories are being written across the nation, from the industrial estates of Tangerang next to Jakarta, to a new port in Medan in North Sumatra and resorts sprouting around Labuan Bajo on Flores.

Their success will help lift national economic growth, which a Bloomberg survey of economists predicts will reach 5.1 percent this year, after dipping to 4.8 percent in 2015. That compares with forecasts for contractions of 3.7 percent in Brazil and 1.5 percent in Russia, and growth of 0.7 percent in South Africa.

Jokowi wants the economy to expand even faster, at 7 percent by the time his term ends in 2019, and he’s been chewing away at the red tape and corruption that have held the world’s fourth-most-populous country back for so long.

‘Greater Confidence’

“There’s greater confidence that Jokowi’s reform program may add up to something substantive over time,” said Benedict Bingham, the International Monetary Fund resident in Jakarta. “The political framework, and Jokowi’s position within it, looks pretty solid.”

Indonesia isn’t out of the woods. Corruption is still rife in many parts of the country, which ranked 109th in the World Bank’s latest ease-of-doing-business survey, below Swaziland and Namibia. Tax revenues are falling short of targets, curbing spending by the government, which by law can’t blow out the budget deficit beyond 3 percent of gross domestic product.

Jokowi’s efforts to speed up infrastructure projects have drawn criticism from human rights groups. He held groundbreaking ceremonies for a Japanese-built power station and a Chinese-funded railway before the land had been secured, and began flooding a valley for a hydroelectric dam before all the residents had been fully compensated or moved.

Part of Indonesia’s equilibrium is a result of the dark days of 1998. The rupiah was the hardest hit in the region during the Asian financial crisis, when the economy crumbled under a pile of dollar-denominated debt.

This time it’s different. When the rupiah fell sharply last year and economic growth slowed to a level not seen since 2009, the central bank resisted calls to cut rates. Instead, Jokowi installed a more business-friendly cabinet and released policies to bolster businesses, such as opening more sectors to foreign ownership.

Unlike in 1998, debt is tightly controlled. Public borrowing is the lowest among emerging market economies at 28 percent of GDP, while household debt at 15 percent is one of the smallest, said Taimur Baig, Asia chief economist for Deutsche Bank AG in Singapore.

“This is a region that still remembers 97-98,” said Sudhir Shetty, chief economist of the World Bank’s East Asia and Pacific region. “They did learn those lessons.”

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