-- Indonesia's consuming class could increase 90 million from 45
million today
-- Increase in members of consuming class second only to China
and India globally
-- Consumer services, agriculture/fisheries and resources could
be worth $1.8 billion by 2030
-- Within consumer services, financial services offers the
greatest investment opportunity
-- Demand for skilled workers could expand private-education
economy four-fold
By Ben Otto
JAKARTA--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 ben.otto@dowjones.com
