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Investors look further afield than Java

Publication Date : 27-01-2014

 

Densely populated Java will no longer be the economic heartbeat of the country as more investors turn their attention to other parts of the archipelago.

Of the 105 trillion rupiah (US$8.6 billion) of realised investment in Indonesia in the fourth quarter, realised investment in Java shrunk to 59 per cent, compared to 63 per cent the same period a year earlier, according to data from the Investment Coordinating Board (BKPM).

In contrast, realised investment outside Java rose to 41 per cent from 37 per cent.

“The recent trend shows that investors have begun to notice that other parts of Indonesia offer opportunities,” BKPM chairman Mahendra Siregar said.

“Our past centralisation policy created the impression that Indonesia only consisted of Jakarta and Java,” he said during an interview in his Jakarta office.

The centralisation policy, pioneered by Soeharto, created a wide income disparity between Java and the rest of the country.

During the 32 years of his tenure, the Javanese leader concentrated all economic and political activities in Java, a strategy that led to the underdevelopment of infrastructure and necessary facilities elsewhere.

Data from the Central Statistics Agency (BPS) shows that Java remains the most powerful driver of growth, contributing 58 per cent of the 5.6 per cent gross domestic product (GDP) growth posted in the third quarter last year, followed by Sumatra (24 per cent), Kalimantan (8 per cent) and Sulawesi (5 per cent).

The fall of Soeharto in 1998 paved the way for a more decentralised political system, leading to rapid economic progress in areas that were once overlooked by the previous government.

Decentralisation helped unveil commercial opportunities in areas outside Java, the potential of which is so immense that several international consulting firms have strongly advised their clients to expand there.

The Boston Consulting Group predicted that this decade the middle-class population in Sulawesi and Kalimantan will grow by 109 per cent and 100 per cent, respectively, outpacing the predicted 69 per cent increase in Greater Jakarta and 96 per cent for the rest of Java.

Meanwhile, McKinsey & Company noted that the majority of fast-growing cities were outside Java, with Batam, Pekanbaru and Makassar enjoying the fastest GDP growth of the past ten years.

The US-based consulting firm also identified five “hidden gems”, comprising Denpasar, Bali; Padang, West Sumatra; Bandar Lampung, Lampung; and Gresik and Madiun, East Java.

The cities all score highly for rapid urbanisation rates, disposable income and consumption pattern, compared to other cities in Indonesia.

“We would like to highlight that there are further growth opportunities beyond the traditional cities,” McKinsey Indonesia president director Arief Budiman said recently.

He explained that many large companies might need to find “the next source of growth” for their businesses. Meanwhile, mid-sized companies could benefit from opportunities in middleweight cities as the market in large, established cities tended to already be mature and saturated.

McKinsey also noted that the challenging business landscape in areas outside Java should be seen as an opportunity rather than a challenge.

“The challenge in infrastructure [in places outside of Java] needs to be addressed,” said Arief. “But, the hope is that as these middleweight cities grow, infrastructure will gradually improve.”

 

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