Indonesia has a very positive story to tell — for openers, its economy is on track to hit $1 trillion in GDP by 2014. The country is the third-largest democracy in the world and it is in a demographic sweet spot — half its population is under 30. But Indonesia is more widely known for its string of natural disasters and the richness of its natural resources than for its industry and infrastructure.
Gita Wirjawan, a 44-year-old former investment banker with Goldman Sachs and J.P. Morgan, last year became Indonesia’s chairman of Badan Koordinasi Penanaman Modal (BKPM), the country’s Investment Coordinating Board, a ministerial-level post. He believes his country has been misunderstood in the past, and that “the world needs to understand Indonesia in a different way.” Wirjawan spoke with Knowledge at Wharton recently in Jakarta about his efforts to attract global investors.
An edited transcript of the conversation follows.
Knowledge at Wharton: Let’s start by talking about the Indonesian economy. When people think about global investments in Asia, the countries that tend to come to mind are the giants like China and India and to some degree Korea and, when you think of the emerging markets, Vietnam. In this global environment, how do you position Indonesia as a destination for international investors? How will that positioning drive your strategy?
Gita Wirjawan: What we have to do is project positive realities about Indonesia, or in other words, pitch positivity with realism. Not many people in the right places know about us. The most fundamental area that we have to work on is to elevate the level of awareness — and we are doing that. We are reaching out to different parts of the world — to the United States, to Europe, to many parts of Asia-Pacific — to let everybody know that Indonesia is a $650 billion economy this year, and that it has 240 million people, making it the third-largest democracy, and that it is the largest Muslim country, and a modern one. That, I think, is being remedied as we go.
Beyond that, we would like to educate the international community with respect to some of the other positives about Indonesia. For instance, not many people know about our fantastic demographic dividend — 60% of the population is 39 years old or younger and 50% is 29 or younger. Compare those numbers with the situation in countries like Japan and China. We not only have a competitive economic environment but we also are able to show political stability. If you had talked to me about Indonesia 11 or 12 years ago, it would have been tough for me to project Indonesia in a positive way — in a realistic manner. Now we’ve got those two elements — macroeconomic stability and macro-political stability.
From an economic standpoint, we’ve been able to show fiscal sustainability. We’ve been able to show monetary stability for the last five or six years. There is no apparent inflationary pressure coming, as we had seen a few years ago. Our ability to balance our budget has been recognized by the international community — particularly the ratings agencies. Our ability to trim down our debt to a mere 28% debt-to-GDP ratio is commendable, especially if you put that number in the context of what some of the other economies in the world are going through today. That’s the macroeconomic stability story we need to tell.
As for political stability, we have gone through a rather difficult democratization earlier on, but we’ve been able to show to the rest of the world that we have democratized in a good way. And there’s no apparent centrifugal force now that could rip the country apart like many people thought would happen 11 or 12 years ago. So you can tick off those boxes on politics and the economy.
Beyond that, one needs to take into account Indonesia’s ability to remedy its mistakes. Indonesia needs to stop being known as a country of tsunamis, earthquakes, floods and all the negatives that have been portrayed in many international media.
The world needs to understand Indonesia in a different way — it has been more misunderstood than it deserved. And that’s what we’re trying to remedy by sitting down with think tank organizations and people within academia and within executive decision-making bodies.
Knowledge at Wharton: What would be the likely impact on Indonesia if economic problems in Europe were to worsen? Do you get a lot of your foreign direct investment (FDI) from there and would that be affected?
Wirjawan: Many have recognized that the recovery that we are seeing in the United States and also in Japan is rather broad based, and we take comfort in that. But what’s happening with Europe is not only concerning to the Europeans — it could also concern many in the rest of the world. Fortunately, our linkage with the European Union countries from a trade standpoint — our export level to Europe — is not significant enough for us to be too concerned. That is also true of our bank claims ratio, in terms of European banks that might need to “claim back” their exposure to borrowing by the Indonesian government or Indonesian companies. But we do have an exposure that is quite large with other countries outside Europe that, in turn, have quite a significant exposure with the EU. So in an indirect manner, we have to be cautious in terms of how we go forward.
How is all this going to impact investment flows coming from Europe? It could have a pretty serious impact. But we have to underline the point that a good chunk of the investment coming into Indonesia thus far has been coming from Asian countries — the Southeast Asian countries and the Japans of the world and the Koreas and increasingly Taiwan and mainland China. And in the last quarter or so, we are seeing an increasing amount coming from the United States.
So while we have to be cautious, we also have to continue deepening our communication with some of the countries that have been loyal and contributing to the investment map in Indonesia.
Knowledge at Wharton: What about China’s recent decision to let its currency appreciate? What impact do you see that having on Indonesian exports?
Wirjawan: The impact is potentially enormous, for two reasons. Number one, if you look at the economic structure of China and that of Indonesia, there is a great degree of complementarity. China for the last 20 years has been driven by investments, and Indonesia has been driven for the last 15 years by domestic consumption. And China is trying to move the pendulum from an investment-centric economy to more of the human capital development and more domestic consumption. For its part, Indonesia needs to move to a more investment-centric model. So that complementarity will play out nicely if we get our act together in terms of inviting and encouraging Chinese investors to come to Indonesia.
And, second, the increased strength of the yuan, or renminbi, will encourage the Chinese to shop for even more goods and services and hopefully to make more investments in Indonesia. We have seen a significant expression of interest by many Chinese companies. The numbers in terms of realization have not been as staggering as the expression of interest, but there is always a lag between expression of interest and actualization of the investment. We have made a couple of trips to China in the last few months and we have been visited by throngs of Chinese companies who have expressed their interest in building the infrastructure (the power generation capabilities, roads and bridges) on the back of their keen interest in getting natural resources from Indonesia such as coal, bauxite, nickel and iron. So we’ve got to be cognizant of ensuring that there is value optimization — we don’t want to just sell coal and natural resources but also attract investors, including the Chinese, who help us create more of a value added to the value chain.
Knowledge at Wharton: Speaking of human capital development, the Indonesian economy has been based to some degree on domestic consumption and to some degree on the successful use of natural resources. How do you envisage moving from that to a knowledge-based economy? Do you have a strategic vision for how Indonesia could get there?
Wirjawan: We do. If you look at our investment road map, the first phase obviously involves the quick wins. The quick wins unfortunately, or fortunately, involve some of the more natural-resource-centric investment pieces. But we are trying to go to the second phase, of basically creating infrastructure. Not just building roads and power-generation capabilities, but the soft part, which involves more capacity building so that we can weed out policies that are confusing, policies that are a little too ad hoc, with a view that we can go forward in a more strategic manner. The investments in the infrastructure — soft and hard — will allow us to go to the third phase, of large-scale industrialization, which we need.
Because we need to ensure that there is vertical integration in a value chain, we’ve got to move away from just natural resources. We’ve got to ensure that we also go to the downstream side of things. We don’t just sell bauxite, but we’ve also got to build smelters. We don’t just sell cocoa, but we’ve got to build the chocolate factories. We don’t just sell palm oil, but we’ve got to build the refineries — similarly with oil and gas. That approach will add value and also create jobs.
Now, is large-scale industrialization likely to happen soon? It could, if we take a fiscal view of things. In other words, we have to go beyond just mapping things out and decide on which industries we want to support that would create a lot of value. And then we need to provide the necessary fiscal structure and space, whether that involves giving fiscal incentives or other assistance. We’ve got to really make a decision on this soon.
If we can get that done, you can see Indonesia’s ability to manufacture goods and services in a big way, which can allow us to position ourselves as a knowledge-based economy, the last phase of our investment road map. That’s a 10- to 15-year view of the road map.
We’ve got the demographic bonus working to our advantage. And let’s not forget the government’s commitment in terms of educating the society — the government is allocating 20% of its budget, indirectly and directly, for purposes of education. With that kind of a commitment, we’ve got a good chance.
Knowledge at Wharton: With that as background, let’s turn to some of the specific things that you are doing at the Indonesia Investment Coordinating Board to advance the mission. Was the elevation of the office to the ministry level helpful in tackling some of the challenges?
Wirjawan: It mattered, but not as much as people think. A lot of what we have done is mainly out of the institution’s own initiatives as opposed to the fact that it is ministerial in level. One classic example was our ability to create a one-stop shop for investment, which was implemented in February. This involved a delegation of authority from 15 ministers and we were able to get that in a relatively short period of time, and then we were able to simplify the investment decision-making process in Jakarta.
Now we can issue a license in five hours — compared with waits, in the past, of up to seven days. Now we can give you immigration permits, labor permits and even fiscal incentives for certain industries without your having to go to all the different ministries. The challenge is to roll this out to all 33 provinces and all 500 regencies — that’s a monster in itself. We have set a target to roll it out in all 33 provincial capitals and the capitals of 40 regencies by the end of the year. If we can get this done, which I believe we can, we will see a significant unlocking of value.
Knowledge at Wharton: Many international investors are confused about what has come to be called Indonesia’s “negative investment” list. In some countries, such restrictions are meant to protect domestic industry from international competition. Was that the case here? And are there plans to liberalize certain areas?
Wirjawan: The list tells the whole world, including domestic investors, what sectors they can or cannot invest in and the extent to which they can invest in any particular sector. So as much as it has that negative connotation, it should have been called a positive list because it talks about the sectors that you can invest in and the extent to which you can invest. We have taken a view to liberalize some sectors, and this is starkly different from how we crafted it in 2006 and 2007. We have decided to basically liberalize up to 40 sectors although we have not decided to open up some sectors that I know foreign investors would love.
Knowledge at Wharton: Which ones are you not opening up?
Wirjawan: The one that we have decided to close clearly is the telecommunications towers — the government has decided to keep that closed for now. But a word of encouragement is that we have taken out the language that this negative list could only be reviewed every three years. So there is an open mindedness in terms of spirit. And I have always told everybody in Indonesia and outside Indonesia that to the extent you have got a view of a certain sector, in terms of how it ought to be closed or opened up, there’s a mechanism with which we go forward with this. And that mechanism involves a cost-benefit analysis. We have also asserted the language of hierarchy — in the past we did not have clarity on this. You would have a presidential decree. You would have a ministerial decree. You would have a collective ministerial decree. And so on, all on an ad hoc basis. Now the presidential decree surely supersedes a ministerial decree or any other decree lower than a ministry. So this is progress and a process. Is it perfect? Is it ideal? Perhaps not. But this is a lot better than how it looked previously. And we have basically sat down with the foreign chambers and many of the local chamber of commerce members. I think they are quite happy with us.
Knowledge at Wharton: Let’s assume that international capital responds and you start an influx of capital coming into the 40 sectors that are being opened up. What kinds of returns can investors expect to earn in these sectors? And how would they compare to the returns from similar investments in other countries, such as the BRIC economies?
Wirjawan: Well, that’s a longer conversation, but I’ll give you my two cents worth. You’ve got to take into account the trajectory of Indonesia. If one takes a five- to ten-year view of Indonesia, it looks pretty good as an investment thesis. And we are significantly under-hyped compared with some of the other countries. Consider Vietnam, for example, and the infrastructure there. We’ve got a pretty good infrastructure in Jakarta and many other cities in Indonesia. Let’s not forget that Fitch and Standard & Poor’s recently upgraded us. We are rated BB+ by Fitch. Japan’s credit rating agency now ranks us as being investment grade.
Knowledge at Wharton: When do you expect to make the investment grade elsewhere?
Wirjawan: In the next 12 to 18 months, realistically. With the continuation of the fiscal discipline and the fiscal decentralization that are being done as we speak and the improvement that we’re making in terms of the investment climate, there is no reason for us not to be an investment grade country in the next 12 to 18 months. That’s going to reduce the cost of capital. That’s going to improve your IRR calculation. We are committing $50 billion from a budgetary standpoint for the development of infrastructure as part of a $150 billion five-year program. That will produce 20,000 kilometers of new roads and an additional 15,000 megawatts of power generation. That is going to create a much higher degree of connectivity than what we have today. So if you take those improvements into account — along with the fact that we are under-hyped and that we have our natural resources, the demographic bonus, the political stability and all that — we are an enormous opportunity for anybody.
Knowledge at Wharton: Why is the cost of capital in Indonesia higher than in other places?
Wirjawan: If you take into account the credit default swap, it is reflective of the perceived risk. As more and more people do not misunderstand Indonesia as much as before, that perception of risk will lessen. And that change in perception will reduce the premium and surely reduce the cost of capital for Indonesia to borrow in U.S. dollars. And with the declining swap rate, you are going to see a continuing decline in the cost of capital in rupiah. The government is aware of this and is in the process of trying to figure out a way to elongate the instrumentation for debt so that it can be channeled to support the infrastructure development. To the extent that takes place, we are not going to see as much of a liquidity trap as we have thus far. That will also help to reduce the cost structure for Indonesia.
Knowledge at Wharton: What is your view of the potential for private equity in Indonesia?
Wirjawan: The potential is enormous. The amount of private equity funds that have been invested or managed with respect to Indonesia is very small in absolute value — we’re talking about no more than $2 billion. Let’s take a look at the market cap of the Indonesian stock market. It hovers around $220 billion. As for our economy, as I said earlier, it is a staggering $650 billion, the largest in Southeast Asia, and it is expected to grow to around $1 trillion in 2014. Put the size of the private equity funds in Indonesia in the context of the market cap and the economy, and it presents an enormous opportunity for many to take a look at us.
Knowledge at Wharton: As you mentioned, Indonesia has a very young population, which you’ve called a demographic dividend. Are you making efforts to encourage entrepreneurship and innovation to create new jobs for those young people through venture capital, for example?
Wirjawan: Yes, but not substantially yet. We need to take a view on how we can cultivate the small and medium entrepreneurship efforts. The bulk of the investment flows in Indonesia, from within and from without, actually relate to small and medium enterprises, and that involves entrepreneurship in a big way. We need to think about how to promote these efforts in an even bigger way — and how to lead them to a more innovative thought process, whether that includes thinking about going to the capital markets model after a few years for exit mechanism purposes or for value crystallization purposes or value maximization purposes.
We are still thinking through this — this is the homework that we have got to do in the next two to three years. But we’ve also got to sit down with the other relevant ministries — the Ministry of Cooperatives, the Ministry of State-Owned Enterprises and the Ministry of Finance — because if we refer back to the old days of 15 years ago, there was a subsidy mechanism from the banking system in terms of interest rate subsidies for small and medium enterprises. That system was abolished. I’m not suggesting that we should re-implement it, but we need to identify and come up with a mechanism that would catalyze small and medium entrepreneurs in a bigger way because that is what will sustain economic growth.
Knowledge at Wharton: Since you referred to the fact that Indonesia is under-hyped, can you give me a realistic view of a foreign direct investment in Indonesia that worked well for the country, for the economy and for the investor?
Wirjawan: Well, first of all, in the first quarter FDI went up by 41%. And from what we are detecting in the second quarter, that momentum is likely to continue. Overall investment spiked up by 25% in the first quarter so there is a decline from a domestic standpoint, but domestic has historically been a much smaller component of the whole investment flow.
Now in terms of cases, we have been able to attract a large Middle Eastern player to build an integrated infrastructure project in East Kalimantan — to build a port, a 130-kilometer rail track, 1,300 megawatts of new power generation capability and a smelter with 500,000 tons of capacity. They also bought a coal mine. They have started. They have poured quite a significant amount of money in — the total will be about $5.2 billion.
We’ve also been able to convince Holcim from Switzerland to do a massive expansion of its cement capabilities. And we are in talks with a large electronics manufacturing firm in Asia — it is one of the largest in the world — to basically relocate its manufacturing capability for Southeast Asia to Indonesia.
As more and more people understand the cost competitiveness of Indonesia — particularly from a labor standpoint — and learn that it is a country with positives, more and more investment will come. The end game is quite simple. It is to be able to convince somebody from Omaha, Nebraska, to put a dollar in Indonesia. And if I can do that, then the billions will come.
Knowledge at Wharton: Let’s end with a personal question. In addition to your life in business and government service, you have a love of music — you are a jazz pianist and a music producer. What does music mean to you?
Wirjawan: Music is everything to me.
Knowledge at Wharton: Has it been a source of personal growth?
Wirjawan: Tremendously. I went to the U.S. on a music scholarship. Unfortunately, or fortunately, I had to switch majors to accounting because my parents were not too thrilled. But music has been a source of creativity and dynamism in whatever I’ve been doing thus far. And it has, I think, shown up a little bit in some of the stuff we’re doing at BKPM.