Indonesia’s Revolution, Rising Demand and Role in the Global Economy

William Mellor and Femi Adi

In May 1998, Indonesia was in turmoil. During the previous 10 months, the currency had plunged 80 percent in value and food prices had soared 200 percent.

Rioters were marauding through Jakarta, torching businesses owned by wealthier ethnic Chinese, who were fleeing for their lives. Safely ensconced in Hong Kong, where he was on vacation, an Indonesian-Chinese retailer named Djoko Susanto could have sat tight. Instead, he flew home to defend his four supermarkets from the mob.

As he transited Singapore, where planes were arriving from Indonesia full and returning empty, the airline’s crew stared at him in disbelief. “There were five people on my flight,” Susanto recalls. “And I was the only Chinese.” While he couldn’t save his stores — all four were looted to the last light bulb — Susanto was on hand to seize an opportunity that would make him a billionaire, Bloomberg Markets reports in its June issue.

More than 1,100 people died in the 1998 riots, and the economy contracted 13 percent that year. Doomsayers predicted that the world’s fourth-most-populous nation would fragment. Susanto — who, as a child, had slept under a mosquito net on the dirt floor beside his impoverished parents’ market stall — bet that Indonesia would survive and that its vast mineral and agricultural resources would enrich many of its 238 million citizens, creating a dynamic consumption-driven economy.

When that happened, Susanto reasoned, many Indonesians would prefer to shop locally in air-conditioned minimarts rather than at traditional roadside shacks, or warungs. In Oct.1999, barely a year after the riots, Susanto opened the first of what’s now a chain of 6,000 stores called Alfamarts. The investment proved prescient.

From 1999 through the end of 2011, Indonesia’s annual growth surged from zero to 6.5 percent, swelling the number of middle-class consumers by 50 million to more than 130 million, according to the World Bank.

While other fast-developing countries such as China struggle to switch from an export-led to a consumption-based growth model, Indonesia is ahead of the game: Consumer spending accounted for 55 percent of gross domestic product in 2011; the comparable figure for China in 2010 was 35 percent.

Pong Ho Yin, a Hong Kong-based fund manager at Allianz Global Investors, which oversees 279 billion euros ($368 billion) worldwide, and runs Munich-based Allianz’s Indonesia fund, says he believes that the country with the world’s biggest Muslim population could soon be ranked alongside the emerging BRIC giants: Brazil, Russia, India and China.

In the last quarter of 2011, Indonesia’s GDP growth, while lagging China’s 8.9 percent, exceeded India’s 6.1 percent, Russia’s 4.8 percent and Brazil’s 1.4 percent, according to data compiled by Bloomberg. In this economic environment, Susanto has thrived.

In 2009, he sold 10 percent of the shares in his company, PT Sumber Alfaria Trijaya, on the Indonesia Stock Exchange, raising 135 billion rupiah ($15 million). As of May 1, the stock had climbed more than 13-fold compared with a threefold increase in the Jakarta Composite Index.

On May 1, Susanto’s 56 percent stake was worth about Rp 11.4 trillion, or $1.24 billion. Not bad for an entrepreneur who left school at 16 because his parents couldn’t afford the fee demanded by the government to change his Chinese name, Kwok Kwie Fo, to an Indonesian one, as required by law.

From the beginning of 2009 to May 1, the Jakarta Composite was the world’s fifth-best-performing benchmark index out of 96 tracked by Bloomberg, returning 232 percent compared with a 70 percent rise in the MSCI BRIC Index. Indonesia is the world’s No. 1 exporter of power-station coal, tin and the palm oil that greases one-third of the world’s frying pans and woks. It’s also home to the largest gold mine and the single biggest recoverable copper reserve and is the world’s second-biggest exporter of liquefied natural gas.

Foreign direct investment — the biggest source being neighboring Singapore — jumped 20 percent last year to a record $19.3 billion. In the space of five weeks in December and January, both Fitch Ratings and Moody’s Investors Service raised Indonesia’s debt to investment grade. By contrast, Standard & Poor’s in January downgraded nine European nations, five months after stripping the U.S. of its AAA status.

“In the midst of downgrades, we have been upgrading,” says Indonesian Vice President Boediono, who has a Ph.D. in economics from the University of Pennsylvania’s Wharton School. The ratings firms’ confidence reflects Indonesia’s ascent from bankrupt dictatorship to fiscally stable democracy.

Under President Suharto’s reign from 1967, businesses in favor with the government exploited an economy reliant on crude oil exports. IMF crisis-management measures began to change that, forcing the breakup of some monopolies. From 1998 to 2004, three more presidents came and went before the election of Susilo Bambang Yudhoyono.

When Yudhoyono, 62, a retired general who underwent some military training in the US, came to power, he sprinkled his administration with Western-educated technocrats such as Boediono, who ran the central bank before becoming vice president. Yudhoyono pledged to attract more investment by cutting interest rates, fighting endemic corruption, raising living standards and fixing crumbling roads and power stations.

In December, the parliament passed legislation making it easier for the government to acquire land for infrastructure construction, and Yudhoyono’s government says it wants to spend $18 billion this year on such projects. Jakarta has a population of 10 million and no subway.

Caterpillar Inc., the world’s largest construction- and mining-equipment maker, is betting that Yudhoyono will succeed. It announced in November that it will triple excavator production in Indonesia and spend $150 million to build its second manufacturing base in the country.

“Infrastructure has been promised in the past and not delivered,” says Kevin Thieneman, the Peoria, Illinois-based company’s country manager for China, India and Southeast Asia. “But this time, we believe it has legs.”

Whether or not Indonesia can fix its infrastructure, Djoko Susanto’s company stands to benefit. Ever the entrepreneur, Susanto has turned congestion on the streets into an advertising opportunity. He has plastered his delivery vans with slogans urging gridlocked motorists to save time and hassle by driving to the nearest Alfamart to shop.

Bloomberg