Faisal Maliki Baskoro – A World Bank report shows that despite challenges facing Indonesia, manufacturing is poised to grow as consumer-oriented companies set up businesses in the country because of its rising middle class and low labor costs.

The bank said in its economic quarterly report released this month that local manufacturers were likely to focus on Indonesia rather than ship their goods abroad. It didn't identify which firms would focus locally.

The share of local manufacturers that are exporters and the volume of the goods they are exporting have been declining, the bank said.

In the 2002-2004 and 2007-2009 periods, the number of manufacturers that were exporters fell to 11.6 percent from 14.4 percent of all companies doing business in Indonesia, while their average share of goods destined for exports by volume declined to 15.9 percent from 18.3 percent, according to World Bank data.

Industry Minister M. South Hidayat said on Dec. 17 that a debt rating upgrade, rising foreign direct investment and a strong domestic market were set to boost industrial production next year, despite the global financial crisis.

Manufacturing growth in 2012 could be in a range of 6.1 percent to 7.1 percent, with growth set to exceed the government's 6.1 percent target this year, he said. "So far this year, Indonesia has shown its resilience amid global uncertainties, but we are still not certain about the future," Hidayat said.

Manufacturing growth in the January-September period reached its fastest pace since 2005, according to Industry Ministry data. Output rose 6.49 percent in the nine-month period from a year earlier, and that was more than the 5.09 percent increase in the same year-on-year period for 2010.

Base metal production led the pace in the nine-month period this year, surging 15 percent; textiles, leather and footwear as a group rose 8.3 percent; food and beverage gained 7.3 percent; and heavy machinery industry was up 7 percent.

"These sectors and the automotive sector will be the drivers for manufacturing growth. We are optimistic that manufacturing could grow by 7.1 percent next year if Europe doesn't fall into crisis," Hidayat said.

Fitch's recent upgrade on Indonesia's sovereign debt to investment grade, the land clearance law, improving infrastructure and a new set of incentives will boost foreign direct investment in manufacturing sector, he said.