The economy of Indonesia has proved far more resilient to the global downturn than expected. In 2011 GDP growth is expected to increase slightly to 6.0% after a 5.9% growth rate this year.
As the economy is not greatly dependent on exports, with domestic consumption accounting for about 60% of GDP, Indonesia weathered the global crisis relatively well. GDP grew by 4.5% in 2009, down from 6.0% in 2008, as domestic consumption picked up, with the help of a US$ 6.4 billion stimulus package.
According to the Indonesian government, the economy grew 6.2% year-on-year in the second quarter of 2010 and 5.8% in the third quarter, thanks to continued strong domestic consumption, investments and a rebound of exports. After a substantial decline in 2009, due to falling commodity prices and recessions in Indonesia’s main export markets, exports have improved strongly in 2010. According to the Indonesian Statistics Office, total exports increased 40.4% year-on-year between January and August, to US$ 98.7 billion, while non-oil and gas exports rose by as much as 36.3%. Imports also increased markedly, resulting in a trade surplus of US$ 10.9 billion in the first eight months of the year. For the whole of 2010, the GDP growth forecast has been revised upwards from 5.6% to 5.8%.
Last year, inflation declined to 4.8%, due to decreases in the price of commodities and staples. Consumer prices increased to 5.6% year-on-year in October 2010, and are forecast to be 5.3% for the whole year.
The exchange rate of the rupiah has been very volatile over the last five years - and under serious pressure in 2008 and the first half of 2009 - but has strengthened again since then.
In March 2009, the government launched a stimulus package worth US$ 6.3 billion, including tax incentives for companies and individuals [US$ 4.8 billion], cuts in fuel and electricity prices [US$ 400 million] and infrastructure spending [US$ 1 billion]. Because of this measure and decreased tax revenues, the budget deficit increased to 1.6% of GDP in 2009. However, Indonesia’s good economic performance means that the 2010 budget deficit will be 1.5% of GDP: lower than the 2.1% expected at the beginning of the year. That said, in the medium term the government has to reduce expenditures on fuel subsidies.
Bank Indonesia has kept its benchmark interest rate stable at 6.5% since August 2009 to support both the domestic economy and the export sector, but a rate increase is foreseen at the end of this year as inflation is gradually rising.
In view of the historically low levels of interest rates in most developed countries, Indonesia, like other emerging countries, has benefited from large short-term capital inflows [portfolio investments] since 2009. Last year Indonesia’s stock market index was up 85% - outperforming the entire Southeast Asian region – and reached a record high in October 2010. Authorities have become increasingly worried about the massive inflow of speculative capital, which is driving further appreciation of the rupiah and could harm the economy if foreign investors were to decide to pull out quickly. As a safeguard, Bank Indonesia introduced capital controls in July 2010, including a minimum holding period for central bank notes.
Red tape, widespread corruption, a poor legal system, an inflexible labour market and poor infrastructure continue to limit the growth rate. During his first term, president Yudhoyono made some promising progress on economic reforms, including a reduction of political sensitive fuel subsidies, but other reforms, such as a reduction of other subsidies and labour market reform, were postponed because of popular pressure and political resistance. Despite Yudhoyono’s repeated promises to combat corruption, this remains widespread in society and business alike.
There are still too many barriers to foreign direct investment [FDI], which is severely hampered by the poor infrastructure and energy supply, so it is no surprise that investment in oil extraction capacity and infrastructure remains disappointing. Although Indonesia has made significant progress in reforming its tax system, observing international trade rules and dealing with licences, a further improvement in the still very poor business environment is needed to attract more FDI.
Indonesia owns large oil and natural gas reserves. The country is almost self-sufficient in oil production and remains a net energy exporter, owing to considerable exports of liquefied natural gas. However, under-investment in oil exploration has resulted in decreasing oil production.
The economy has proved far more resilient to the global downturn than expected. In 2011 GDP growth is expected to increase slightly to 6.0% after a 5.9% growth rate this year, led by domestic private sector demand. Indonesia’s relatively low reliance on external demand means that it should be largely unaffected by a possible slowdown in global growth.
The budget deficit will remain small - at 1.4% of GDP. As inflation is expected to gradually increase, Indonesia’s central bank may raise interest rates in the coming months. Additionally, a further tightening of capital controls to counter further rupiah appreciation and reduce the current huge capital inflows to the stock exchange cannot be ruled out.
Indonesia will keep its good solvency, comfortable liquidity and positive current account in 2010 and 2011. In order to secure long-term growth, more long-term foreign direct investment is needed to compensate for the shortage of domestic capital. This will require major improvements to Indonesia’s investment climate, to overcome shortcomings in the legal system, endemic corruption, and infrastructure and energy supply.