Indonesian economy set to surge

Indonesia’s economy is expected to power ahead this year, as its vast domestic market and natural resources continue to pull in investors.

But clouds are looming – a restive labour force and rising economic nationalism could see businesses hold back. Nevertheless, many believe the rewards will outpace the risks.

“Strong and growing household consumption amid the global slowdown means growth will be sustained in the coming year,” University of Indonesia economics lecturer Muslimin Anwar said.

Indonesia saw 6.3 per cent growth last year, and is projected to grow 6.5 to 6.8 per cent this year. The fastest-growing sectors in recent years signal a country on the move – mining, trade, hotels and restaurants, and transportation and communications.

The fastest-growing regions and cities such as Balikpapan, Makassar and Pekanbaru are enjoying growth of nearly 10 per cent.

Domestic demand accounted for some 65 per cent of the gross domestic product (GDP) – boosted largely by rising incomes that have seen the middle class expand to more than half the national population of 240 million.

Meanwhile, foreign direct investment, estimated to have hit US$21 billion (Bt635 billion) last year, is expected to reach $29 billion this year as multinationals seek bases with long-term potential. The World Economic Forum’s 2012 competitiveness report on Indonesia ranked it 25th in terms of macroeconomic stability, ahead of Thailand and Malaysia, while the McKinsey Global Institute expects Indonesia to be the world’s seventh largest economy by 2030.

But strains are showing too, especially in Java: Roads, railways and airports are congested, as infrastructure building has not kept up with demand.

Another worry, says Standard Chartered senior economist Fauzi Ichsan, is that the rupiah is falling against the greenback, with the rate at nearly 10,000 rupiah to the dollar – well below the 9,300 rupiah targeted by planners.

One reason is the trade deficit. Exports weakened after slowdowns in markets such as China. This limits dollar supply for exporters while demand to finance imports continues to rise.

Ichsan says Bank Indonesia should intervene more aggressively in currency markets, and the government should cut the fuel subsidy and divert spending to more urgent areas.

“As the country approaches the 2014 elections, there is the risk that policymakers will lose focus,” he says.

Vice-President Boediono has already sounded the alarm, warning in a speech this month that politicians might not make unpopular but necessary economic decisions should global conditions worsen.

Others feel that while politics might get in the way a little, it will also help, as aspiring candidates start spending on campaign supplies ahead of national elections next year.

“Rising household consumption is backed by strong purchasing power and steady consumer confidence, as well as preparations in the lead-up to the 2014 elections,” says the University of Indonesia’s Dr Muslimin.