While many European countries are struggling to avoid slipping back into recession, because of the deepening debt crisis engulfing the eurozone, one of the main problems facing the Indonesian economy appears to be how to avoid economic overheating.
Much of the heat in the economy is coming from the home front, with rising consumer demand and private sector investments adding fuel to the fire. Though having eased slightly from its record highs as of the beginning of the year, Indonesia's consumer confidence levels are still slanted well into the positive, according to a recent study conducted by market research firm Roy Morgan, with the confidence index standing at around 121.6 points as of the end of the first quarter.
Though down three points from three months before, having the confidence index more than 22 points above the neutral territory of 100 is a solid indicator of an active economy, said Roy Morgan consultant Debnath Guharoy.
"Almost without exception, the indicators are overwhelmingly positive for the economy," Guharoy wrote in an article carried by the local press on May 25. "If employers look at their marketplace with equal confidence, unemployment will continue to decline and wages continue to grow. That's the cycle that greases the big wheel best."
Proof of this confidence came in late May, when the local automotive industry association Gaikindo announced that vehicle sales had gone into top gear since the beginning of the year, with 238,680 units rolling off the lots in the January-April period, a 78% rise over the 134,050 units sold in the first four months of 2009. In April alone, 65,122 vehicles were sold – a 90% year-on-year increase – with sales of commercial vehicles up by more than 100% and those of passenger carriers accelerating by around 80%.
Further proof, were it needed, came from state's statistic bureau, which released figures on May 10 showing the economy had expanded in the first three months of the year at its fastest rate since late 2008, with GDP up by 5.7% year-on-year. Booming household spending and continued moderate levels of inflation drove this strong growth – with annuallised price rises still running at less than 4% as of the end of April. This in turn has allowed Bank Indonesia to keep interest rates at a historic low of 6.5% since last August.
According to Veronika Lukito, the managing director of Ancora International, the economy is well positioned to grow strongly, and to attract increasing levels of overseas investments.
"It seems as though Indonesia could grow between 5-6% without having to do anything," Lukito told OBG. "There has been an improved interest in the potential of Indonesia as a destination for foreign investment. Primarily Chinese and regional investors are actively assessing opportunities in the country."
It seems as if at least some of that potential is being realised. Capital inflow from overseas was up in the first quarter, according to the Investment Coordinating Board (BKPM), which in late May reported $3.9bn of foreign direct investment (FDI) to the end of March, a 42% year-on-year increase.
Though the European debt crisis could have an impact on short-term investors, those looking to the longer term and investing in capital projects would remain focused on Indonesia's economic fundamentals, including its strong domestic demand and the country's political stability, said BKPM chairman Gita Wirjawan. There should be sustained growth of FDI in the second quarter and beyond, Gita told local media on May 24.
"What we have seen in the second quarter is quite promising. We believe we can sustain the momentum for growth," Gita said.
That momentum can in part be sustained by Indonesia's continuing improvement as an investment and business destination. On May 18, the Institute for Management Development (IMD) released its 2010 World Competitiveness Yearbook, a comparative study of 58 leading global economies measuring how countries created and maintained conditions favourable to business. One of the big movers in the rankings was Indonesia, which climbed seven rungs from last year to 35th overall.
The improved ranking was a sign that Indonesia's economic foundations were more solid than many had previously thought and that the country had shown itself to be resilient to the effects of the global financial crisis, said the deputy trade minister, Mahendra Siregar.
Though stabile, Indonesia still had to do more if it wanted to continue its climb up the rankings, with further improvements to its infrastructure network essential, Mahendra told the local press on May 21.
"If we could have improved infrastructure, we might have had a bigger jump," the minister said.
The relative weakness of the country's infrastructure was highlighted in the IMD report as a major factor in holding back economic development, with Indonesia being rated 55th out of 58 in that category. By comparison, Indonesia ranked 23rd for government efficiency and 34th for business efficiency, while its economic performance for the past year was graded as 27th, a far cry from the 55th it was placed in 2007.
There are still a number of question marks hanging over the Indonesian economy. Analysts are looking for signs of firmness from the newly appointed finance minister, Agus Martowardojo, who is expected to continue the reform process launched by his predecessor, Sri Mulyani Indrawati – soon to become a managing director at the World Bank.
Indrawati has been widely credited with improving the standing of the economy in the eyes of investors and ratings agencies, implementing a series of reforms that streamlined bureaucratic processes and combated corruption. Her successor will be watched closely to see if he will be able to maintain the pace set by Indrawati in her five years in office.
Martowardojo will also have to work closely with Bank Indonesia to carefully manage the money supply, striving to keep economic growth while keeping a lid on inflation through tight control of interest rate policy.
There seems little risk that Indonesia's economy is going to slow any time soon but far more likely is that it expands too fast. Having just been appointed on May 18, Martowardojo will need to act fast to rein in any propensity of the economy to bolt.