Momentum Building

Indonesia

Economic News

22 Jul 2010
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While Indonesia's economy has avoided slipping into recession, posting solid growth throughout the global crisis, there are still some underlying concerns that Jakarta needs to address.



By most measures, Indonesia has been a star performer throughout the international economic crisis. Bank Indonesia, the country's central bank, has just upgraded its growth estimates for this year, with GDP now expected to increase by 4.3%, up from earlier predictions of between 3.5% and 4%. Official forecasts for GDP movement next year anticipate expansion of 5.5%, though some private analysts suggest this is a pessimistic estimate.



The country's solid economic sector performance was underscored in early October by figures released by the Central Statistics Agency (BPS) showing that exports had topped the $10bn mark for the month of August, the first time this barrier had been broken in nine months.



Another source of good news came from the stock exchange, with the Jakarta Composite Index surpassing the 2500 barrier on October 6, taking the increase of the index since the beginning of the year to 70%.



Ensuring the economy continues to perform to this standard will be the major challenge for President Susilo Bambang Yudhoyono when he begins his second five-year term on October 20 this year.



Part of that challenge will be to make sure that the benefits of the economy's strength filter down to as many people as possible. Though Indonesia has made solid progress in improving income distribution, with the rate of those below the poverty line having dropped from around 20% of the population to just over 14%, according to the Asian Development Bank (ADB), this still represents 35m people not able to meet their basic needs.



The bank has also warned that a further 42% of Indonesia's population were vulnerable to sliding into poverty if economic circumstances suddenly deteriorated.



It was these very concerns that prompted the ADB to provide Indonesia with a $500m loan facility to support the government's own $7.6bn economic stimulus programme.



"Indonesia's economy has been resilient during the global crisis, but with exports, private investment and consumption still sluggish, strong countercyclical fiscal stimulus is needed to protect the social sectors and support poverty reduction," Arjun Thapan, the director-general of the bank's South-east Asia department, said in a statement announcing the loan on October 7.



There are some factors beyond the government's control, foremost of these is the price of oil, which the government has valued at $65 per barrel when determining the 2010 budget. Any increase above this rate will put pressure on state expenditure, adding to the $6bn set aside for fuel subsidies.



Higher oil costs could force the government to either outlay more through subsidies or authorise a price increase at the pumps, a rise that would flow into the economy and dampen demand while pushing up inflation. Of course, if the state chose to pump more money into subsidies, this would reduce the funds available for other elements of the economic stimulus programme. However, with global demand slow to build, the budget's pricing level for oil may prove to be adequate.



Though widely praised for riding out the global storm, at least some experts believe fortunate circumstances as much as good management helped see Indonesia through the crisis.



"We survived the crisis not because of a strong economic structure, but because we were lucky. Our banks didn't have subprime mortgages. Our exports were not yet competitive, and did not account for a large portion of the economy," Faisal Basri said on October 7 when launching a book on the workings of the Indonesian economy.



In order to give the economy something more solid than fortune to ride on, the noted economist said the government should do more to bolster the manufacturing sector, a move he said would help reduce unemployment and improve poverty alleviation.



It seems that the government is thinking along the same lines as Faisal and other experts. On October 6, the foreign investment coordinating minister, Muhammad Lutfi, outlined part of the second-term policy programme the government was planning to follow.



Foremost among these would be efforts to create a larger production system and implement re-industrialisation, Lutfi told a seminar on Indonesia's response to the global crisis.



Increasing industrialisation levels would be promoted through providing tax holidays for investors, government guarantees for loans and ensuring that liquidity was available in the market, the minister said.



Having flagged its intention to address some of the problems still facing the economy, and having the resources to do so, the Indonesian government appears prepared to make its own luck as it promotes growth and competitiveness.

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