Indonesia Economy

Although external commodity price shocks and the declining value of the rupiah are the macro-economic trends dominating headlines about the Indonesian economy, some foreign investors still view labour policy and rising wages as greater challenges.

As concerns grow that an over-reliance on resource-related exports could see Indonesia repeat the boom-bust mistakes of its past, the country is being encouraged to accelerate moves to diversify its economy away from commodities and towards areas such as the creative industries.

With economic growth slowing, inflation rising and the currency weakening, Indonesia faces some tough macroeconomic challenges. However, the government has responded to the situation with variety of monetary and fiscal policy tools, including raising interest rates while at the same time rolling out fiscal stimulus measures.

Inflation in Indonesia picked up in the early months of 2013, as rising prices have constrained the Bank of Indonesia’s (BI’s) ability to loosen monetary policy to encourage GDP growth, with possible further rate rises to come. However, the robust economy is unlikely to suffer much as a result, particularly if other pro-growth measures are taken.

Lower-than-expected economic growth for 2012 in Indonesia has been widely attributed to uncertainty in the global economy, with rising domestic demand and investment levels set to back growth in 2013.

The Indonesian economy is maintaining momentum in 2012, despite difficulties across the globe. A large domestic market and growing foreign direct investment (FDI) are ensuring that expansion remains steady. Policymakers and government officials are aware of the downside risks that exist, however, particularly regarding the uncertain global economic climate and the need to tackle the issues that hold back Indonesia’s long-term prospects.