Indonesia

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.

With its low debt-to-GDP ratio, abundant resources, growing consumer demand, healthy political discourse and rising investment, Indonesia is set to lead the region and could become the world’s sixth-largest economy by 2030. But its bright future remains at risk due to bottlenecks that are the result of the lack of infrastructure and of the low quality of what is already in place.

With oil and gas imports weighing on its trade balance, Indonesia is taking steps to reduce domestic demand for fuel and boost local refinery capacity. These moves come as the International Energy Agency (IEA) has released a report projecting that energy demand in the South-east Asian country is set to nearly double over the next two decades.

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.

An expanding middle class and a broadening economic base have been cited as two of the driving forces behind the forecast for rapid expansion of the Indonesian automotive industry, with predictions that domestic and regional demand will combine to boost growth over the next few years. However, rising interest rates and a weaker rupiah may put a damper on sales in the more immediate term.

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.