Indonesia: In the limelight

As Indonesia moves into 2011 with excellent prospects for long-term growth, its place alongside giants China and India as one of the most important economies in the world is being increasingly widely acknowledged.

In January, Jim O’Neill, chairman of financial services firm Goldman Sachs Asset Management and the man who coined the term “the BRICs” (Brazil, Russia, India and China – the four countries deemed to be at the forefront of the emerging markets boom of the past decade) named Indonesia as one of four new “growth markets”. O’Neill hopes the new term will replace “the BRICs” as a label for leading emerging economies, with Indonesia – along with Turkey, South Korea and Mexico – joining the original four countries as engines of growth that will drive the global economy in the post-crisis era.

The recognition of Indonesia as one of the most important and dynamic markets is a timely reminder that this vast and resource-rich country – the world’s fourth-most-populous, with nearly 240m people – is ready to take centre stage. Notice had already been served by the inclusion in Goldman’s list of the “Next Eleven” (N-11), the “Emerging and Growth-Leading Economies” (EAGLES), a term coined in late 2010 by Spanish banking group BBVA, and the “CIVETS”, another list of leading emerging economies issued by Robert Ward, global forecasting director for the Economist Intelligence Unit (EIU), a UK-based economic analysis outfit. But O’Neill’s judgement that the time has come to be listed with China and India is arguably the most important sign that Indonesia has finally stepped into the global economic spotlight – the last several years, which saw impressive growth, have made it clear that the country is now ready to live up to its vast potential.

Indonesia weathered the economic turmoil of the past few years remarkably well, despite the difficulties experienced by many of its export markets. It posted 4.5% growth in 2009, when the global economy (and those of several of its neighbours) contracted and the 2010 rate looks likely to have been 6% or higher. The Jakarta Composite Index (JCI), the country’s benchmark stock index, continued to rise over the past two years. Strong domestic demand helped power Indonesia through the downturn, while its financial system, much reinforced since the 1997 Asian economic crisis, held steady and kept loans flowing to businesses and consumers.

With the world economy, and particularly the markets around Indonesia, expected to grow over the next several years, the country now has an excellent platform to build its position as one of the world’s leading economies. It can capitalise further on several natural competitive advantages, including its huge population; its proximity to the large and rapidly expanding markets of China, India, the rest of Asia; and abundant natural resources, including coal, oil and crude palm oil (CPO). On top of this, Indonesia now offers investors sound macroeconomic fundamentals and financial institutions, a healthy business climate and political stability.

While its induction into the list of the world’s leading emerging economies is indeed a cause of celebration, Indonesia still has some weaknesses and areas of concern to contend with – and the signs are that it will not rest on its laurels. The country’s infrastructure is still patchy, partly due to the difficulty of connecting the country’s 922 permanently inhabited islands, according to the government. Corruption is still a concern for many Indonesians and per capita income is well below the global average. Indonesia is certainly growing quickly, but from a relatively low base, and is to some extent catching up for lost time. Additionally, some areas of the economy are still hemmed in by regulation, bureaucracy and the dominance of state-supported firms.

Happily, progress is being made on all these fronts. Massive investments are being made in infrastructure, including motorways (largely being constructed by Jasa Marga, something of a national champion) and power plants. Indonesia has also made great inroads into tackling corruption over the past decade, partly thanks to the leadership of President Susilo Bambang Yudhoyono. On January 17 the international press reported that President Yudhoyono had ordered a probe into companies allegedly linked to a former tax official who had bribed his way out of prison, having been jailed for corruption and abuse of position.

Pro-business reforms, meanwhile, continue. The World Bank and International Finance Corporation named Indonesia “Asia’s most active reformer of business regulations” for 2008/09, although in the World Bank’s 2011 “Doing Business” rankings it came in at 121 out of 183 countries.

While efforts continue to enhance the investment climate and stimulate the growth that will continue to boost household incomes, analysts have highlighted another concern for the coming year: inflation. On January 19 the local press reported that inflation could rise to 7% this year, more than twice the 2009 rate, according to Taimur Baig, chief economist of Deutsche Bank Global Markets Research Group for India, Indonesia and the Philippines. The national bank has kept the base interest rate at a historic low of 6.5% since August 2009, but is likely to increase it soon to head off inflationary risk.

After several years of macroeconomic stability, Indonesia will be keen to ensure that prices do not rise out of hand and erode its citizens’ purchasing power, particularly as growth has to a large extent been based on strong domestic consumption. Yet though it still has substantial economic and social challenges to overcome, few doubt Indonesia’s well-deserved place among the global leaders.