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EConoMY oVERVIEW
The Fastest Growing Economy in South-East Asia: Can Indonesia Manage the Transition to Global Heavyweight?
Largely misunderstood, Indonesia’s economy is not based solely on export of manufacturing and commodities; it is also thriving on continued growth in domestic consumption and services.
The Indonesian economy has remained relatively stable throughout the recent global economic downturn, and this dy- namic region of South-East Asia has the potential to rise rapidly from its current standing as the 16th largest economy in the world. If the economic transformation of Indonesia continues to be care- fully managed over the period leading up to 2030, it could quite
also considerable scope for tax reform by improving the tax sys- tem and administration. Broadening the tax base and improving compliance would make the system fairer, while removing exemp- tions and raising the tax rate on economic rents in the resource sector would also generate increased revenues.
The banking system is in good condition and banks are prof-
feasibly grow to become the 7th largest global economy. Indonesia has made significant strides in recent years in mac- roeconomic management; inflation has fallen into single figures, and government debt as a share of GDP is significantly lower than the majority of the more advanced economies. The Indonesian economy has experienced an average of 6% growth over the last five years, which has been driven in part by increased domestic
consumption.
Economic Initiatives
According to the World Economic Forum’s competitiveness re- port on Indonesia, the archipelago’s ranking on macroeconomic stability rose to 25th place in 2012, up from 89th place in 2007. The infrastructure of the economy is in need of reform and Indo- nesia is in a favourable position to
develop its economic framework.
Inflation is expected to end 2012
at 5%, well within the government
target of 4.5% ± 1%. Monetary
policy should continue to ensure
that inflation remains on a down-
ward trend using interest rates, liquidity management and macro- prudential measures. Indonesia’s infrastructure and social spend- ing needs are substantial, and they will need to be managed and financed efficiently.
Energy subsidies, which have failed to achieve social goals and are fiscally expensive, could be reduced to free up finance for more pressing social and economic needs; while better targeted cash transfer schemes in their place could help to reduce poverty and help to avoid resistance to energy price increases. There is
itable and well capitalised, but authorities have still taken steps to strengthen financial stability. A financial services authority has been established, which will be in full operation by the end of 2014; a high level forum has also been set up, which will be responsible for coordinating financial stability; and a memorandum of under- standing has been finalised for all organisations responsible for financial stability.
Growth
Indonesia’s growth despite global uncertainty has remained steady throughout 2012, with recent figures showing GDP rose by 6.4% year-on-year in the second quarter of 2012, the seventh consecutive quarter of over 6% growth. This was supported by the strong performance of investment in the economy, posting
a year-on-year growth of 12.3%. Construction accounts for ap- proximately 70% of total invest- ment in the region, and grew by a reasonable 7.2%, but the main driving force behind the substantial increase was investment in foreign
machinery and equipment and in foreign transportation. These sectors were up 23% and 60% year-on-year respectively; growth rates which are an indicator of strong investment lending.
In production, the major contributors to growth in the second quarter of 2012 were the service sectors, with the input from the manufacturing, mining and agricultural sectors slightly weakening. Services growth rose to 8.1% year-on-year in the second quarter, while wholesale and retail trade grew by 9.8% year on year in the same period.
Indonesia is on the verge of a new era of prosperity, which could see it grow to become one of the largest economies in the world.
STRATEGY
IndonESIA 2013
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