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FInAnCE & BAnKInG
Indices of Economic
Forecasting
The Indonesian economy parades impressive indicators that signpost a direct path to future prosperity.
Even basic economic omens strongly favour Indonesia, specifically for a robust short-term growth that is founded on its current encouraging economic climate. Consider its favourable demographics, a major force for propelling the present eco- nomic boom through its direct effect on low cost manufacturing, that is not expected to peak until at the earliest 2025. Add to that a Gross domestic Product per capita of over US $3,000 for a soaring middle class that is beyond the 50 million mark, and the conclu- sion is irrefutably, a vibrant demand in con- sumer demand and spending.
Performance Galore
The measure of Indonesia’s attractive- ness as a prime business and manufactur- ing haven is underpinned by its recent For- eign Direct Investment (FDI) figures, which has grown from US $4.9 billion to US $20 billion in just four years. A consequence, amongst many others, of its lower manufac- turing cost in comparison to southern China and the commercial abundance of com- modity resources such as coal and palm oil.
So evident is Indonesia’s vantage eco- nomic position that financial experts such as david Fletcher, president-director of PermataBank, are bullish in their projec- tions for ASEAN’s most powerful economy to become the sixth largest economy in the world by the year 2030. According to him, the evidence is clear, such as the current 6% growth rate in GdP, the doubling of its foreign reserves from their 2008 values and the control so far on inflation. Apparently, Fitch and Moody, in upgrading Indonesia’s sovereign rating to investment grade, also toe the same line.
There is the reality of the Euro debt crisis and the hovering trepidation over its impact
DavID FletCher President Director, Permatabank
on Asian economies. Indonesia particularly will not be totally insulated from the rever- berations of Europe’s financial meltdown, but its impact absorbers appear to be more resilient than many of its Asian neighbours. Fletcher ably concurs with such evaluation when he states, “...Indonesia is one of the least vulnerable Asian economies to the crisis in the West. This is because it is a do- mestically driven economy, with domestic consumption accounting for around 60% of GdP and net exports accounting for about 10% of GdP. Thus Indonesia is more insu- lated to downturns in international trade and robust household consumption and fixed investment provide additional insulation.”
Economic growth is influ- enced by a vibrant SME sector.
Yet he is also not unmindful of the knock-on effects from any slowdown in China, which may directly harm Indonesian exports since it provides a major market. Thankfully though, many of Indonesia’s exports to Chi- na are basic commodities necessary for in- frastructural development, so any cutbacks in demand should relatively be tempered.
Reinforced Sectors
The Indonesian banking sector is reaping the gains of robust regulation as evidenced by a capital adequacy ratio of about 16.5%, average loan deposit ratio of about 82% and decreasing non Performing Loans (nPL) ratio of 2.7%. It is a sign that Bank Indonesia (BI), the sector’s regulator, learnt valuable lessons from the continent’s past financial crises. Another source of strength for the sector has been the macro environ-
ment, which opened business opportuni- ties to the banks as a result of the impres- sive economic growth. Issues still remain though, such as the sector’s dependence on a few large banks (10 of the top banks account for about 63% of assets), weak de- posit mobilisation and reinforcement of the legal system to improve collateral enforce- ment.
Indonesia’s growth has benefited from direct contributions of its Small and Medium Enterprise (SME’s) sector, as it has pro- vided employment and propelled the low cost manufacturing sector. There are ample opportunities for more growth in the sector, but its reliance on internal funding is a ma- jor limitation; a problem that the redress of Indonesia’s weak credit penetration (about 30% of GdP) should eliminate.
Open Economy
Since the 1998 financial crisis Indonesia has increasingly reaped the rewards of an open economy, and its investment agency, BKPM, deserves credit for the influx of for- eign investors. Sectors of its economy, such as education and health care however, re- quire quicker investment attention to cater for its growing population.
There is every reason for optimism, as In- donesia’s impressive economic chronology continues to unfurl.
The many misconceptions are reducing as it purposefully tackles issues of corrup- tion, entrenches democratic values and promotes international trade. Come 2030, and its apparent trajectory into the top ten of world economies should be an achieved reality.
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STRATEGY IndonESIA 2013