Economy and Trade
Indonesia’s economy, south-east Asia’s largest, has grown robustly since Asia’s 1997–1999 financial crisis. Economic reforms and better fiscal management became a priority after 2004, after the succession of President Susilo Bambang Yudhoyono, following the country’s first direct election, which ended decades of authoritarian rule. GDP growth rose from 5.5% in 2006 to 6.3% in 2007, the highest in a decade, but in 2008 it dipped to an estimated 5.9%. Indonesia’s debt-to-GDP ratio has fallen, and, in 2003, it graduated from the International Monetary Fund (IMF) loan program. The region’s main oil and gas producer, it became a net importer of oil in 2004, as a result of ageing wells and low levels of investment. Exports include oil and gas, plywood, textiles, rubber, and palm oil. Indonesia, which is Asia’s third most populous country, has faced costly natural disasters, including the 2004 tsunami, and three earthquakes in 2005–2006. Its legal system remains weak, while bureaucracy and lack of infrastructure impede foreign investment.
Economic Policy over 12 Months
The high oil price dented the Indonesian government’s budget in 2008 because of high fuel subsidies. In March 2008, the fuel subsidy was forecast to cost US$11.53 billion for that year, more than double the original forecast. The government announced in May 2008 that Indonesia would leave OPEC, and focus instead on boosting its own lagging oil and gas industry. This was, in part, a political move to highlight escalating oil prices. In an unpopular development during the same month, the government also raised domestic fuel prices by 29%.
In February 2009, the government sanctioned a US$6 billion stimulus package that included tax breaks, cuts in electricity subsidies, and increased spending on transport and infrastructure. Suharso Monoarfa, deputy chairman of the parliamentary committee, said the package would curb rising unemployment, sustain consumer spending, and strengthen businesses.
Monetary policy has been conducted within an inflation-targeting regime since mid-2005, when the former policy of monetary targeting was scrapped. Following an upsurge in 2005–2006 as a result of fuel price hikes, inflation was brought under control, and ended 2007 within the desired range of 5–7%. However, it had risen to 10.5% in February 2009. Even so, the central bank felt able to reduce interest rates to 7.75% the following month.
To help ease its US$11.6 billion budget deficit, Indonesia sold US$3 billion of bonds in February 2009. The country had already raised US$4.2 billion from dollar-denominated bond sales during 2008. In February 2009, Indonesia was also one of 13 Asian nations that pooled US$120 billion of foreign-exchange reserves in an attempt to stem the flight of capital out of south-east Asia.
On March 3 2009, the World Bank approved a US$2 billion contingency loan on which the government can draw, should market liquidity or access to international or domestic credit tighten. The loan was part of US$5.5 billion contingency financing for Indonesia, which could include US$1.0–1.5 billion each from Australia, Japan, and the Asian Development Bank.
Joachim von Amsberg, the World Bank’s Indonesia director, said that Indonesia had reduced its debt-to-GDP ratio by more than any major economy in the region—from 55% in 2004 to 30% in 2008. “The strong macroeconomic management of previous years is now paying off,” he said.
The success or failure of the stimulus package is expected to be critical to the political fortunes of President Yudhoyono as he seeks re-election in July 2009, after the parliamentary polls of April 2009.
Economic Performance over 12 Months
Indonesia is weathering the international financial storm better than many other countries. The economy grew by 5.9% in 2008, and the government of President Yudhoyono expects it will grow by 4.5% in 2009.
The country, classed as an emerging economy, has practised prudent fiscal management, backed by reforms of its financial sector. In early 2008, however, it suffered an exogenous shock because of the rising price of food, especially staples such as wheat, soybeans, and rice, and crude oil.
In a bid to prop up the value of the rupiah, the central bank has been tapping into its foreign currency reserves. In March 2009, the currency sank to around IDR11,700 to the US dollar, well below the earlier forecast of IDR9,400. The rupiah was worth IDR2,000 to the US dollar before the Asian financial crisis of 1997–1998.
However, the weakness of the rupiah does not seem to have outweighed the slump in demand for Indonesia’s key commodities. In January 2009, overseas shipments fell by 35.5% to US$7.15 billion, their biggest fall in 22 years.
The leading destination for Indonesian exports is Japan. Other big export markets include Singapore, the United States, China, South Korea, and Saudi Arabia. Indonesia’s exports, however, are only equivalent to about one-third of its GDP, so it is less vulnerable to swings in global demand than some of its Asian neighbors. Indonesia is expected to become a net exporter of rice for the first time in more than 30 years during 2009, with a production of 60.93 million tonnes, up by about 1% on 2008. As a consequence, the domestic retail price of the staple did not suffer its customary first-quarter hike.
Indonesia’s fiscal deficit is expected to broaden to an average of 2.8% of GDP in 2009–2010 as the country seeks to ride out the global downturn.
The country’s central statistics agency said, in February 2009, that unemployment had climbed to 8.39% of the country’s total workforce of 111.9 million in August 2008.
Indonesia’s problems with corruption were highlighted by the conviction, in October 2008, of the central bank’s ex-governor, Burhanuddin Abdullah, for embezzling some US$12.6 million from the bank. In a related case, four other former central bankers were charged with graft in February 2009. They have denied wrongdoing.
The IMF is more pessimistic about the outlook for the Indonesian economy than the government. In January 2009, it projected that GDP growth would fall to 3.5% in 2009 before recovering to 4% in 2010. The Economist Intelligence Unit is gloomier, forecasting growth will slow to 1.9% in 2009, before recovering to 2.2% in 2010.
Support for Inward Investment and Imports
The Indonesia Investment Coordinating Board oversees foreign direct investment, and can provide information on incentives, and details of potential commercial partners. The board oversees Indonesia Investment Promotion Centers in cities including London, Osaka, and Los Angeles. However, foreign investors face significant restrictions. In 2007, Indonesia updated its restricted investment list of sectors in which foreign investment is prohibited or restricted. Details can be found on the board’s website.
Tax Exemptions
The government said in March 2009 that it will provide additional incentives for investment in oil refineries. Indonesia needs to build new refineries and wants to encourage investment in the sector in order to reduce its dependence on imported oil. The top corporate tax rate is 30%. Other taxes include a value-added tax and a tax on interest. The March 2009 stimulus package included reduced tax tariffs, government-borne value added tax, import duties, and incentives related to income tax.
Statistics
GDP growth: 5.9% (2008, est.)
GDP per capita: US$3,900 (2008, est.)
CPI: 10.5% (2008, est.)
Key interest rate: 7.75% (February 2009, BI)
Exchange rate versus dollar: rupiah per US dollar—11,500 (February 2009)
Unemployment: 8.7% (2008, ILO)
FDI: US$63.46 billion (2008, est.)
Current account deficit/surplus: US$2.485 billion (2008, est.)
Population: 237.5m (July 2008, est.)
Source: CIA World Factbook except where stated
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