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Home > Country Profiles > Indonesia

Country Profiles

Indonesia - Economy

Whitaker's Almanack Version

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 from 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/GDP ratio has fallen and, in 2003, it graduated from the International Monetary Fund (IMF) loan program. Although 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 and 2006. Its legal system remains weak, and bureaucracy and lack of infrastructure impede foreign investment. The economy shrugged off the impact of the global downturn in 2009, expanding by 4.5%.

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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 the Organization of the Petroleum Exporting Countries (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 that the package would curb rising unemployment, sustain consumer spending, and strengthen businesses.

Despite the increase in spending, the debt/GDP ratio of the national government fell to 28% in 2009, continuing a decline that had cut the ratio by half in five years. The deficit in 2009 followed several years of prudent fiscal management, including primary fiscal surpluses of about 2% of GDP per year. The fiscal stimulus will be reined in during 2010, when the government expects to run a budget deficit of 2.2% of GDP, down from an estimated 4.9% in 2009.

Monetary policy was also relaxed in 2008 and 2009. Bank Indonesia, the central bank, lowered its policy interest rate by 300 basis points from November 2008 to August 2009, to 6.5%, where it remained at April 2010. At this time, the bank said that it might keep interest rates low for the next few months, given the benign inflation outlook. Declining inflationary pressures in 2009—the central bank targets an inflation range of 4% to 6%—allowed the bank to cut rates.

In April 2010, President Susilo Bambang Yudhoyono said that Indonesia would continue to improve its investment climate, as the country strives to attract private sector participation to jointly develop its infrastructure. Indonesia is expected to increase the development of roads, ports, airports, and power plants to boost its economic growth in the next five years. To meet the demands, the World Bank estimates that Indonesia needs US$50 billion per year, or about 10% of its GDP.

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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 expanded by a further 4.5% in 2009, only one percentage point below the average growth seen in the previous five years. South-East Asia’s biggest economy was one of the few Asian countries to post positive growth in 2009. The strength of the economy reflected its greater dependence on domestic consumption rather than exports. The economy also received a big boost in the first quarter from election-related spending, which provided strong support for private consumption.

The economic slowdown reached its nadir in the second quarter of 2009 and the economy rebounded in the fourth, driven by accelerating exports and a pickup in the price of export commodities. Stimulatory fiscal and monetary policy also drove growth. Good harvests (which bolstered rural incomes), low inflation, government cash transfers to poor households early in 2009, election-related spending, and tax cuts (adopted as part of a fiscal stimulus package) drove private consumption.

Growth appears to be accelerating rapidly in 2010. In April, Finance Minister Sri Mulyani Indrawati said that Indonesia’s economy was likely to have expanded by between 5.7% and 5.8% in the first quarter against the previous year, thanks to strong domestic consumption and a pickup in investment. At the same time, Economics Minister Hatta Rajasa said that full-year 2010 GDP growth was also seen at 5.7%.

A surge in foreign investor interest drove up the value of the currency in 2010. The robust investor interest reflects the fact that the Indonesian authorities had steadily lifted their forecasts for growth in 2009, on the back of strong demand for Indonesia’s natural resources and improving domestic consumption.

Indonesia’s annual inflation remained below 3.5% in the first quarter of 2010, allowing the central bank to keep interest rates at the record low of 6.5%. The central bank forecasted yearend inflation of 4.8% for 2010 if the government did not raise electricity prices, and at 5.2% if it did hike power prices.

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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.

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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 (VAT) and a tax on interest. The March 2009 stimulus package included reduced tax tariffs, government-borne VAT, import duties, and incentives related to income tax.

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Statistics

GDP growth: 4.5% (official, 2009)

GDP per capita: US$4,000 (2009 est.)

CPI: 5% (2009 est.)

Key interest rate: 6.5% (December 2009)

Exchange rate versus US dollar: Rp10,399.2 (2009)*

Unemployment: 7.7% (2009 est.)

FDI: US$73.02 billion (December 31, 2009 est.)

Current account deficit/surplus: US$10.7 billion (2009 est.)

Population: 242,968,342 (July 2010 est.)

* Indonesian rupiah

Source: CIA World Factbook except where stated

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Further reading on Indonesia

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