Economic Update

Indonesia: Year in Review 2012

Asia | 16 Jan 2013

Lower-than-expected economic growth for 2012 in Indonesia has been widely attributed to uncertainty in the global economy, with rising domestic demand and investment levels set to back growth in 2013.

Indonesia’s Chief Economic Minister, Hatta Rajasa, told reporters in November that GDP growth for 2012 would reach 6.3%, falling short of its target by 0.2% and down slightly on the 6.5% growth seen in 2011.

Weeks later, the central bank held its benchmark reference rate steady at 5.75%, describing it as consistent with low inflation and forecast growth levels for 2013.

“Going forward, Indonesia’s economic growth is expected to pick up, buoyed by strong domestic demand and better exports performance along with improvement in the global economy, as well as higher international commodity prices,” Bank Indonesia said in a statement.

The bank said that after depreciating in the second and third quarters, the rupiah stabilised in the last three months of the year and looked set to “remain stable supported by the balance of payments, which is expected to remain in surplus”.

The upward economic trend is perhaps most evident in foreign direct investment (FDI), which rose 22% to notch up yet another quarterly record of $5.9bn for July to September.

Realised investments in Indonesia topped Rp81.8trn ($8.49bn) in the third quarter, up 25% year-on-year (y-o-y), the Indonesian Investment Coordinating Board (BKPM) said in October. Foreign exchange reserves rose to $111.29bn at the end of November, up from $110.30bn at the end of the previous month.

Investment is undoubtedly becoming a major driver of Indonesia’s economic growth, stemming from growing domestic consumption, especially among the emerging middle class.

The chairman of the BKPM, M Chatib Basri, told OBG that moving forward, it was important for Indonesia to focus on value-added investment, particularly those that bring technology transfers and human capital development, which he said would support the country’s development.

On the markets, 23 IPOs launched in 2012, with listings by major private and state-owned firms expected to raise a combined total of Rp10trn ($1.04bn). The Jakarta Composite Index, the benchmark stock gauge, had gained 13.4% by October, repeatedly posting record-closing highs.

The offerings followed confirmation in January by Moody’s Investors Service that it had returned the country to investment level for the first time since the Asian financial crisis. In November, Fitch Ratings maintained Indonesia’s sovereign debt rating at investment grade, citing resilient economic growth.

While investor confidence has been boosted by the country’s healthy financial sector, abundant natural resources and stable political environment, concerns remain that tighter regulations for the mining and banking industry introduced in 2012 could lead to repercussions.

In moves some critics dubbed “resource nationalism”, Bank Indonesia announced new rules that limit foreign bank ownership to 40%, and also introduced a law requiring divestment of up to 51% of mining interests held by foreign investors by the end of the 10th year of production.

A controversial proposal for reducing energy subsidies aimed at helping to narrow the budget deficit and make room for spending on infrastructure is also making waves across the political spectrum both at home and abroad. Energy subsidies cost the government $18bn in 2011. However, while the country has already begun introducing some measures, including recording the use of subsidised fuel and campaigns to minimise consumption, price hikes, which would be a much riskier move politically, are unlikely to be considered until after the 2014 elections.

Rajasa told OBG that the government would handle any subsidy reductions “very carefully” since they would have to be balanced with the impact of lowering householders’ purchasing power and inflationary pressures.

While Indonesia’s overall growth remains strong, there are fears that China’s economy will impact on key exports, led by coal. In addition, Rajasa added that unresolved, the eurozone crisis would also continue to dampen global economic growth. “As such, global demand is likely to remain soft, restricting our exports growth,” he told OBG. Easing demand led to Indonesia’s coal-mining association cutting its 2012 production forecast in October by 13%. That same month, the trade deficit hit a record $1.54bn, as imports of oil and gas rose but exports declined amid weakening global demand. In the same month, Trade Minister Gita Wirjawan said exports would fall by 5% for 2012 from an initial target of $203bn.

Jakarta’s key challenges for 2013 will be consolidating energy supply and diversifying exports away from China. It will also be hoping that major infrastructure projects help it to meet its other key objective of increasing private sector participation.

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