Wednesday, January 4, 2012

The Indonesian economy : a precarious balance

Indonesia’s economic growth remained strong in 2011 despite continued turmoil in the international financial markets, due to the euro crisis, and weakened global growth.
Significantly, this slow down also affected China, which has become one of Indonesia’s major export markets, but Jakarta was able to see off this risk. In the third quarter of 2011 economic growth reached 6.5 per cent year-on-year for the third consecutive quarter, mainly supported by strong private consumption and exports (although exports were slightly down from the second quarter).

For this reason the Indonesian economy remains relatively well positioned to weather future external shocks, although the World Bank has lowered its 2012 growth forecast for Indonesia to 6.2 per cent — slightly lower than its forecast of 6.3 per cent in October. Still, the growth forecast for 2011 has remained unchanged at 6.4 per cent.
A freezing up of the international financial markets or a severe prolonged global slow down could adversely affect portfolio inflows, the prices of Indonesia’s primary commodity exports, and domestic and external demand. Although so far the impact of weakening global activity on the Indonesian economy is relatively limited, there have been some portfolio outflows. FDI inflows also declined in the third quarter, although they are still higher than the country’s average inflows over the past two years.

Indonesia’s current account maintained its positive importance in the third quarter of 2011 with a small surplus of US$0.2 billion — but this current account surplus was inadequate to cover the capital and financial account’s deficit of US$3.4 billion. As a result, Indonesia’s overall balance of payments posted a US$4 billion deficit, which reduced the country’s foreign exchange reserves to US$114.5 billion by the end of the third quarter of 2011. This is sufficient for 6.6 months of imports and official external debt service payments. But Indonesia’s balance of payments is forecast to regain a surplus for the whole of 2011, which will continue into 2012, supported by an increasing surplus in the capital and financial account due to strong portfolio and FDI inflows.

During the past year inflationary pressures have also tended to decline in line with global commodity prices. The declining price of gold and the adequate supply of food — due to increased production and imports, better distribution, and lower inflationary expectations — have been instrumental in this process.

In affirmation of Indonesia’s continued economic progress, the Fitch Ratings Agency has recently upgraded Indonesia’s long-term and local currency ratings to ‘investment grade’, a move that will further boost Indonesia’s standing among global investors. To this end, the Indonesian government has worked hard to ensure macro-economic stability. It is crucial that the government continues its reform program and strengthens its macroeconomic fundamentals.

But despite continued growth rates, Indonesia’s growth strategy has not achieved ‘welfare’ in the broad sense of the word. While estimates by the Central Agency of Statistics show that the number of poor people declined to 12.5 per cent of the population in 2011 (or a little more than 30 million people), many in Indonesia are still poor. This is clear from the large number of beggars in the cities, and the amount of workers in the informal sectors — which account for about two-thirds of Indonesia’s total labour force of more than 100 million people.

There is also the fact that males and young male graduates respectively have much better access to education and employment than their female counterparts. Access for the rural poor to basic health care in their villages is also limited or inadequate, if it exists at all. Clean air and water and the protection of biodiversity are inadequate, and similarly for anti-corruption measures. Indonesia’s struggle against the vested interests of the economic elite, which often distorts or adversely influences government policies, is generally ineffective or unsuccessful.

Indonesia’s rapid population growth of 1.5 per cent — in a country of more than 240 million people — also adversely affects quality of life. This is, among other issues, reflected by the UNDP’s recently published Human Development Index, which ranks Indonesiaat number 124 among the 187 listed countries — lower than Bosnia at number 74, or even Palestine at number 114. So in addition to pushing economic growth to higher levels, in 2012 the Indonesian government should prioritise Indonesia’s social development to enhance the quality of economic growth.
Thee Kian Wie is a Senior Economist at the Indonesian Institute of Sciences (LIPI), Jakarta.
East Asia Forum

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