Why Indonesia is the One to Watch?

Written by Akhyari Hananto Administrator at GNFI
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The I in MINT: Why Indonesia is the One to Watch

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Until last year Indonesia was something of an investor favourite. It is the 4th largest country globally in terms of population and averaged real GDP growth of 6.3% between 2010 and 2012. 2013 saw it fall from grace as one of the “fragile 5” economies most exposed to the taper, and growth fell below 6.0%. In the first quarter of 2014 real GDP growth slowed to its slowest pace since 2009, yet in the long term, if not on the same scale as China in the BRIC, Indonesia will remain the key market to watch in the MINT.

Real GDP Growth in MINT: 2000-2020

Source: Euromonitor International from national statistics/OECD/UN/IMF

Note: Data from 2014 onwards are forecast. MNT average refers to Mexico, Nigeria and Turkey

Past Glories

Indonesia’s large domestic market left it relatively unscathed by the aftermath of the financial crisis. Private consumption has increased by above 5% annually since 2007. With its abundant natural resources, the economy also benefited from the boom in commodity prices – mineral fuels accounted for 33.3% of all exports in 2012. Employment grew by an average of 2.7% annually between 2007 and 2012, supporting consumption.

Indonesia attracted large inflows of Foreign Direct Investment with an increase in inflows of 121% between 2007 and 2012 – growth that places it behind only Brunei in ASEAN. In US$ terms Indonesia is also now the second-highest recipient of FDI in ASEAN – behind Singapore.

What Went Wrong?

In 2013 exports slowed, partly due to supply issues with natural resources – including important sectors such as palm oil, oil and rubber. This contributed to a widening of the current account deficit at a time when international attention was turning to macro-economic fundamentals. In addition government finances were also under pressure and a reduction in fuel subsidies contributed to rising inflation. This left Indonesia in a weakened position – suffering from twin deficits and inflationary pressures. The exchange rate depreciated sharply in 2013 during the period which became known as the “taper turmoil”. At the same time the downturn in commodity prices impacted on export performance.

Come-Back Kid?

Yet the government has acted positively by increasing interest rates, removing quotas on some food imports, providing tax breaks to exporters, offering tax holidays to investors in certain industries and letting the currency depreciate in order to quell imports. These policies have enabled Indonesia to regain investor confidence to some extent in the final quarter of last year and into 2014. The balance of trade has returned to surplus, inflation is on a downward path.

Nevertheless, GDP growth increased by 5.2% (at an annualised rate) in Q1 over the final quarter of 2013 – the slowest rate of growth since 2009. The slowdown has been caused by a combination of domestic and external factors – including the government’s mineral export ban and the China slowdown. This shows that the country’s short-term challenges remain and the government must continue to act in order to shore up growth.

Long-Term Prognosis is Good

More important than these recent challenges and the government’s measures to combat them are the long-term trends in the country. Indonesia has a growing middle class – the number of households with an income over US$10,000 (in constant 2013 prices) is expected to increase by an average 1.9 million per annum to 2030. Consumer expenditure is expected to see real growth of 41.7% between 2014 and 2020 and 152% between 2014 and 2030; in dollar terms at US$777 billion, this latter figure is the equivalent of another consumer market the size of South Korea.

Indonesia benefits from its strategic location in Asia – a dynamic region celebrating its 10th consecutive year as the world’s fastest-growing region. Its trade is increasingly intra-regional – 66.8% of exports stayed in the region in 2013, compared to 57.5% in 2000.

Productivity remains low, but many of the drivers of productivity look promising: Indonesia has relatively high enrolment in secondary education, and this enrolment is growing quickly.  Mobile telephone subscriptions are high, and a large proportion of these subscriptions are internet subscriptions (more than one quarter in 2013).

Finally its sheer scale makes it the only real competitor to the BRICs. At 247 million in 2013 its population is larger than that of Brazil and Russia. In 2030 its population of working age will be more than twice the size of Russia’s. This scale, if combined with increasing productivity, will make Indonesia the MINT to watch.

 

by Sarah Boumphrey

 

http://blog.euromonitor.com

 
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