Indonesia: Major growth outperformer

Published: 31 August 2009

Heading in the right direction

Strong GDP numbers, rising income levels and increased domestic consumption – it sounds like a flashback to the good old days seen in many parts of the world before the global economic slowdown.

In fact, this is the current state of the Indonesian economy.

While most countries in the rest of the world have seen their economies go into a steep tailspin, Indonesia's government has managed to avoid the worst of the damage and keep on a growth track. To reinforce this sense of stability, in July President Susilo Bambang Yudhoyono (also known as SBY) was re-elected with a large majority, putting him in a strong position to continue the pursuit of pro-growth economic policies and, importantly, his anti-corruption drive.

So what is the secret of success of Southeast Asia's largest economy?

Economy is largely domestically driven

Ms Prakriti Sofat, an HSBC economist who covers Southeast Asia, said: "One of the main reasons why Indonesia has fared so much better in the global downturn than some of its neighbours is that the economy is largely domestically driven, with exports making up less than 30 per cent of GDP. At the same time, the election itself helped to stimulate domestic demand – a lot of money gets spent during political campaigns across the whole economy."

"President Yudhoyono's re-election was definitely a big positive, as was the fact that the election went so smoothly. It is being seen as a vote for stability and continuity. He now has a strong mandate to continue with the reform process he started, which will please overseas investors. The fact that his running mate was Boediono, a former governor of the central bank who is regarded as being very capable and strong on transparency, also helped. The president's first job is to make sure the strong growth continues."

Significantly, while many countries rushed out huge fiscal stimulus packages to support their flagging economies, Indonesia announced a more modest package worth 1.5 per cent of GDP.

Source: CEIC Data
NB: Graph truncated at 100 per cent. Exports of both Singapore and HK are more than 150 per cent of GDP.

"Again, this is a function of the structure of the economy," Ms Sofat said, "with less of an overall drag from exports to growth."

She added: "The lower fiscal stimulus package together with relatively good growth means that the government will be able to keep a tab on its budget deficit this year. On our forecasts Indonesia's 2009 budget deficit would be the smallest in Asia ex-China."

Bank Indonesia has been doing its bit as well, having cut the policy rate by 300bps to 6.5 per cent.

"Just like the rest of the region Indonesian exports have suffered and in year-on-year terms are still falling by nearly 30 per cent, but shipments have risen in four out of the last five months on a sequential basis," Ms Sofat said. "Indonesia is also one of the few countries where household consumption has remained robust with real disposable incomes getting support from easing inflation and election-related spending. Consumer confidence in the country is running at four-and-a-half-year highs suggesting that consumer demand should remain underpinned going forward."

The government is forecasting GDP growth of 4.3 per cent in 2009 and inflation has fallen back on lower oil and food prices, although rising commodity prices might make it difficult for the government to hit its inflation target of 5 per cent in 2010 (HSBC is forecasting 8.3 per cent).

While the rupiah is seen as a high-risk currency that moves in line with global risk appetite, it has been strengthening on the back of the robust economy. Government bonds attract high interest rates (10.51 per cent on 10-year benchmark bonds), making them attractive to foreign investors. Strong inflows into the equity markets have seen the Jakarta Composite Index rise 73 per cent y-t-d.

With so much positive news about, it is no surprise that Indonesia's future looks good.

"The way Indonesia handled the financial crisis has been impressive," Ms Sofat said. "Policymakers were well ahead of the curve by gaining access to not only standby facilities from the World Bank and Asian Development Bank but also arranging swap lines with China, Korea and Japan. It's fair to highlight that democracy has come a long way in Indonesia with the elections having been completed without any violence and a good voter turn out. With SBY back in power the reform process should gain momentum which will help further improve the long-term prospects of the country.

People need to rethink their outlook

"I think people need to rethink their outlook on Indonesia. Too many investors still base their views on the Asian Financial Crisis of 1997-98 when there were many serious problems in the country. There have been fundamental changes that have helped to buffer the country against economic and financial shocks.

"Indonesia has come a long way in the last 10 years. The economy is improving, the central bank is performing well and transparency has increased. The scale of economic progress has been impressive. It may take time to change the perceptions of some overseas investors so the best thing the government can do is keep up the good work."