WHERE WILL INDONESIA’S ECONOMY BE IN 2019, AS MANDALA TURNS 50? DEWI ASMARANI GOES CRYSTAL BALL GAZING

The current economic downturn aside, much has been made of Indonesia’s dynamic economic progress over the past few years. With its vast resources and sizeable population, the country is expected to turn heads in the next few decades.

Goldman Sachs predicts Indonesia will become one of the seven largest economies in the world by 2050, led only by China, the United States, India, Brazil, Mexico and Russia. PricewaterhouseCoopers predicts Indonesia will be sixth largest by this time.

A decade ago, few would have foreseen such confidence so soon. In 1999, Indonesia just made it back in the black with 0.79 percent growth in gross domestic product, totaling US$154.7 billion. By 2008, GDP growth was at 6.1 percent, with production up to US$488.1 billion and virtually every economic indicator has more than doubled in less than 10 years.

Exports rose from US$44 billion in 1999 to US$118.4 billion last year. Last year’s industrial production annual growth rate, including the manufacturing, mining and construction sectors, was 6.1 percent, compared to 1.5 percent eight years ago. Indonesia’s debt-to-GDP ratio has been declining steadily, while foreign exchange reserves are at an all-time high of more than US$50 billion. Before the current crisis, its stock market had been one of the three best performers in the world in 2006 and 2007. Two years ago, Indonesia exceeded Goldman Sach’s prediction that GDP would reach US$419 billion by 2010.

LOOKING FORWARD

Will this success continue over the next 10 years?  
Some analysts believe so. “Prospects are very good, this current crisis is exceptional,” says James Castle, chairman and CEO of business consultancy Castle Asia. “Indonesia has done very well in the past few years.  
The government seems stable and has been making steady progress.  
So I think it should have a pretty good decade as the world recovers from the crisis.”

Purbaya Yudhi Sadewa, chief economist for Danareksa Research Institute, predicts that after a tough year, Indonesia’s economy will stabilize, with growth averaging six percent a year for the next decade.  
Agriculture and mining will drive growth, as prices recover again, as will domestic-oriented sectors like telecommunication and transport. “These are the sectors that have driven the economic growth in the last few years, and will continue to do so,” he says.

The mining sector has the potential to grow further, but unless legal certainty in this sector is improved, it will continue to be stagnant or dwindle further, Purbaya warns. Indonesia will continue to lead in the production of crude palm oil for the next decade, as plantations expand. The country should eye further investment into other high potential industries, such as cocoa and fishery, he adds.

One of the ways to boost value in the agriculture sector is by developing processing industries to increase exports of processed rather than raw goods. Indonesia’s manufacturing sector has been under pressure from China and emerging economies like Vietnam, but it has not completely lost its competitive edge, says Purbaya.

The textile sector is still stabile and even improving with US buyers, while some shoe producers have reportedly shifted orders from China back to Indonesia. “With better labor policy, infrastructure and shipping facilities, and less illegal fees, the manufacturing sector has the potential to grow.”

There is room for growth in the media sector, provided there is increased investment into television and the Internet. “Some Internet media companies have been short-lived, but those that have passed the test of time will become a business model for the newcomers,” Purbaya continues.

Castle anticipates Indonesia’s domestic market largely fueling Indonesia’s economy in 10 years time, with exports contributing just 30 percent of Indonesia’s GDP.

INVESTMENT

The biggest question is whether or not foreign direct investment will grow to the level prior to the 1997 economic crisis. From the late 1980s Indonesia attracted more than US$23 billion in FDI. But since 1997 there has been a net outflow of $8 billion, giving rise to unemployment, currently at 8.39 percent.

Says Purbaya: “With six percent growth, as long as there is plenty of human capital, FDI will be attracted to Indonesia especially for domestic-oriented industries.”

Lower infrastructure spending is a key reason Indonesia’s economy has grown slower than China and India, adds Castle. The government established an Infrastructure Fund this year, and among the first to contribute were The World Bank and Asian Development Bank. About 20 trillion rupiah is needed over four years for business development for infrastructure.

Castle is confident further reform will simplify regulations and make life easier for investors. Meanwhile, businesses need to look beyond the current crisis in order to survive in the long run.

“Every business cycle has its up and down every few years or so. Right now may be the time for scaling down as the market contracts,” says Purbaya. “But we should keep our eye open for when the economy – particularly the US economy – picks up again, so we won’t be left behind when it is time to expand again.”

Now freelance, Devi Asmarani was a senior correspondent in Indonesia for The Straits Times for eight years.