Population 244.468 million
GDP 894.854 US$ billion
@rating
country
Business climate
assessment
| 2010 | 2011 | 2012(e) | 2013(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
6.2 |
6.5 |
6.1 |
6.5 |
|
Inflation (yearly average) (%)
|
5.1 |
5.4 |
6.2 |
6 |
|
Budget balance (% GDP)
|
-1.2 |
-1.6 |
-1 |
-1 |
|
Current account balance (% GDP)
|
0.8 |
0.2 |
-0.4 |
-0.8 |
|
Public debt (% GDP)
|
27.4 |
25 |
23.2 |
21.1 |
| (e) Estimate (f) Forecast | ||||
STRENGTHS
- Strengthening banking sector
- Diversity of natural resources (agricultural, energy, mining)
- Highly competitive thanks to low labour costs
- Dynamic tourism
WEAKNESSES
- Low investment rate
- Raw materials exports are increasingly dependent on China’s demand
- Weakness of bank intermediation
- Lack of infrastructure
- Persistent corruption and lack of transparency
- High levels of unemployment and poverty accentuating inter-ethnic tensions
Risk assessment
Growth is strong and will be very robust in 2013
Economic growth will remain strong in 2013, supported by a very dynamic domestic demand. Economic activity suffered little from the global economic slowdown in 2012. Indonesia’s economy is relatively closed: exports represent only 25% of GDP, the lowest in emerging Asia after India. Growth is still driven by domestic demand, spurred by continuous credit growth. Household consumption and business investment are both growing strongly. These trends more than make up for the deterioration of the trade balance in 2012. On the supply side, sectors linked to the expansion of domestic demand and credit are unsurprisingly the most dynamic (construction, vehicles, services).
Exports are expected return to growth in 2013, with raw materials like oil, gas, coal, palm oil and rubber (which represent 50% of the total) benefitting from strong Chinese demand. Domestic demand, for its part, will benefit from the strong growth of credit to the private sector, though this will slow slightly because of the introduction by the central bank of stricter prudential rules for commercial banks.
As to prices, inflation remained under control in 2012, close to the ceiling of the central bank’s target range (3.5 -5.5%). It is expected to remain so in 2013 against the backdrop of moderate household inflation expectations and near-stable oil prices. However, in the risk scenario where the oil price would exceed 120 dollars for 6 consecutive months, the reform voted in March 2012 provides for an automatic downward revision of oil price subsidies. The inflation increase would then be of the order of 3 points.
The financial position remains solid but the current account balance is now in deficit
The public debt dynamic remains very favourable: public debt will continue to fall in 2013 under the combined effect of sustained growth and a low deficit. This performance, however, masks a poor allocation of government resources: public infrastructure investment remains weak, unlike spending related to oil subsidies which represent 3.5% of GDP.
As for the external accounts, the situation is sound but the current account balance is worsening. The trade balance suffered in 2012 from a strong import growth related to lively domestic demand and the export downturn. The current account balance is expected to worsen further in 2013 despite an expected export rebound. Foreign investments, for their part, are rising sharply, growing particularly strongly in the sectors related to household consumption (such as cars) and investment. In this context of a persistent current account deficit and rising foreign direct investment, the rupiah is expected to remain stable versus the dollar in 2013. However, this will largely depend on the dynamics of portfolio investments and the global risk appetite. But even in a high risk scenario a sharp depreciation of the rupiah is unlikely, since the central bank has high levels of foreign currency reserves. These have almost doubled since their 2009 low.
Finally, the banking sector continues to perform satisfactorily: high capitalisation and profitability ratios, falling rate of non-performing loans. However, rapid credit growth is pushing up the risk of non-performing loans, although only in the medium term.
More and more visible disagreements within the coalition
Politically, disagreements within the ruling coalition formed after the 2009 elections are becoming more and more visible as the 2014 presidential and parliamentary elections approach. They impede the decision-making process, as evidenced by the lively debate concerning the reform of oil price subsidies in March 2012. These disagreements will limit the government’s ability to implement structural reforms in 2013.
As regards governance, the anti-corruption commission brought several of the country’s high officials to justice in 2012, which seems to confirm that fighting corruption is a priority for President Yudhono. Finally, we note that new rules restricting foreign investment in the mining and banking sectors were announced in 2012.
