Indonesia

Date: 10 May 2012

The event will be held in Jakarta , Indonesia , with the participation of distinguished participants from academia, government, civil society, international organizations, and the press. The list of well known participants making opening remarks, presentations and commenting on the publication includes:

Mr. Prabowo
Director
PT Strategic Asia

Ms. Katinka Weinberger
Director
ESCAP Centre for Alleviation of Poverty
through Sustainable Agriculture (CAPSA)

Country briefing note      <download pdf file>

Economic growth on a high trajectory, driven by a large domestic market

•  Indonesia 's economy expanded by 6.5% in 2011, up from 6.1% in 2010, posting its highest growth since the 1997 financial crisis.

•  Consumption expanded by 4.7% on the back of rising incomes, lower borrowing costs and steadily declining inflation.

•  Investment also picked up, with foreign investment rising by 18% and domestic investment by 26% from a year earlier. Gross fixed capital formation increased steadily in the past decade and reached 32% of GDP in 2011.

•  Given that the country remains largely domestic market driven, exports also grew handsomely, rising by 29% to $204 billion in 2011.

•  On the production side, the manufacturing sector including textiles and transport equipments posted 6.2% growth, despite some concerns that recent growth had relied heavily on a commodity boom. Services expanded by 8.5%, but agricultural output growth was weaker at 3%.

•  In 2012, Indonesia is expected to grow steadily by a strong 6.5%, as its large domestic market continues to drive the economy.

Inflation rising but manageable; high food and oil prices a risk

•  Year average inflation rose to 5.4% in 2011, from 5.1% in 2010 and 4.8% in 2009. Inflation peaked at 7% in January 2011, but fell steadily through the year and reached 3.8% by December.

•  In response to high food prices, Indonesia imported 1.8 million and 1.9 million tons of rice in 2010 and 2011 respectively, from 1.3 million in 2008 and nil in 2009.

•  Other contributing factors included the postponing of planned reductions in fuel subsidies amid higher global oil prices.

Fiscal policy in need of better targeted subsidies and enhanced capital spending

•  Indonesia achieved a remarkable reduction in public debt over the past decade, and regained investment grade for sovereign debt in 2011.

•  However, capital expenditure for infrastructure development and spending on much needed social programmes were below targeted levels, as in previous years.

•  A higher fiscal deficit of 1.1% of GDP, compared to 0.7% in 2010, was due to higher spending on energy subsidies, which exceeded the official target. Subsidies took up 3.4% of GDP in 2011. Tax revenues also increased.

•  The phase out of fuel subsidies on vehicles in the capital region, originally planned for 2011, was moved to April 2012 due to higher oil prices, but full implementation was replaced by a rule under which administered fuel prices would be raised only if the average Indonesian crude oil exceeds a $120.8 threshold over a six month period.

Monetary policy accommodative in line with lower inflationary pressures

•  In 2010, Indonesia used various tools such as reserve requirements to curb inflation.

•  In 2011, it raised its policy interest rate in February in response to 7% inflation at the beginning of the year. Entering into the second half of 2011, however, a deteriorating global outlook led Indonesia to reverse course and cut policy rate in October, by which inflation had significantly subsided. By March 2012, the policy rate was down 100 basis points to 5.75%.

External position strong on both current and capital accounts, but reversal a risk

•  Indonesia 's oil and gas exports began to show signs of a slowdown in the second half of 2011, but overall, exports remained strong, especially in the machinery and mechanical equipment cluster. Exports grew by 29% to a record $204 billion in 2011.

•  However, the country's slim current account surplus narrowed further to 0.4% of GDP in 2011, and may turn into a small deficit in 2012, due to strong domestic demand and a growing deficit in the income account as repatriation of corporate earnings rise.

•  With prolonged weak external demand from traditional markets in developed countries, it is a relief to know that South-East Asia's export base has diversified over the past decade, with a higher share of exports now going to regional markets in Asia . For instance, the share of euro zone and United States markets declined from 32% in 2000 to around 20% in 2010. This same period, however, also saw the deepening of regional supply chains, with a rising share of intermediate goods exports. ESCAP analysis shows that the subregion's export dependency on traditional markets remains quite high, once such re-exported goods are considered.

•  Foreign direct investment into Indonesia grew by 173% in 2010 and 48% in 2011, when it received $19.7 billion, the highest in the subregion after Singapore .

•  Portfolio investment inflows exhibited greater volatility in 2011 and large outflows were seen in the second half of the year amidst sovereign debt crisis in advanced economies and as foreign banks seeking to recapitalize repatriated part of their funds.

•  Inflows to government and central bank securities grew in large volumes in 2010 and 2011. To limit exposure to short-term reversible capital, Indonesia introduced minimum holding periods on central bank bonds (SBIs), and issued longer-term notes while phasing out shorter-term ones in security markets. A cap was also placed on short-term external borrowing by local banks and foreign currency reserve requirement was raised.

•  The Indonesian rupiah gained 4.2% against the US dollar in 2010 but lost 0.1% in 2011.

Continued effort needed to increase quality jobs

•  Increasing the number of quality jobs is a major challenge, as the informal sector accounts for some 60% of total employment and the number of working poor (those earning less than $2 a day) remains high.

•  One of the ways Indonesia is addressing this is by scaling up support for micro, small and medium-sized enterprises. Recent measures to improve their access to finance could be accompanied by measures to enhance their access to markets and information.

 

Policy brief: Living with high commodity prices <download pdf file>