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AseanAffairs Magazine May - June 2011





The election of Yingluck Shinawatra through a peaceful and democratic election may usher in a new period of political stability in Thailand.

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Rajiv Biswas
Indonesia is on the threshold of becoming one of the world’s leading emerging market economies, driving growth in Asean over coming decades  

Indonesia: Asia’s Next BRIC Economy

When President Susilo Bambang Yudhoyono (SBY) was elected to lead the Indonesian government in 2004, Indonesian gross domestic product (GDP) per person was just US$1,200, which was virtually unchanged since 1995. For the previous decade from 1995-2004, Indonesia had become mired in a period of economic stagnation. Indeed, GDP per person had fallen sharply during the East Asian Crisis in 1997-98, with Indonesia in political and economic turmoil.

However, within the seven-year period since President SBY took office in 2004, GDP per head in Indonesia has more than doubled, to around $3,000, reflecting the remarkable economic transformation that has taken place in Indonesia under his leadership. The medium-term outlook is for further progress in boosting per capita incomes, with GDP per person projected to exceed $5,000 by the end of 2015.

Source: IHS Global Insight

Today, global financial investors are increasingly discussing the possibility that Indonesia should be included among the BRIC (Brazil, Russia, India, China) economies, the largest fastgrowing emerging economies in the world. This has also been reflected in capital flows, with both foreign direct investment and portfolio capital flows strengthening significantly in 2010 due to growing international investor confidence in the Indonesian economic outlook.

Nevertheless, Indonesia remains a country facing tremendous further challenges in achieving fundamental human development goals. Despite progress in poverty reduction since 2004, the World Bank estimates that 32 million Indonesians live in poverty, with half of all households close to the national poverty line. Rural poverty remains a burgeoning problem, with the rural poor accounting for around 70 percent of the total numbers in poverty. Similarly, despite large improvements in the access to basic health care since 2004, with health insurance coverage for the poor having roughly tripled to cover around 43 percent of the population, this still leaves half of the poorest segments of society without access to basic health care cover.

However, President SBY’s government made important economic progress during his first term of office, setting the foundation for sustainable development and poverty reduction. The macroeconomic achievements of his economic frontbench during his first term of office have included substantial achievements in reducing the twin burdens of high government debt and external debt over the last seven years. Government debt as a share of GDP has been reduced from 56 percent of GDP in 2004 to an estimated 26 percent of GDP by 2010, putting Indonesia’s government debt burden in a very favourable light compared with the fiscal plight of most Organization for Economic Cooperation and Development countries today.

Indonesia’s external account position has also improved substantially, with external debt as a share of GDP having been reduced from 54 percent of GDP in 2004 to around 23 percent of GDP in 2010, another very significant achievement in reducing Indonesia’s vulnerability to external financing. This improved external account position has also been strengthened by a significant rise in foreign exchange reserves since 2004.

In 2004, Indonesia’s FX reserves were around $35 billion, and since then have tripled, breaking through the $100 billion mark in early 2011 and hitting $106 billion by the end of March 2011, equivalent to around six months import cover.

A Trillion Dollar Consumer Market
Source: Bank Indonesia

Indonesia demonstrated significant economic resilience during the global financial crisis in 2008-09. It weathered the storm with positive GDP growth of 4.6 percent in 2009, followed by GDP growth of 6.1 percent in 2010. The economic outlook is for potential growth of around 6 to 7 percent per year over the medium term. This is projected to drive Indonesian GDP through the $1 trillion mark by 2014, reinforcing Indonesia’s position as one of the largest developing economies in the world. Importantly, the size of its domestic consumer market is also expected to surpass the trillion dollar mark within the next decade, making it an increasingly attractive economy for large multinationals, as sustained strong economic growth and its youthful demographic profile drive consumer spending.

A key driver of Indonesia’s growth over the long term will be the strong demand from both China and India for both agricultural and mineral resources from Indonesia, boosted by rapid growth in consumer spending in both countries.

This is already attracting significant direct investment flows into Indonesia from Chinese and Indian resource firms that are keen to secure supply lines for key commodities.

The growing economic weight of the Indonesian economy among the group of developing nations has also lifted the geopolitical importance of Indonesia.

This is reflected in its new seat since 2009 as a member of the G-20, which has become the main global international forum for economic decision-making for the world economy, as well as its new seat on the BIS Basel Committee, the key international standards-setting body for the global financial services industry.

This has considerably increased its international political weight, a trend which is expected to continue over coming decades.

This has most significance within the Asean region. Indonesia’s position as the largest economy among the Asean countries, together with the impact of its sustained economic expansion on trade and investment flows with other Asean members, has made Indonesia an increasingly important driving force for the future economic growth of the Asean region. As the size of the Indonesian domestic market continues to expand rapidly, with total GDP projected to exceed $2 trillion by 2022, Indonesia is expected to propel Asean to become one of the fastest growing regions of the global economy over the medium to long term..............


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