ASEAN KEY DESTINATIONS
A slippery slope in Indonesia
Stronger than expected GDP data this week has Indonesia struggling with maintaining growth while keeping inflation in check.
The economy grew close to 7 percent year-on-year in the final quarter of 2010 - the fastest in nearly a decade and capping a year in which it became a darling of emerging market investors seeking returns of which developed economies can only dream.
Despite the benchmark interest rate being held at historical lows for nearly two years, foreign money has flooded into the country - boosting bonds, the stock market and the rupiah - and leading to fears the bubble could burst if inflows reverse quickly.
Foreign direct investment more than doubled last year from less than $5 billion in 2009 to more than $12 billion, and forex reserves stand close to $100 billion. Commercial banks are lending more than ever and charging less interest, while some mortgage rates are in single digits for the first time.
Inflation is also picking up, though, and at the back of the minds of government officials is the memory of the massive social upheavals brought about by the Asian financial crisis of 1998 that ended the 32-year reign of autocratic President Suharto. The country is nowhere near that stage right now, and many of its concerns are no different to those faced by other regional economies and the BRIC nations (Brazil, Russia, India and China), to which it is frequently compared.
However, policy makers are clearly wary of allowing unbridled growth to gallop ahead and mindful that pulling on the reins too hard could check foreign investment desperately needed to boost infrastructure and create jobs. Indonesia's central bank surprised many market watchers with an interest rate increase on Feb. 4, its first since the end of the global financial crisis, and analysts polled by Reuters expect three more hikes by the end of 2011.
Indonesians are suffering as much as others as a result of rising global food prices but, paradoxically, the country's growth is largely attributed to its bountiful commodity exports. While Java Island dominates the economy, other islands are seeing rising wealth from the commodities boom, and ports and airlines are struggling to cope with rising trade volumes.
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