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AseanAffairs Magazine November - December 2010



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Rajiv Biswas




     Indonesia: A Phoenix Rising
“Indonesia is on the threshold of becoming Asia’s next trillion dollar economy by 2015.”

The Next BRIC Country? Since the East Asian crisis in 1997- 98, which plunged the Indonesian economy into a deep recession and a period of considerable political instability, Indonesia has emerged like a phoenix from the ashes. Indeed, Indonesia is now considered by many economists and international financial markets investors to be the next BRIC economy, fit to join the elite grouping of large, rapidly growing emerging market economies of Brazil, Russia, India and China.

The garuda is Indonesia's national symbol.

Indonesia’s position as one of the world’s largest emerging markets has also increased its role as a key player in global geopolitics, winning it a seat at the G-20, the new forum for international economic decision-making, as well as at the BIS Basel Committee since 2009, giving it a greater voice in global decision-making on international financial standards-setting.

There has been a farreaching transformation of Indonesia’s macroeconomic position since President Susilo Bambang Yudhoyono (SBY) took office after winning the 2004 Indonesian presidential election. With the support of his able economic frontbench led by Finance Minister Sri Mulyani Indrawati during his first term of office, the difficult macroeconomic circumstances he inherited in 2004 were substantially improved by 2009, when his first term of office ended.

Among the most notable achievements during his first term, government debt as a share of GDP was reduced from 56 per cent of GDP in 2004 to 29 per cent of GDP by 2009. Against the context of sharply higher government debt to GDP ratios in many OECD countries since the 2008 global financial crisis, Indonesia’s government debt burden is very low compared to most other other developed and developing nations, and indeed has continued to decline during 2008-2009 despite the global economic recession. Crucially, as the International Monetary Fund (IMF) notes in its latest Article IV consultation, Indonesia has made great progress over the last decade in improving financial sector stability and strengthening bank regulation and supervision.

One of Indonesia’s key macroeconomic vulnerabilities in the past has been its external account position. A key achievement has been the reduction of the external debt as a share of GDP from 54 percent in 2004 to 32 percent of GDP by 2009, while foreign exchange reserves have been strengthened from US$36 billion in 2004 to US$66 billion by 2009. While these key macroeconomic indicators give a sense of the major economic achievements that took place during SBY’s first term, the greatest achievement has undoubtedly been the much improved political stability in Indonesia since SBY took office.

The Indonesian economic frontbench also demonstrated their skilful economic management of the economy through the global financial crisis in 2008-09, when international financial markets expected Indonesia to experience an external account crisis as it had during the East Asian crisis. Indeed, in late 2008, Indonesian sovereign CDS spreads had risen to more than 1,200 basis points, signaling that markets feared a crisis was imminent.

However, the government acted preemptively by arranging a US$5.5 billion contingent financing facility with the World Bank and other international development agencies, while a further US$3 billion was raised through a sovereign bond issue, strengthening Indonesia’s external account position considerably and helping it to sail through the global economic tempests. Indonesia’s economic resilience was further demonstrated by the positive 4.6 percent GDP growth rate recorded in 2009, a year when many countries worldwide, including some in East Asia, suffered deep recessions.

Source : IMF

The Economic Outlook
Having secured great political and economic achievements during SBY’s first term of office, there are still significant challenges confronting the SBY government during its second term. The coalition government has been beset by political difficulties, which have deflected the political focus away from some of the essential reforms still needed. Nevertheless, SBY successfully tackled a key political hurdle when Sri Mulyani, who had held the Finance Minister portfolio for many years, stepped down earlier in 2010. His appointment of Agus Martowardojo as her successor in the Finance Minister post was well received by both domestic and foreign business leaders and financial markets, calming fears that the economic frontbench would be significantly weakened by the change.

Real GDP growth is projected to be slightly above 6 percent per year over 2010 and 2011, with a sustained GDP growth rate of around 6-6.5 percent achievable. Over the medium term, a key focus for government policy will be to lift the potential growth rate of the economy over the 5 percent range to above 7 percent in order to accelerate poverty reduction and improve living standards. Indonesia is very well positioned as a major resource-exporting nation, with the rapid industrialisation of China and India expected to sustain strong demand for Indonesian commodities over the medium term.

The domestic economy is also growing strongly, with Indonesia now on the threshold of becoming Asia’s next trillion dollar economy by 2015, making it an increasingly important consumer market in emerging Asia.


The many positive economic developments in Indonesia’s economic and political risk scorecard have gradually moved it closer to the coveted investment grade sovereign credit rating from the major rating agencies, with growing expectations that its first investment grade credit rating may be within reach in the near term. However, Indonesia still needs to address many significant economic challenges over the long term, including a wide range of issues such as corruption, an uncertain legal environment, difficult labour laws, and a difficult environment for foreign direct investment.

A key challenge for the medium-term outlook is the need for significant new......................................

From left, Rajiv Biswas and former Australian prime minister
John Howard at the RSIS Singapore Dialogue
When I spoke to former Australian prime minister John Howard at the RSIS Singapore Global Dialogue a few weeks ago, he gave a very positive view about political and economic developments in Indonesia in recent years.

“Indonesia has been one of the unheralded and unremarked success stories in the region politically in the last 20 years. The transformation from a military dictatorship as late as in 1998 to what is the third largest democracy in the world is remarkable,” he said.

“I think that President Yudhoyono has done a remarkable job. Indonesia has done very well politically and economically over the last five years and I think it is very important what happens there. It is important in the region, and important globally, as a role model of a successful moderate Islamic country. Indonesia has had a longer and more successful experience with democracy than many people predicted,” Howard concluded.

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