A Collective Sigh of Relief - Deloitte

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Pralhad Burli is a Senior Analyst at Deloitte Research, India 36 INDONESIA Indonesia: Unlocking potential by Pralhad Burli While several European economies are reeling under the shadow of a worsening debt crisis, Indonesia’s performance has been nothing short of stellar. In 2011, the economy grew at its fastest pace in over 15 years. Robust economic growth backed by fiscal prudence prompted rating agencies to raise Indonesia’s sovereign credit rating. Moreover, Indonesia’s economy has shown remarkable resilience following the currency crisis of the late 1990s, and it is currently better positioned to handle external shocks. As a result, economists, finance specialists, and international investors have plenty of reasons to be excited about Indonesia’s prospects. A macroeconomic mixed bag With nearly 240 million people, Indonesia is the fourth most populous country in the world. Furthermore, more than half the population is under the age of 30. At over $3,300, Indonesia’s per capita income is over twice as high as India’s. While there is a huge disparity in income levels, the gap is expected to narrow. In addition, Indonesia is likely to experience a significant shift in its consumer market as a large portion of its population enters the middle class. As a result, Indonesia is a very important consumer market, and domestic consumption remains an economic mainstay. International retailers, as a result, can make a strong case for entering or expanding operations in Indonesia over the next few years. If the government’s plan to roll back fuel subsidies takes effect, private consumption growth will likely shrink in 2012. Given the subsidy cut, consumption may not attain its pre-crisis growth rate anytime soon. On the other hand, a delay in implementing the fuel subsidy cut will boost disposable income and consumption in the near term. Meanwhile, Indonesia’s reliance on exports is much lower than its regional peers. However, surging commodity prices turned Indonesian exports into a significant driver of economic growth, and resource-hungry nations such as India and China provide ready markets for Indonesian commodities. Moreover, Indonesia’s strategic location has led to strong trade relations with additional countries in Asia and Oceania. Exports supported economic growth during a period of subdued domestic demand, but ongoing reliance on export-led growth could make its economy vulnerable to external shocks. A weak recovery in the United States and the potential exacerbation of the Eurozone crisis pose significant downside risks. Furthermore, an economic slowdown in China coupled with cooling commodity prices could result in substantially shrinking export revenues.
A step in the right direction Indonesia’s parliament passed the land acquisition bill in December 2011, and it now awaits the president’s approval. The land acquisition bill, if approved and implemented expeditiously, has the potential to spur additional economic growth. The bill will likely reduce bottlenecks in land acquisition for infrastructure projects by streamlining the mechanism for compensating land owners, significantly reducing bureaucratic interference. The bill is expected to allow the government to fast-track infra- Indonesia structure development and also attract private sector participation. These developments are favorable as the lack of adequate infrastructure is often touted as the most important impediment to Indonesian growth. However, as of now, Indonesia’s prospects are comparatively positive. The recent sovereign rating upgrade could spur foreign investors and lead to a surge in foreign inflows in 2012. As Indonesia embarks on an ambitious plan to boost spending in infrastructure development, Geographies 37
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