Economy Of Indonesia

Indonesia
Indonesia

Indonesia is a country that contains great economic potential; a potential that has not gone unnoticed to part of the international community. Indonesia – Southeast Asia’s largest economy – is increasingly mentioned as an appropriate candidate to be included in the BRIC countries (Brazil, Russia, India and China) as the country is rapidly showing signs of similar newly advanced economic development. Recently, a new set of emerging economies has gained public attention.

Members of this set are countries that contain promising markets with diverse economies, reasonably sophisticated financial systems and fast-growing populations. These countries are grouped under the acronym CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa), and its combined Gross Domestic Product is predicted to account for half the global economy by 2020.

Another important example of international recognition regarding Indonesia’s economy is the recent upgrades in the country’s credit ratings by international financial services companies such as Standard & Poor’s, Fitch Ratings and Moody’s. Resilient economic growth, low government debt and prudent fiscal management have been cited as reasons for the upgrades and are key in attracting financial inflows into Indonesia: both portfolio flows and (significant increasing) foreign direct investments (FDI). These FDI inflows, which had been relatively weak for Indonesia during the decade after the Asian Financial Crisis had seriously shaken up the foundations of the country, showed a steep increase after the global financial crisis of 2008-2009.

What are Indonesia’s strong points that explain increasing foreign investments and the recent macroeconomic growth?

Abundant and diverse natural resources
Young, large and burgeoning population
Political stability (relatively)
Prudent fiscal management since the late 1990s
Strategic location in relation to the giant economies of China and India
Low labour costs

Indonesia, a market economy in which the state-owned enterprises (SOE) and large private business groups (conglomerates) play a significant role, thus shows a number of highly positive features at the beginning of – what can become – a period of substantial economic development. However, it should also be pointed out that Indonesia is a complex country that contains certain risks for investments and experiences difficulties within the framework of its unique dynamics and context. In order to be aware of the risks involved we advise you to read our Risks of Investing in Indonesia section and to keep track of Indonesia’s latest economic, political and social developments through our News section, Business section and Finance section.

General Economic Outline of Indonesia

Prudent financial macroeconomic policy is one reason why Indonesia was resilient to the global financial crisis of 2008-2009. Both public and private debt have fallen sharply (as a percentage of GDP), international reserves have grown fast and inflation has been under control. In combination with relative political stability and certain favorable demographic trends it provides opportunities for strong economic performance over the medium term. Regarding the longer term, the Indonesian government aims to be in the top six of largest global economies by the year 2030.

Update 2013
Update 2013

Another key element that accounts for Indonesia’s recent economic growth is domestic consumption. In line with rising per capita GDP and low borrowing costs, Indonesia’s private consumption is robust. It accounted for 56 percent of the country’s economic activity in 2011 and future projections indicate that it is to grow further.

Despite such positive conditions Indonesia remains a complex country from a business, social and political perspective. We advise those that intend to invest in Indonesia to read our Risks of Investing in Indonesia page as one should be aware of matters that can negatively influence Indonesia’s investment climate.

The table below shows recent results and future forecasts of important macroeconomic indicators. For a more detailed account on these indicators please visit the Macroeconomic Indicators page or click on the links in the pict.

Composition of Indonesia’s Economy: the three main sectors

The table below indicates a remarkable development during the last five decades in the percentage shares of the three main economic sectors (to wit agriculture, industry and services) with regard to Indonesia’s Gross Domestic Product (GDP). Indonesia changed from being an economy that was highly dependent on agriculture into a more balanced economy in which the percentage share of manufacturing in the country’s GDP quickly exceeded that of the agriculture sector.

This also indicates that Indonesia lessened its traditional dependency on primary exports, although it still remains relatively high today. It should also be underlined that all of these sectors underwent rapid expansion, despite the fact that its contribution to Indonesia’s GDP fell (agriculture) or remained at a similar level throughout the indicated period (the services sector).

1965 1980 1996 2010
Agriculture 51 24 16 15
(percent of GDP)
Industry 13 42 43 47
(percent of GDP)
Services 36 34 41 37
(percent of GDP)

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