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Indonesia - Economy

Indonesia’s economy is forecast to be the world’s 10th largest by 2025. With the largest economy in Southeast Asia, Indonesia is the only Association of Southeast Asian Nations (ASEAN) member in the G20. Indonesia has a market-based economy in which the government plays a significant role. There are 141 state-owned enterprises, and the government administers prices on several basic goods, including fuel, rice, and electricity.

Inequality in Indonesia has reached a record high, according to a new study released on 08 December 2015 by the World Bank. The research found that despite high economic growth in South East Asia’s largest economy, wealth inequality has intensified over the past 15 years. "Indonesia is at risk of leaving its poor and vulnerable behind," said the World Bank’s Country Director for Indonesia, Dr. Rodrigo Chaves.

The recent data concluded that the country’s Gini coefficient, a measure of inequality has surged from 30 points in 2000 to 41 points in 2014. The key factors were identified as unequal employment, high wealth concentration, as well as limited access to employment in the formal economy. "Poverty reduction has begun to stagnate, with a near zero decline in 2014. Income inequality is rapidly rising and up to one third of it is explained by inequality of opportunities."

Among Asia’s worst performing currencies in 2013, in late August 2013 the rupiah suffered its worst week in four years, sliding 4.2 percent. Following reports of a record high current account deficit, the country faced sell-offs in the rupiah, stocks and bonds. More than $500 million in global funds were pulled from the local stock exchange. The government announced plans designed to boost investment and reduce imports. The measures include increasing import taxes on luxury cars, reducing oil imports and providing tax incentives for investments in agriculture and the metal industries. The Indonesian government revised its GDP growth estimate from 6.3 to 5.9 percent this year.

In the mid-1980s, the government began eliminating regulatory obstacles to economic activity. The steps were aimed primarily at the external and financial sectors and were designed to stimulate employment and growth in the non-oil export sector. Annual real gross domestic product (GDP) growth averaged nearly 7% from 1987-97 and most analysts recognized Indonesia as a newly industrializing economy and emerging major market.

The Asian financial crisis of 1997 altered the region's economic landscape. With the depreciation of the Thai currency, the foreign investment community quickly reevaluated its investments in Asia. Foreign investors dumped assets and investments in Asia, leaving Indonesia the most affected in the region. In 1998, Indonesia experienced a negative GDP growth of 13.1% and unemployment rose to 15%-20%. In the aftermath of the 1997-98 financial crisis, the government took custody of a significant portion of private sector assets via debt restructuring, but subsequently sold most of these assets, averaging a 29% return. Indonesia has since recovered, albeit more slowly than some of its neighbors, by recapitalizing its banking sector, improving oversight of capital markets, and taking steps to stimulate growth and investment, particularly in infrastructure.

GDP growth steadily rose in the following decade, achieving real growth of 6.3% in 2007 and 6.1% growth in 2008. Although growth slowed to 4.5% in 2009 given reduced global demand, Indonesia was the third-fastest growing G-20 member, trailing only China and India. Growth rebounded in 2010 to 6.1% and is forecast to have reached 6.2%-6.5% in 2011. Poverty and unemployment have also declined despite the global financial crisis, with the poverty rate falling to 12,5% (March 2011) from 13.3% a year earlier and the unemployment rate falling to 6.6% (February 2011) from 6.8% a year earlier.

Indonesia’s improving growth prospects and sound macroeconomic policy have many analysts suggesting that it will become the newest member of the “BRIC” grouping of leading emerging markets. In December 2011, Fitch Ratings upgraded Indonesia’s sovereign debt rating to investment grade. A similar upgrade to investment grade is expected from Standard and Poor’s and Moody’s.

In reaction to global financial turmoil and economic slowdown in late 2008, the government moved quickly to improve liquidity, secure alternative financing to fund an expansionary budget and secure passage of a fiscal stimulus program worth more than $6 billion. Key actions to stabilize financial markets included increasing the deposit insurance guarantee twentyfold, to IDR 2 billion (about U.S. $235,000); reducing bank reserve requirements; and introducing new foreign exchange regulations requiring documentation for foreign exchange purchases exceeding U.S. $100,000/month. As a G-20 member, Indonesia has taken an active role in the G-20 coordinated response to the global economic crisis.

Indonesia has a wide range of mineral deposits and production, including bauxite, silver, and tin, copper, nickel, gold, and coal. Two U.S. firms operate two copper/gold mines in Indonesia, with a Canadian and a U.K. firm holding significant investments in nickel and gold, respectively. Although coal production has increased dramatically over the past 10 years, the number of new metals mines has declined. This decline does not reflect Indonesia's mineral prospects, which are high; rather, the decline reflects earlier uncertainty over mining laws and regulations, low competitiveness in the tax and royalty system, and investor concerns over divestment policies and the sanctity of contracts.

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Page last modified: 08-12-2015 19:05:51 ZULU