The global economy is once again in turmoil, with advanced economies on the verge of a sharp recession or recession. Russia’s war, food and fuel crises, supply chain disruptions, China’s zero-Covid woes and the US Fed’s monetary tightening led to financial tightness making it difficult for almost all economies. Low income earners, such as Sri Lanka and to a lesser extent Pakistan, are facing a sovereign debt crisis.
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While many Asian economies, including India, are not looking as bad in general, a Southeast Asian one is proving to be a star. Indonesia (smaller than India with a population of 274.8 million and a GDP of $1,065 billion) is recovering from the Covid disruptions at a rapid pace.
Indonesia, Southeast Asia’s largest economy, outperformed estimates in the April-June quarter, fueled by a boom in commodity-led exports and strong spending, global inflationary pressures, financial market volatility and the COVID-19 pandemic. The fiscal stimulus is driven by a lack of measures. The crisis—its 5.4 per cent GDP growth from a year ago beat all forecasts, and is the fastest growth in four quarters. The economic recovery picked up pace in late 2021 and is strengthening this year supported by domestic demand as well as favorable global commodity prices.
Its inflation, which averaged 1.6% last year, and was 4.7% this August, is among the lowest in the world. Rupiah is the best performing Asian currency this year (India’s rupee is the second best performer, but mainly the central bank is spending the dollar from its foreign exchange reserves to strengthen it) .
Meanwhile, India, although currently the world’s fastest growing economy, has been growing below capacity for years. Its program of economic reforms initiated in 1991 has been in reverse gear, with the government withdrawing trade liberalization policies and looking to reintroduce quasi-license-permit-raj-type measures, such as In the draft telecom bill for services. Such as Gmail, WhatsApp and Signal.
The Asian Development Bank (ADB) expects Indonesia’s economy to grow by 5.4% in 2022 and 5% in 2023. ADB found that Indonesia faces growth threats well, and consumer spending remains strong. The Asian Development Outlook 2022 update said strong consumer demand has more than offset the reduction in government spending. Inflation is projected to remain at 6% by June 2023 (due to higher commodity prices and the recent increase in fuel prices) and is projected to be below 4% by the end of 2023.
Exports are booming for the second year in a row (exports grew 30% to $28 billion in August). Not just because commodity prices are also up (Indonesia is a major exporter of coal and palm oil), but also because Indonesia’s exports of textiles, clothing, footwear, machinery, furniture and electronics are on the rise. Despite a temporary export ban on palm oil, its trade surplus rose to $15.55 billion in the June quarter, up nearly 150 percent from the same period a year ago.
Travel and personal consumption spending, which contributes half of the GDP, picked up pace during the Eid festivities, as the lockdown was eased.
The country’s fuel subsidies have helped quell inflation, which has caused Indonesians to not lose spending power like people in other countries. With inflation under control, Indonesia’s central bank raised interest rates in August to 3.75 percent for the first time in three years, as inflation surpassed target levels in line with global trends of rising prices.
With an incredible record on corruption and environmental protection, and longstanding challenges including low tax revenues and shallow financial markets, how did Indonesia put itself on the road to prosperity?
The Indonesian economy’s resilience to policies (by the International Monetary Fund, among many) to maintain macroeconomic and financial stability despite the severe impact of the pandemic has been helped by a substantial policy buffer accumulated over years of strong macroeconomic performance.
The country’s response to COVID was a bold and comprehensive, and well-coordinated, policy package that has successfully maintained economic and financial stability. With the recovery, he began to withdraw the extraordinary support measures in time.
Indonesia’s ambitious structural reform agenda includes tax reform legislation, a carbon tax for climate change mitigation, and a commitment to return to the pre-pandemic budget deficit limit of 3 percent of GDP by 2023 without too many spending adjustments. Like India, Indonesia is also striving for digitization.
Indonesia’s policymakers want its reserves – a third of the world’s total and the largest in Australia – of nickel, a mineral needed to make batteries, used to develop a global electric vehicle manufacturing base. Foreign companies have started refining nickel ore in the country after Indonesia banned its exports in 2020. The country is building eight plants to produce EV battery-grade nickel. South Korea’s LG and Hyundai are building the country’s first EV battery cell plant. Hyundai is building an EV plant. Indonesia is eyeing Tesla’s Elon Musk for big-bang investments in the next big global industry, EVs.
In five years, Indonesia’s nickel-dependent exports have grown from $1.1 billion to nearly $21 billion.
The country is also focusing on building human capital, for which it has participated in businesses to improve education institutions and state-owned firms, which dominate large parts of its economy. Its reformed labor regulations to boost job creation have, in fact, brought foreign investment flows from construction companies to locate some of their production facilities outside China.
Indonesia is also building physical capital – toll roads, airports, ports and new dams.
The centerpiece of Indonesia’s transformation is the new capital being built, Nusantara, which is four times the size of the current capital, Jakarta, which is sinking due to rising sea waters. By its centenary year in 2045, Indonesia is expected to become the fourth largest economy in the world.
Still, challenges remain: on improving education, women’s labor force participation, and governance structures as well as energy subsidies.
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