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Indonesia Heading for Solid Growth in 2012 (OBG update)

Indonesia, the world’s fourth most populous country, has a huge and burgeoning domestic market, vast natural resource wealth, and an enviably open and stable political system

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Indonesia, the world’s fourth most populous country, has a huge and burgeoning domestic market, vast natural resource wealth, and an enviably open and stable political system

In spite of the economic uncertainty that characterised much of 2011, Indonesia’s strong growth has solidified its reputation as one of the world’s most important emerging economies.

On November 3, Deputy Finance Minister Anny Ratnawati said that the government was confident that its forecast for excellent growth would still be met, despite global uncertainty. Official estimates put growth in 2011 at 6.6%, rising to 6.7% in 2012, with government infrastructure expenditures helping support continued expansion.

Indonesia, the world’s fourth most populous country, has a huge and burgeoning domestic market, vast natural resource wealth, and an enviably open and stable political system

Indonesia, the world’s fourth most populous country, has a huge and burgeoning domestic market, vast natural resource wealth, and an enviably open and stable political system

In mid-December, Fitch Ratings upgraded Indonesia’s sovereign debt rating to investment grade, 14 years after the country lost the rating during the 1997-98 Asian financial crisis. The ratings agency said that Indonesia, in terms of sovereign risk, is better than some Western European countries at the moment.

Even as growth has been maintained, inflation has been easing, hitting a 19-month low of 4.15% in November.

This has allowed Bank Indonesia (BI), the central bank, to cut its main interest rate twice since mid-October, once from 6.75% to 6.50%, the first reduction in more than two years, and then from 6.50% to 6% in mid-November.

This should have a knock-on effect of lowering borrowing costs for businesses, though the BI will keep a watchful eye on prices, with bank officials suggesting that inflation could rise again this year to an average 5%, which may actually be a symptom of Indonesia’s eye-catching economic success, resulting from investment flows into the country and continued increases in GDP.

Official estimates put growth in 2011 at 6.6%, rising to 6.7% in 2012

It has been a busy year for the energy industry as Indonesia builds its position as a major hydrocarbons player. In February Pertamina, the state-owned energy firm, announced that it was embarking on a long-term expansion programme, including up to $1bn in acquisitions.

While in December the firm pulled out of a large oil field deal in Angola, it is still firmly setting its sights on international expansion. In December Pertamina also announced that it would be investing Rp408.6trn ($50bn) in the 2011-15 period in developing oil and gas blocks at home and abroad, including through mergers and acquisitions. The company aims to produce 1m barrels of oil equivalent (boe) by 2015, from an average of 475,300 boe in 2011.

A range of domestic and foreign firms are also involved in the development of the energy sector. In January, for example, Japan’s Mitsubishi Corporation announced a joint venture with Korea Gas Corporation (KOGAS) to develop a $2.8bn liquefied natural gas (LNG) facility in central Sulawesi, in partnership with Pertamina and Medco LNG Indonesia. The facility will help Indonesia meet its ever-rising need for gas, freeing more for export.

While energy is one mainstay of the economy, tourism is playing an increasingly important role, providing foreign currency earnings and supporting incomes across the country, including in rural areas. The government set a target of attracting 7.7m visitors in 2011, a target that may indeed have been reached, as almost 5m tourists arrived in the first seven months of the year alone. But this is just the start – the country hopes to be welcoming 20m tourists a year by 2025.

While energy is one mainstay of the economy, tourism is playing an increasingly important role

To achieve this, the government is encouraging private investors to participate in investments in infrastructure to support growth, and is working to increase the number of visitors from fast-growing markets including China, India and Russia. The authorities and industry leaders are well aware that the sector can be affected by the global economic climate, and that continued investments and improved marketing are necessary to meet ambitious growth targets. But Indonesia already has an excellent base on which to build, particularly in Bali, and great appeal to a wide range of visitors from across the world.

An additional area of focus for the country has been ensuring food security, which is a key issue given its population of more than 230m people. The aim of increasing domestic output has had the benefit of stimulating growth in agriculture and supporting rural development. Indonesia is the world’s third-largest consumer of rice and has had great success in increasing the efficiency of rice production, which is now well above the international average.

According to a September report by the Australian Centre for International Agricultural Research, Indonesia increased its yield per hectare by 13% between 1985 and 2009, reaching an average 5.1 tonnes per hectare, against a global mean of 4.3 tonnes. Rice output is expected to continue to rise, and is set to reach 68m tonnes in 2011, up from 66.4m tonnes in 2010. By 2014, therefore, the country should be self-sufficient in its primary staple. Experts suggest that this can be accomplished through further increases in output on existing paddies rather than by expanding land under cultivation.

Infrastructure is also primed to get a boost with the passing in December of a long-awaited land acquisition bill that will attempt to speed up infrastructure development, presenting major opportunities for private sector development of roads, ports and airports.

Indonesia’s infrastructure is still patchy

The development of these sectors, and many others, is encouraging, though there are caveats – the country’s infrastructure is still patchy, poverty is widespread, human resources are limited in areas, and increased connections to the global economy raise the risk of contagion in international crises. Some sectors of the economy could be liberalised further, and the business climate improved for domestic businesspeople and foreign investors alike.

But Indonesia, the world’s fourth most populous country, has a huge and burgeoning domestic market, vast natural resource wealth, and an enviably open and stable political system. Going into 2012, these are uncertain times for the international economy, but Indonesians have a great many reasons to be optimistic.

Note: This article was published on behalf of  Oxford Business Group, the views and opinions expressed in this article are those of the authors and do not necessarily state or reflect the views of  Thailand Business News

Oxford Business Group (OBG) is a global publishing and consultancy company which produces original economic and business intelligence on markets in the Middle East, Africa, Asia, Eastern Europe and the Caribbean.

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