Asia’s newest trillion-dollar economy faces bittersweet win
JAKARTA: Indonesia is on track to become a trillion-dollar economy and should be the envy of South-East Asia. Yet on some key measures, the region’s biggest economy is falling behind.
The nation lags neighbours on infrastructure development, faces a fiscal shortfall that’s heaping pressure on the state budget and still has 28 million people living in poverty. That’s even after reforms saw the economy’s value more than double over the past decade to US$932bil, with President Joko Widodo’s government forecasting growth this year of about 5%.
Size isn’t everything. Even after eight rate cuts since the beginning of last year, the economy is struggling to fire up: loan growth remains muted, while the central bank expects low inflation to linger for some time. The picture is made more complex by a wide divergence in growth across the archipelago of more than 17,000 islands, with rates ranging from negative to more than 7%.
“This is a pretty large economy that has a lot of potential but the trick really is how to get to that place where growth becomes more sustainable at relatively elevated levels. That’s more important than the overall size of the economy,” said Euben Paracuelles, an economist at Nomura Holdings Inc in Singapore. “From that perspective, their work is cut out for them.”
Sustaining growth is crucial to luring overseas investors, who are returning to Indonesia 20 years after the Asian financial crisis. Foreign reserves are at a record high of US$129bil while bond market inflows are near record levels.
S&P Global Ratings in May joined the other two main rating companies in awarding Indonesia investment grade status, citing a more prudent approach to budgets. The cur- rency is stable this year after gaining 2.3% against the US dollar in 2016.
Graduation into the trillion dollar club “signifies how Indonesia now is laddering up in the middle-income group,” said Perry Warjiyo, deputy governor at Bank Indonesia. “Under the leadership of President Joko Widodo, moving in that direction also signifies the fundamentals of the economy are quite strong and resilient.”
Jokowi is ramping up spending on roads, rail and seaports as he targets economic growth of 5.4% in 2018, the fastest rate in five years. But a massive infrastructure deficit – estimated by the World Bank at US$1.5 trillion – is frustrating his efforts. The global lender said another US$500bil in infrastructure spending is needed over the next five years.
After years of under-investment, the rate of growth in government spending per capita in Indonesia has fallen behind Vietnam, China, India and Malaysia, the World Bank said. Public investments grew at half the pace of the economy from 2005 to 2015 and the quality of infrastructure lags the region and other emerging markets.
Indonesia’s tax revenue as a portion of GDP remains one of the lowest in the region with the Organisation for Economic Cooperation and Economic Development estimating it at around 12% two years ago. It has since fallen to 10.3%, which Finance Minister Sri Mulyani Indrawati in July described as “low and unacceptable.” She’s aiming to boost that ratio to 16% by 2019.
The shortfall is putting a strain on the budget deficit, which the government is mandated to keep under 3% of GDP. The president flagged spending cuts in July when this year’s deficit was revised to 2.9% of GDP from 2.4%.