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Indonesia Holds Great Promise for Rapid Economic Growth

by internationalbanker

By Samantha Barnes, International Banker


While China and India tend to capture most of the headlines when identifying the world’s major economies likely to grow the fastest over the coming decade, another Asian behemoth is much less discussed, despite demonstrating formidable economic growth over the last decade (outside of the pandemic). And with estimates suggesting that Indonesia will continue on its solid growth trajectory until at least 2030, Southeast Asia’s largest economy represents one of the most exciting prospects in the world over the coming years.

Underscoring this promise was the February news that Indonesia’s economic growth last year surged to a nine-year high, with gross domestic product (GDP) having expanded by 5.31 percent from 2021 levels, thus returning it to its pre-pandemic pace of more than 5 percent growth per year. The strong performance can be attributed to several key factors—chief among them household consumption, which represents more than half of Indonesia’s GDP and accelerated last year as Indonesians enjoyed a rebound in mobility and tourism following the lifting of pandemic-era restrictions.

Exports also generated considerable growth as high global commodity prices boosted the value of coal, palm oil, iron and steel shipments. “Globally, high prices of Indonesia’s main export commodities supported trade performance last year,” Margo Yuwono, head of Statistics Indonesia, noted in February. “However, global commodity prices are already in [a] downward trend, hence will impact growth going forward.” 

Indeed, the prices at which Indonesia can sell its abundant natural resources remain the biggest consistent threat to the nation’s annual economic performance. With prices typically volatile across the entire commodity complex, the impacts on Indonesian exports can be substantial. And it is this key concern that the government has sought to resolve as part of its quest to transform Indonesia into a high-income economy. As far as Indonesia’s President Joko Widodo (widely known as Jokowi) is concerned, this goal is within the country’s grasp.

Widodo has pointed to South Korea and Taiwan as realistic economic models that can inspire Indonesia over the coming years to make the rest of the world more dependent on what the archipelagic nation has to offer. The president confirmed in December 2022 that Indonesia could conceivably replicate the alternative economic strategies adopted by industrialised Asian economies to achieve high-income status, with Taiwan’s successful semiconductor-chip industry and South Korea’s advanced digital-hardware sector both shining examples of what can be accomplished. “They are focused, strategic and competitive; this is the system we need to keep emulating,” Jokowi said, as quoted by Bloomberg, adding that his primary aim for Indonesia is “making other countries reliant on us”. 

As the world’s largest producer of palm oil and nickel and a leading source of copper, bauxite, tin and many other commodities, moreover, the exports of such products will play crucial roles in helping Indonesia fulfil its economic potential over the next decade and beyond. But Jokowi has stressed that developing domestic industries based on those commodities that can push Indonesia up the value chain will be the crucial driver of growth, rather than simply exporting raw materials and allowing the processing, refining and other high-value industrial treatments of those commodities to occur outside of the country’s borders.

Citing Latin American economies as being overly reliant on excessively open economic models that have resulted in their countries “always developing”, Jokowi is determined to set Indonesia on a trajectory that will enable it to escape the notorious “middle-income trap”, in which countries succeed in reaching a middling per-capita income level—which the World Bank defines as being within the annual range of $1,036 and $4,045—but cannot progress beyond this level to become developed countries. “If we follow [in] the footstep[s] of the Western countries, we will always be left behind, we will never catch up,” Jokowi added. “We will keep our economy open, but once again, we need to be able to design it in such a way that other countries are reliant on us.”

The goal is thus to reach a per-capita GDP of $10,000 by 2045, which would position the country on the verge of becoming a high-income country as well as reduce its inequalities by developing areas outside of its main economic power centre: the densely populated island of Java, on which the capital city, Jakarta, is located. This will require significant manufacturing investments and productivity boosts over the next few years.

Thankfully, the process is already reaping rewards, with the country using its nickel industry as the canary in the coal mine in its attempts to move up the value chain. Specifically, a law enacted in 2009 required mining companies to process and refine the ore they were extracting within the country before exporting the product and investors to reduce their shareholdings in mining companies operating in Indonesia.

The export ban on raw minerals implemented in 2020 by the Indonesian government forced foreign companies to invest in Indonesia’s smelters to keep hold of their nickel. And despite losing a lawsuit in November 2022 filed by the European Union (EU) for violating World Trade Organization (WTO) rules stating that each member country is prohibited from imposing restrictions other than duties, taxes or other charges, the development of downstream facilities helped to boost the total added value of nickel commodities in 2022 by an estimated $12 billion (or 188 trillion rupiah).

With the ongoing boom in electric vehicles (EVs), the batteries of which contain nickel, moreover, that value addition can be enjoyed for many years. Indeed, last year saw total foreign direct investment (FDI) in Indonesia reach a record high of $44 billion, a whopping 44 percent higher than 2021’s figures, according to data from the Indonesian Investment Coordinating Board (BKPM), which also noted that the bulk of that investment was allocated to the country’s metals sector. Among the most important investors are Korean firms, which now amply support downstream segments of Indonesia’s EV value chain, including battery cathodes and cells and vehicle production. Last year saw Hyundai Motor Group open its first factory in the country, while LG Corporation and SK Group have also announced Indonesian investment plans.

A similar ban on bauxite exports came into effect in June of this year, with the government planning to introduce more bans on shipments of copper and ores such as iron and aluminium. More onshore processing is also slated for the oil and gas and fisheries industries, while the number of raw exports still permitted by the government will be trimmed to only refined palm oil, coconut products, timber, seaweed and salt. “We’re using nickel as the prototype,” Minister of Investment Bahlil Lahadalia told Bloomberg in February. “It’s silly. We have the raw materials, but we sell [them] to be refined overseas, then we import [them] back. Where did we leave our brain?”

According to government estimates, this new model could attract a whopping $545 billion in investment, worth roughly half the value of Indonesia’s current economy. “We used to sell the Indonesia story by the numbers: 280 million people, thousands of islands, and so on. That’s promoting history, not investment,” Lahadalia added. “Now we tell them: ‘What industry do you want? Here’s what you can make, and here’s where you can do it.’” Such windfalls have enabled the Indonesian government to cut its budget deficit to below its target threshold of 3 percent of gross domestic product a full year ahead of schedule, according to the Asian Development Bank’s (ADB’s) April 2023 outlook for the country.

But the economy could still experience a moderate slowdown this year, with the ADB anticipating growth of 4.8 percent this year and 5.0 percent in 2024 as the commodity boom wanes and domestic demand normalises. “Booming commodity exports drove growth to 5.3% in 2022, making up for modest domestic demand,” said the ADB’s country director for Indonesia, Jiro Tominaga. “Global headwinds in 2023 are projected to cut export growth, although the current account should continue to be close to balance. But because private consumption accounts for a large share of Indonesia’s economy, as consumer spending further normalizes and benefits from the tapering off of inflation, this should put a floor on growth. Investment, however, is likely to remain modest as businesses wait-and-see.”

The Organisation for Economic Cooperation and Development (OECD) holds a similar view for Indonesia, having recently forecast that real GDP growth will slow to 4.7 percent in 2023 before reaching 5.1 percent in 2024 once the impact of monetary tightening fades and uncertainty about the Indonesian 2024 general election abates. “The economy has benefitted from strong commodity prices and will be sensitive to mounting global headwinds, including geopolitical tensions, slowing trade growth, and financial volatility,” the OECD’s “Indonesia Economic Snapshot: Economic Forecast Summary (June 2023)” states. “Low real wage increases and a soft labour market are holding back household consumption.”


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