For Indonesia, the key risk in store next year is not of an economic meltdown or financial crisis, but a recovery toward mediocre growth.
A year on after the Lehman debacle of 2008, the resilience of Indonesia’s economy has surprised many.
While countries around the world suffer considerable contractions, Indonesia’s economy has managed to grow by more than 4 percent year-on-year in the first nine months of 2009 — helped by strong domestic demand and to some extent recovering export demand amid China’s stockpiling of raw commodities.
Indonesia’s ability to weather the global downturn has helped pushed up financial asset prices closer toward their pre-Lehman levels. Suddenly almost everybody is now talking about Indonesia, how it could become the next China.
Looking forward to next year, 2010 may be quite different from 2008 and 2009, whereby the key issues watched by the markets were related to macroeconomic and financial sector stability risks.
Today there appears to be a much clearer sky ahead on those fronts.
Of course inflation has the potential to rise as the government possibly adjusts the prices of electricity, LPG and fuels; however, any increase would likely be gradual and would probably be orchestrated to avoid a malignant effect on the economy.
Any accompanying interest rate increases would also be on a manageable scale, perhaps only involving a change in the monetary stance from “loose” to “neutral” as opposed to “tight”. After all, the central bank’s policy rate is still at a historic low of 6.5 percent.
Meanwhile, on the external front, Indonesia’s shrinking trade balance and reliance on short-term capital flows may expose the exchange rate to its fair share of volatility. Nonetheless, few disagree that the currency will be more stable next year compared to the rollercoaster rides of 2008-2009, i.e. during the height of the global financial crisis.
So given the rosier picture on the macro front, the key test for next year is probably how well the country delivers on promised reforms — changes needed to take Indonesia to the next level in terms of economic growth.
With Indonesia now in the spotlight of the global investment community, the momentum for catapulting the country out of the doldrums is stronger than ever. There couldn’t be a better time to draw in foreign direct investment for manufacturing industries that have been experiencing sub-par growth for almost a decade.
Unfortunately while we’ve seen a resurgence of portfolio investment inflows (often coined short-term or “hot money”), significant effort is still needed to draw in a sustainable flow of FDI.
In the first nine months of 2009, for instance, FDI in Indonesia was still down by half compared to the same period in 2008.
Many problems such as poor infrastructure, power shortages, labor market rigidities and legal uncertainties remain as barriers to real sector investment that need to be removed by the government.
In this regard, expectations are high that President Susilo Bambang Yudhoyono will be more assertive in pushing ahead with reforms, having emerged from the elections with a stronger mandate.
Yet unfortunately hopes are all we can go by, especially if the past month and a half is any indication of what’s to come over the next five years.
So far the administration has not passed its first test in regard to the most crucial of all issues: quickly restoring confidence in the rule of law. The row between the police and the antigraft body, the KPK, has lacked clear resolution.
This only serves to tarnish all the progress made so far in terms of combating corruption, if not signal a U-turn for the worse going forward.
Indecisiveness also remains visible even in simple tasks such as appointing public officials. Pole position at the central bank – a very strategic office – has been left vacant for no apparent reason.
And while economic reforms greatly need the full attention of economic policymakers, Vice President Boediono and Finance Minister Sri Mulyani Indrawati have apparently become targets in a forthcoming parliamentary inquiry concerning the 2008 bailout of Bank Century, which could be a significant diversion.
The list can go on, but these examples should be enough for a reality check in terms of foreseeing the challenges that might emerge going forward.
The obvious thing now is that 2010 will be a moment of truth. What happens next year is likely to reflect what is to come over the subsequent four years: it could be rapid progress, or more episodes of indecisiveness.
The writer is an economist at Bank Danamon Indonesia; the views expressed are his own.
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