Opinion

Indonesia: Towards a one
trillion dollar economy

Last year Indonesia celebrated a new milestone for its economy. The Indonesian GDP per capita breached US$3,000 in 2010, a threshold that for a long time had been the target of the Chinese government.

In China, its Communist Party’s annual congress in 2002 decided on a target of $3,000 GDP per capita in 2020. That target was reaffirmed by President Hu Jintao in a speech delivered at the Boao Economic
Forum in Hainan in 2004. Such a level was said to produce accelerated economic growth for 11 years in South Korea.

Apparently, the Chinese economy was able to achieve that level, not in 2020, but much earlier in 2008. And, the sector that benefited the most was the automotive industry. If Chinese domestic car sales reached one million in 2000, in 2009 sales had increased to 13.6 million, surpassing the United States to become the largest car market in the world.

Having reached a per capita GDP of $3,000, the Indonesian economy has shown more signs of becoming an extremely dynamic economy. Domestic car sales have once again increased by around 30 percent to 225,000 units in the first quarter of 2011.

Looking at historic patterns, if there are no supply disruptions from the critical components produced in the earthquake-affected area in Japan, the rest of the year will see a further rise in sales. Thus, over 900,000 cars may be sold domestically in 2011, a level just a few inches closer to the new milestone of one million cars.

Last year, the government predicted the one million level would be achieved in 2015. Sales of electronic goods such as LCD televisions, air conditioners, refrigerators and many other appliances also experienced a very high level of growth last year and in the beginning of this year.

The Indonesian economy will produce a nominal GDP of Rp 7,400 trillion ($870 billion if the exchange rate leads to an average of Rp 8,500 against the greenback) in 2011. This is roughly an increase of 15 percent from 2010.

These days the US currency has continuously weakened against other major currencies, including the rupiah. If by year end the rupiah is around Rp 8,000 per US dollar, then the average rate of exchange of the US currency will be around Rp 8,400 to Rp 8,500. Therefore, an average exchange rate of Rp 8,500 is certainly a conservative assumption.

A GDP of $870 billion will certainly exceed the prediction made by the Economist (see “The World in 2011”, Economist, December 2010). The magazine predicted that Indonesia’s GDP would be around $806 billion in 2011, exceeding Turkey ($753 billion) and the Netherlands ($740 billion) for the first time.

So, where is the way forward?

In 2010 and 2011 we have seen a massive inflow of capital, FDI and portfolios to Indonesia. The automotive industry, steel, tires, textiles and garments, shoes, personal care products, ice cream and many other items have enjoyed a rapid expansion. Unilever Indonesia, for example, experienced a massive capital investment not seen in many years. The company was able to double its sales in the last five years and has determined to repeat the feat in the next four to five years.

Indonesian pharmaceutical companies have continuously expanded in the last few years to catch up with the increased demand. Daihatsu expanded its capacity from 260,000 cars per year to 390,000 cars annually. Similar moves were also made by Nissan Indonesia, Hino and Mercedes-Benz. Similarly, the motorcycle industry has increased its capacity just to meet the rising demand.

As the car and motorcycle industries both have very high local content, supporting industries have to automatically expand as well. Toshiba Indonesia, for example, has expanded its LCD TV capacity from 360,000 units in 2009 to 1.4 million units in 2011.

In the service business, we have seen continuous expansion in banking and other financial industries, hotels, hospitals, retail and shopping malls, telecommunications services and the airline industry.

Bank BCA, for instance, has seen rapid growth in its transactions that eventually led to a massive buildup in deposits. The increase in transaction frequencies led the company to open more branches and invest in the enhancement of its IT infrastructure, etc. Their ATM expansion, for example, has helped to improve the level of convenience, even though long queues can sometimes still be seen.

At the same time, we are also witnessing the rise of Indonesian airlines such as Garuda, Lion Air, Batavia Air and Sriwijaya. These airlines had to catch up with the rapid rise in passengers by increasing their fleets. Garuda, the flagship carrier, increased its fleet last year with 23 brand new Boeing 737 aircraft. Early this year, new Boeing jets and an Airbus arrived to strengthen the fleet. The company expects to see the arrival of more brand new planes in the coming months.

With such dynamic activities, it is no surprise that the country’s economy will expand further next year. If such a rate of growth continues, we will see Indonesia’s nominal GDP rise again in 2012 to a level of around Rp 8,500 trillion, an increase of 15 percent.

With the strengthening rupiah against the US dollar, Indonesia’s GDP may translate to a level of over $1 trillion in 2012. That means that the Indonesian economy will join the league of $1 trillion economies that comprises countries like Australia, South Korea, Mexico and perhaps India. This GDP level will propel the economy further to approach the big 10 countries in not too long a time.

In a recent study “Global Growth Generators: Moving beyond Emerging Markets”, Citibank predicted that the Indonesian economy will become the fourth-largest economy by 2040, while in 2030 Indonesia will be seventh in global economic rankings. But, what is the downside of this prediction?

Certainly the level of infrastructure plays a very crucial role in achieving a $1 trillion economy. If public transport, roads, railways and other infrastructure are not in place, what will result is not a country with a thriving economy but a country that will see traffic every hour of
every day.

Underdeveloped infrastructure will in reality choke the country’s growth.

The writer is an economist.

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