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Analysis: A view on the Indonesian economy: Past, present & future
It is interesting to closely monitor the progress of Indonesiaâs economic development over the years
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It is interesting to closely monitor the progress of Indonesia's economic development over the years. Bank Mandiri has a number of tools that give it an insight into the current economic conditions and make it able to predict future economic trends that could be used as a basis for creating policy and facilitating decision-making, both for the company and for the government.
Bank Mandiri's economic cycle analysis model has produced two types of composite indices: the Mandiri Leading Economic Index (MLEI) and the Mandiri Coincident Economic Index (MCEI).
The MLEI will move ahead of the country's gross domestic product (GDP), while the MCEI moves in accordance with gross domestic product (GDP). This way, they can be useful as an early warning system on the movement of the Indonesian economy.
Past: Sustained Growth during Global Uncertainty. Over the last five years, the country's economic development has had its ups and downs. In 2008, Indonesia recorded economic growth of 6 percent year-over-year (YoY), a drop from the previous year's 6.3 percent (YoY), as a result of the global economic slowdown.
The decline in demand and the prices of commodities led to falls in company profits, especially for commodity-based businesses.
In 2009, however, economic growth became sluggish, posting a figure of 4.6 percent (YoY), dragged by a fall in the prices of most plantation, mining and industrial commodities.
Meanwhile, the 2010-2011 period was a turning point, signaling the recovery of the Indonesian economy. The recovery of the manufacturing industry was followed in turn by the agricultural and mining sectors.
Economic growth in 2010 and 2011 was recorded at 6.2 percent (YoY) and 6.5 percent (YoY), respectively. In 2012, although the global economic turmoil put pressure on trade routes, the Indonesian economy was still able to grow by 6.2 percent (YoY).
In 2013, the economy grew 5.8 percent (YoY), as investment weakened and imports of machinery and petroleum products eroded earnings from exports.
The growth of Indonesia's economy during 2008-2013 was consistent with Bank Mandiri's MLEI. From the average value of the MLEI during the third quarter of 2008 and second quarter of 2009 (which served as a means of predicting economic growth in 2009) were 98.7, lower than the average value of the MLEI during the third quarter of 2007 and the second quarter of 2008 (representing economic growth in 2008) which stood at 101.3.
Furthermore, the average value of the MLEI during the third quarter of 2012 and second quarter of 2013 (which served as a mean of predicting economic trends in 2013) was 99.7, lower than the average value of the MLEI during the third quarter of 2011 and second quarter of 2012 of 100.2 (for predicting economic growth in 2012).
Present: Facing Internal and External Challenges. Significant progress has been achieved by this country since the Asian crisis of 1997-1998. Nevertheless, Indonesia must remain introspective as it is still very susceptible to the influence of external factors and internal issues, such as global financial market fluctuations, foreign demand, commodity price volatility and domestic political conflicts.
In addition, the economic recovery in the industrial nations may encourage foreign investors to move their funds out of Indonesia. In light of this, Indonesia must be able to maintain capital inflows into the domestic financial market, as well as stepping up equitable development and competitiveness. It is also essential that strong economic growth is enjoyed by all layers of society.
Based on Central Statistic Agency (BPS) data, economic growth in the second quarter of this year was recorded at 5.12 percent (YoY), a deceleration compared with the first quarter at 5.21 percent (YoY). This slowdown was caused by declining investment as business players delayed several projects amid concerns over the elections.
The average value of the MLEI during the first and second quarters of 2014, as a reflection of economic growth in Indonesia over the next two quarters (3Q14-4Q14), has indicated that the economy will grow faster than in the second quarter of this year.
Nonetheless, we are targeting economic growth in 2014 at 5.3 percent (YoY). This growth will be supported by increasing household consumption and improvement in exports. The government is optimistic that economic prospects in the medium term will show a positive trend if some fundamental problems in the economy can be overcome by means of structural reforms.
How About the Future? A forecast of improving global economic conditions next year coupled with structural reforms are the keys to improving the performance of national exports and fostering confidence in investment opportunities in Indonesia.
This will also support stronger economic growth. Nonetheless, to attain sustainable economic growth and to prevent the Indonesian economy from falling into the middle-income trap, the transition process to a developed, high-income economy needs to be accelerated.
This transition process demands an economic growth rate that is based on the reliability of the industrial sector and the ability of economic actors to adapt to the era of globalization.
Risks to economic growth next year may arise from increases in inflation and the benchmark interest rate. The potential for a rise in inflation as a knock-on effect from the hike of subsidized fuel prices is one of the main risks to economic growth next year. Rising inflation suppresses public purchasing power, thereby constraining any growth in household spending. However, an increase in the price of fuel will lighten the government's subsidy burden, fuelling hope that the budget might be used in a more effective manner to spur economic growth.
Meanwhile, an improvement in the trade balance and a stable domestic political environment in the wake of the 2014 election would certainly have a positive impact on the Indonesian economy in 2015.
With the various risks as well as opportunities that we have outlined here, Bank Mandiri's economics research team predicts that the Indonesian economy in 2015 will grow 5.6 percent (YoY). The optimizing of the new government's role in bolstering economic growth should be done through structural reforms and effective policies, so that Indonesian economic growth can reach 7 percent in the coming few years.
' Quantitative Analyst, PT Bank Mandiri, Tbk
