2008-2009 DATA CONSULT. All rights reserved.
December 2011




In 2012, Indonesia's economic development is facing growing  pressure of oil price hikes  and slump in export market  especially crisis hit Europe, which is one of the country's major traditional markets.

The prospects still look gloom for Europe at least until early 2012. A number of countries in Europe like Greece, Spain, Portugal and Italy are still struggling to wriggle them out of the crisis. The slow recovery of Europe from the crisis is attributed to lack of seriousness of Europe in seeking a solution to the problem before it is too late.

Progress, however, has been made in improving the world economy in general. A number of indicators have shown improvement The US economy is recovering marked with the growth of its manufacturing sector and decline in unemployment.

China and India continue to grow although not as sharp as in the past few years. Fairly strong growth was also recorded by a number of other Asian countries that provide a good market for Indonesian commodities.

Indonesia has so far managed to chalk up an encouraging growth amid the global economic malaise. Indonesia has relied much on its huge domestic market and exports of primary commodities to sustain growth. However, in 2012 the prices of some of the primary commodities have tended to decline on weak demand in international market. Meanwhile, the contribution of domestic market to economic growth is feared to weaken with the flood of imports. Large imports of goods from China and other Asian countries cause marketing problem for local products. China and other countries have been forced to look for new markets including Indonesia as they are facing growing difficulties in disposing of their surplus with the slump in Europe and the United States.

The condition in international market is worse with growing tension in the Persian Gulf   and Iranian oil embargo. The embargo is feared to result in further increase in the oil prices. Oil price hikes would in turn place heavier oil fuel subsidy burden on the country's economy.

In 2011, the country still recorded a fairly strong economic growth. Exports and imports were brisk. The manufacturing sector which has suffered a setback in two years began to revive in 2011. In 2011, exports hit an all time record at US$ 203 billion or an increase 29.05%. The international market began to recover from the global financial crisis in 2009. The real sector including the manufacturing sector began to recover from a long slump.
An especially fast growth was recorded by the automotive sector. In 2011, car and motorcycle sales hit new records.  Car sales peaked at 890,000 units and motorcycle sales exceeded 8.04 million units. According to the Association of Motor Vehicle Industries (Gaikindo), in 2012, car and motorcycle sales are expected to grow further though not as sharp as in 2011.In 2012, car sales are forecast to reach 920,000 units.

Similarly, the country's electronic industry is predicted to grow further in 2012, despite the flood of imports.

In 2011, the country's economy grew 6.5% or higher than expected to follow progress recorded in the global economic recovery. Indonesia also gained from the rupiah strengthening as a result of inflows of foreign capital to emerging markets in Asia including   the country. 

In 2011, Indonesia regained investment grade it lost 14 years ago when the country was badly hit by the regional monetary crisis in 1998. Two international rating agencies, Fitch Ratings and Moody's upgrade the ratings of the country's sovereign debts into investment level giving the country a better place among investment destinations. With the status, foreign investors seeking portfolio investment and direct investment have greater confidence in the country's economy.

There are, however, a number of other factors weakening the country's position in the competition facing other investment destinations such as inadequate or poor condition of infrastructure including in road, sea transport facilities and power supply sectors. These factors will remain the biggest hurdles hampering efforts in boosting economic growth until 2012.

Indonesia's economic growth may also not be up to expectation because of the declining trend of the prices of the country's major export commodities like rubber, cocoa, and palm oil especially if the Europe, one of the country's major traditional markets, failed in its attempt to recover soon from the crisis.

However, despite the gloom over the global economy, the government and Bank Indonesia expressed optimism setting a fairly high target for the country's economic growth. The government, as said by finance minister Agus D.W. Martowardojo, sets the country's economic growth target at 6.5%-6.9% in 2012.

Meanwhile, Bank Indonesia is a bit more conservative with economic growth target at 6.5%   or lower than 6.7% set in the 2012 state budget.  Bank Indonesia sets its target partly based on assumption that the world's economy would grow only 4% or down from 4. 5% last year.

The World Bank also has predicted that Indonesia's economy would grow only 6.3% in 2012, lower than last year's 6.4%. The growth is slower on the global slump.

The International Monetary Fund (IMF) predicted the world economy would expand only 3.3% in 2012 amid looming recession in the Euro zone.

Overview of Indonesia's economy, 2011

In the past three years, Indonesia managed positive growth weathering the devastating impact of the global crisis.  In 2009, when the global crisis was at its worst Indonesia recorded a growth of 4.5%. Indonesia was one of a few countries that recorded healthy growth such as China and India in Asia when many other countries were suffering economic contraction. In 2010, the country performed even better with economic growth of 6.1% driven by exports and household consumption. In 2011 the country's economic development was faster with a growth of 6.5%.

The success in averting a second blow in a decade was attributable to huge domestic market and strict observance by banks of prudential banking principles.

Increase in demand and purchasing power of the people triggered a surge in inflation to 6.96% in 2010 from 2.78% in 2009. However, in 2011, despite acceleration in economic growth, the country succeeded in pressing down the inflation rate to 3.79%.

The low inflation rate in 2009 was a result of weak demand amid the global slump. In 2011, when the economy grew strongly inflation was lower and put under control  on greater efficiency in the distribution of goods  especially  essential commodities  including foodstuff and oil fuels.  In addition, the central bank succeeded in controlling interest rate   and the rupiah stability.

In 2009, when the global financial was at its worst, Indonesia's exports shrank sharply by around 15% to US$ 116 billion   from US$ 138 billion in the previous year. However, in the last quarter of 2009, exports began to scale up and in 2010; exports surged to US$ 157.8 billion. The trend continued through 2011, when exports were valued at US$ 203.6 billion. The increase in exports was followed with the same trend in imports. Imports even grew higher by 31% to US$ 177.3 billion in 2011.

The increase in imports was marked with the revival of the manufacturing industry. Imports were dominated by industrial basic materials and capital goods.  Large imports were also recorded for consumer goods  to follow the improvement of the people's purchasing power. The increase in imports was also attributable to the Asean China Free Trade Agreement allowing China to flood the domestic market with more competitive and cheap Chinese products.
International confidence in the country's economy is also indicated by growing inflows of foreign capital into Indonesia.  One indicator is the steady increase of the Jakarta Composite Index (IHSG) from 2,534   in 2009 to 3,704 in 2010 and to 3,808 in 2011.

Meanwhile, the rupiah exchange rate was relatively stable in 2011 in 2010, the rupiah strengthened at the level of 8,991 per US dollar. In 2011 it hovered around 9,000-9060, a level considered safe and ideal for both the consumers and exporters.

The strong inflows of foreign capital also contribute to an increase in the country foreign exchange reserves that reached a record high at US$ 110.1 billion by the end of 2011. In 2009, the country's foreign exchange reserves totaled only US$ 96.2 billion.

International rating agencies upgraded the country's sovereign debts to investment grade in 2011. Fitch Ratings raised the country's foreign debt to BBB-, followed by Moody's raising the country's foreign debt rating to Baa3 or the lowest level of investment grade.  It is expected in 2012, other rating agencies will follow to upgrade Indonesia's foreign debt rating to investment level.

Manufacturing industry began to revive in 2011

Indonesia's manufacturing industry began to revive in 2011 marked with higher growth from earlier years. In 2011, the country's manufacturing industry grew 6.2% compared to an average of 5% in the previous six years. The lowest growth was 2.1% recorded in 2009.

The sluggish growth of the country's manufacturing sector has caused fear of de-industrialization especially after the regional monetary crisis struck in 1998. Investment in the manufacturing sector shrank for several years after 1998. Meanwhile many factories needed modernization and replacement of their old machines to improve efficiency and competitiveness such as in textile sector.

Many large companies  and factories having debts in foreign exchanges suffered badly  because of an increase debt repayment burden as a result of the shrinking value of the rupiah. A number of large companies even went bankrupt  after defaulting on loans. The fastest to recover from the financial woes are automotive industry and food and beverage industry. Textile, steel, shoes and other industries were slow to recover. In 2011, investment in the manufacturing industry grew helping revive the sector.

In 2011, the country's Gross Domestic Product (GDP) grew 6.5% year-on-year with almost all sectors recording positive growth. The highest growth was recorded in his transport and communications sector that expanded 10.7%. The agricultural sector recorded the lowest growth of 1.4%. The trade, hotel and restaurant sector, which grew only 1.1% in 2009 and 8.7% in, expanded 9.2% in 2011. See the following table.

Exports hit new record high in 2011

After a sharp fall in 2009, Indonesia's exports surged to a record high in 2010. In 2011, the trend continued with export value reaching an all time record of more than US$ 200 billion.

The export value of Indonesia  in 2011 reached US$ 203.6  billion  or an increase of  more than 29.05 percent  from 2010,  and exports of commodities other than oil and gas were valued at US$162  billion  or an increase of 24.88 percent.

The export value of manufactured goods in 2011 rose 24.66 percent from 2010. The exports of agricultural commodities rose only 3.34 percent and exports of mining products and other commodities rose 29.72 percent.

The country recorded an increase in both exports and imports in 2011. Imports in 2010 were valued at US$ 135.6 billion or a 40% increase from 2009's US$ 96.8 billion. In 2011, the country's imports rose further to US$ 177.3 billion

Imports of commodities other than oil and gas were valued at US$136.6 billion in 2011 or an increase of 26.2 percent from 2010's level of US$108.24 billion.  Meanwhile, the country's imports of oil and gas were valued at US$ 40.6 billion   in 2011 or an increase of 48.4 percent from 2010's US$ 27.36 billion.

Inflation down again in 2011

Amid the devastating global financial crisis, the country's economy was relatively stable in 2009 marked with low inflation of 2.78% or the lowest in 10 years. In 2010, the inflation surged to 6.96% exceeding Bank Indonesia's target of 5% - 6%. The increase in inflation followed growing demand with improved condition of the economy and purchasing power of the people.

In 2011, the country's inflation dropped again to 3.79 % on a number of factors including stable prices of foodstuffs and better distribution systems of goods. The climate was relatively favorable in 2011 resulting in an increase in production of foodstuffs.

Meanwhile, Bank Indonesia succeeded in keeping interest rates at a reasonable level and controlling rupiah fluctuations.

Economic challenges in 2012

The world is still struggling for recovery especially in the Euro zone. The Euro zone is even a threat to spread the crisis to other parts of the word in 2012. The European Union leaders are accused of being too slow in taking crucial decision to prevent the crisis from getting worse.

Meanwhile, the United States has not made much headway to improve its economic condition. Analysts predicted the US economy will face heavier pressures in 2012 on high unemployment problem.

The potential threat brought about by continued crisis besetting Europe and sluggish growth of the US economy would have bad impact on other regions especially export oriented economies. Even the two Asian giants China and India are expected to suffer a setback. The IMF predicted China would grow only 8.2% and India 7% in 2012 or down from last year.

Meanwhile, Indonesia, according to the World Bank prediction would post a 6.3% economic growth in 2012, down slightly from its previous forecast of 6.5%. This indicated that Indonesia is more able to ward off the crisis.
However, the challenges to be faced by the country in 2012 would not be easy. The challenges would come from outside and inside or include external and internal factors.

External factors include:
"        Vulnerable global economic condition especially in the Euro zone posing a potential threat to countries in other regions. The European Union is still struggling to lift itself from the mire of debt crisis besetting a number of its members such as Greece, Portugal, Spain Ireland and Italy.

"        China and India have also suffered from the impact as demand for their export commodities would decline resulting in a fall in their economic growth to one digit in 2012.  China facing difficulty to dispose of its surplus may have to look for other markets including Indonesia. Imports from China already come in floods   after the Asean China Free Trade Agreement in 2010.

"        The resurge in the prices of oil and foodstuffs could pushed up the prices of other goods in the country especially consumer goods as well as industrial basic materials. The condition is worse with the West embargo of Iranian oil over nuclear issue.  Israel is even threatening to attack alleged nuclear bomb production facility in Iran.

Internal factor
"        The soaring oil prices have resulted in an increase in oil fuel subsidy putting heavier burden on the state budget. The government, therefore, has decided to raise the prices of subsidized oil fuels in a bid to cut subsidy burden  The government has announced it would raise the prices in April  by Rp1,500 per liters   to Rp6,000 per liter of premium gasoline. With the increase, the country's inflation is expected to rise to 6.5%-7.5%. The fuel price hikes are almost certain to trigger an increase in the prices of other consumer goods.

"        A number of internal problems are still causing a drag in the country's economic development such as poor condition of infrastructure especially with shortage in power supply, insufficient roads and other transport facilities. Toward the end of 2011, the government launched Master plan of Acceleration and Expansion of Indonesia's Economic Development, 2011-2025 listing plans for infrastructure projects to be built in 2012. In 2012, the government   will set aside funds for the realization of infrastructure projects.

"        Bureaucratic bottleneck and conflicting regulations cause high cost economy discouraging investors.

Indonesia's economic prospects, 2012

In 2012, will be a difficult period for Indonesia in maintaining a healthy growth. The country, however, has the potentials to continue to post a healthy growth in 2012 because of the availability of supporting factors.

Among the factors sustaining the country's economic growth in 2012 is

"        Prudence in the management of state finance by maintaining   state budget deficit of not more than 1.5% of the country's GDP and safe macro economic management.

"        Healthy banking system. After Indonesia lifted itself from the monetary crisis more than 10 years ago, the central bank has adopted a tighter control of the country's banking system strictly observing prudential banking principles. The policy has helped saved the country from the impact of the global financial crisis in 2009.
"        Large natural resources that the country has gained   from the increase in the prices of primary commodities over the past several years.

"        Large domestic market and improving purchasing power of the people give he country enough strength to weather   the impact of the global economic turbulence.

"        GDP per capita which has exceeded US$ 3000 in 2010 provides a strong footing to drive economic development. The economy would grow faster driven by growing domestic demand.

The government, as said by finance minister Agus D.W. Martowardojo, has set the country's economic growth target at 5% - 6. %. It is expected that main drivers of economic growth including household and government consumption would grow respectively by 4.8% - 5.2 % and 6% - 6.4 %. In 2012, investment is forecast to grow 10%-10.4% with new investment worth around Rp 2,800 trillion.

The biggest hurdle slowing the country's economic growth in 2012 is an increase in the prices of subsidized oil fuels as a result of the soaring oil prices in the world market. According of chief economics minister Hatta Rajasa if oil prices continue to climb and reach US$ 120 per barrel the state expenditures would all be spent on subsidies.

The government, therefore, has to raise the prices of subsidized oil fuels with the price of premium gasoline to raise Rp 1,500 to Rp 6,000 per liter.

The government could prevent the condition from getting worse by improving distribution systems and efficiency. Flows of goods via ports must be made as smooth as possible and those found illegally piling up stock must be firmly punished.

Bank Indonesia predicted the country's economy would grow 6.3%-6.7% in 2012. In the first quarter of 2012 the country's economic growth is expected to reach 6.5%. Growing investment and household's consumption will sustain growth. Spending by the government is also expected to grow though slower.

The upgrade of the country's foreign debt to investment level is expected to increase the inflows of foreign capital into the country. The increase is also encouraged by improved infrastructure condition.

Meanwhile, exports are also expected to continue to scale up though in slower pace as a result of weak demand in the world market.  Contributing to growth in exports is expansion of exports to emerging markets.

The central banks forecast that inflation in 2012 and 2013 would remain under control.
Data Consult predicted that after the decline in mid 2011, the prices of primary commodities such as crude palm oil, cocoa beans and rubber  would increase in 2012 as a result of improved condition of the global economy and shortfall in supply. Meanwhile, the manufacturing sector is also expected to grow further in 2012 with success in market expansion.

Based on the trend in 2011, the country's exports are predicted to grow more than 20% in 2012. Imports are also expected to grow faster dominated by industrial feedstock for export commodities.  More foreign investors are expected to do business in Indonesia   as the country's economy offers better investment opportunity compared with other developing nations.

The purchasing power of the people is expected to increase with GDP per capital already reached US$ 3,542.9 in 2011 up from only US$ 3,010 in 2010. The increase in the purchasing power would push up domestic demand and spending. The country's manufacturing industry has found a good momentum and has been on the right track for faster growth after experiencing sluggish period in previous several years. The revival of the manufacturing sector is marked by the quick recovery and rapid growth of a number of industries mainly the automotive and electronic industries.

The surge in inflation triggered by planned increase in the prices of oil fuels could pose a potential stumbling block slowing the country's economic growth in 2012.

In a bid to raise fund from the market to finance development, the government earlier announced it would seek to widen the state budget deficit to 2% from 1.5% of the country's GDP set earlier. The new deficit target is still safe below 3% considered the maximum safe level. With the expansion of the deficit target, the government could use an additional fund of Rp 50 trillion from the market when the market condition is favorable at present. Now with the country's foreign debts upgraded to the investment level, the state bond return ratio is only 5.7% or the lowest ever.  With low cost of fund it is time for the government to make use of more funds from the market.

If the government and the central bank could put inflation under control, with relatively low interest rate   and rupiah stable, the domestic market could grow and contribute to expansion of the country's GDP in 2012 by   6.5%-7%.

Strict observance of prudential policy and discipline by both the government and the central bank would very much determine the country's success in going through the great malaise besetting the world at present.

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