Indonesia will need to overcome several economic challenges over the next decade. Some of these issues are already on the radar of the new Joko Widodo administration, and will likely be solved with time and financing – but other problems are more structural in nature and will need a greater amount of perseverance to fix.
For starters, let’s take a look at some of the good things about the Indonesian economy. The country is the largest in Southeast Asia by both population and the size of its economy, has not had negative GDP growth since the 1998 Asian Financial Crisis, and is a large exporter of automobiles, petroleum and palm oil.
However, many of these positives are overshadowed by broader macroeconomic concerns. Indonesia’s weaker growth, pressure on the state budget, widening deficit, and a lack of competitiveness are all worrying for the nation’s longer term prospects.
The World Bank recently cut Indonesia’s 2015 growth forecast from 5.2% to 5.1% – the lowest in five years. But the fact that GDP growth is slowing at the same time as the current account deficit widens is even more of a cause for concern.
Because of a number of cyclical factors, it is not unusual for Indonesia’s current account deficit to increase during the second quarter of each year. However, the deficit’s substantial increase during Q2 came despite a decelerating economy – something that should have by all means been favorable for the current account.
While the deficit did narrow to 3.07% of GDP during the third quarter, Q2’s numbers are still worrying and indicate that Indonesia has a debt problem that is now showing itself despite a weaker GDP growth.
Another challenge for Indonesia is a massive amount of government expenditure being allocated to fuel price subsidies. President Widodo lowered subsidies, which mostly favor the upper and middle classes, by around 30% in November. But fuel subsidies still account for over 14% of Indonesia’s total state budget and will continue to use money that would be spent better on other projects.
In addition, Indonesia will need to step up its game if it wants to become a winner in the ASEAN Economic Community (AEC 2015), which will bring out an increased amount of competition between the ten member nations of ASEAN.
The community aims to transform Southeast Asia into a single economic union for trade, labor, and investment, but Indonesia is lagging behind many of its neighbors in getting ready for the AEC’s commencement in late December of 2015.
Several different laws must be changed to not only comply with the AEC’s standards, but for Indonesia to be seen as competitive by investors and businesses regardless of the community. This includes allowing companies in all industries to be majority foreign owned, lowering the level of government bureaucracy, and removing protectionist barriers.
In fact, the only two countries in Southeast Asia that could be considered in full compliance with the ASEAN Economic Community’s requirements are Malaysia and Singapore – which perhaps by no coincidence, are also the region’s most developed.
Indonesia may be able to learn a thing or two from its neighbors.