Last updated September 14th, 2018.

 

Indonesia boasts the largest economy in Southeast Asia. However, it’s also one of the region’s worst performing lately.

They’ve lagged far behind peers such as Vietnam and the Philippines over the past decade. Meanwhile, GDP growth is stagnant at around the 5% range – mediocre for a frontier market.

Indonesia’s economic problems will unfortunately keep posing a challenge over the next decade. Some issues can be solved with time and money. Yet others are more structural in nature and will stay around for awhile.

Fixing them will require greater effort than anyone is putting forth right now. Both the government and private sector are simply falling behind on implementation.

 

Challenges for Indonesia’s Economy

For starters, let’s take a look at some of the good things about the Indonesian market. The nation is Southeast Asia’s biggest in terms of both population and economic size.

Indonesia is among the world’s largest exporters of automobiles, petroleum and palm oil. Furthermore, they haven’t suffered negative GDP growth since the 1998 Asian Financial Crisis.

Broader concerns overshadow many of these positive aspects though. Indonesia’s economic problems include weaker growth, pressure on the state budget, widening deficit, a plunging currency, and lack of competitiveness. These are all worrying for the country’s long term prospects.

Tackling Indonesia’s Economic Problems

President Joko Widodo kept an election promise of lowering fuel subsidies.

The World Bank maintained Indonesia’s 2017 growth forecast of 5.1% – among the lowest in Southeast Asia. But the fact that GDP growth is slowing while the current account deficit widens is causing even more concern.

Because of a number of cyclical factors, it’s not unusual for Indonesia’s current account deficit to increase during the second quarter of each year.

However, the deficit’s substantial increase came despite a decelerating economy. Something which should normally be favorable for any nation’s current account.

Yet another problem for Indonesia is its massive amount of government expenditure allocated to fuel price subsidies.

President Widodo lowered subsidies, which mostly favor the upper and middle classes. Fuel subsidies still account for over 14% of Indonesia’s total state budget though. The nation will continue using that money which could otherwise go toward other things.

 

No Preparation Worsens Indonesia’s Economic Problems

In addition, Indonesia will need to step up its game if it wants to become a winner in the ASEAN Economic Community (AEC 2015). The community will bring forth increased competition between the ten member states of ASEAN.

AEC 2015 aims to transform Southeast Asia into a single economic union for trade, labor, and investment. With that said, Indonesia is lagging behind many of its neighbors in getting ready for the initiative.

Lawmakers must change several policies to not only comply with the AEC’s standards, but for Indonesia to compete with its neighbors regardless of the community.

Required changes include allowing companies in all industries to have majority foreign ownership, cutting government bureaucracy, and removing protectionist barriers.

In fact, the only two countries in Southeast Asia in full compliance with the ASEAN Economic Community’s requirements are Malaysia and Singapore. These are also the region’s two most developed economies so it’s probably not coincidental.

Indonesia’s economic problems can perhaps finally be solved if they can learn a thing or two from their neighbors.

 

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