Indonesia’s economic problems will continue to challenge the nation over the next decade. Some of these issues are already on the radar of the new Joko Widodo administration.
Some problems in Indonesia can be solved with time and money. But other issues are more structural in nature. Fixing them will require greater effort.
Challenges for Indonesia’s Economy
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. They haven’t suffered negative GDP growth since the 1998 Asian Financial Crisis. Indonesia is also a large exporter of automobiles, petroleum and palm oil.
Broader concerns overshadow many of these positive aspects though. Indonesia’s economic problems, weaker growth, pressure on the state budget, widening deficit, and a lack of competitiveness are all worrying for the nation’s long 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 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 be favorable for the current account.
The deficit did narrow to 3.07% of GDP during the third quarter, yet Q2’s numbers are still worrying. They show Indonesia has a debt problem in addition to weaker GDP growth.
A massive amount of government expenditure allocated to fuel price subsidies is another problem for Indonesia.
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.
Poor 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 be solved if they can learn a thing or two from their neighbors.