Economy of Indonesia

Indonesia is a country that contains great economic potential; a potential that has not gone
unnoticed to part of the global community. Indonesia - Southeast Asia's largest economy -
contains a number of characteristics that put the country in a great position for newly advanced
economic development. Moreover, in recent years there is strong support from the central
government to curb Indonesia's traditional reliance on (raw) commodity exports, while raising the
role of the manufacturing industry within the economy. Infrastructure development is also a key
goal of the government, and one that should cause a multiplier effect within the economy.

Indonesia was often mentioned as an appropriate candidate to be included in the BRIC

countries (Brazil, Russia, India and China). Another set of emerging economies -
grouped under the acronym CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and
South Africa) - also gained attention as its members have reasonably sophisticated
financial systems and fast-growing populations. Several years ago the combined gross
domestic product (GDP) of the CIVETS was predicted to account for half the global
economy by 2020. However, since the prolonged global economic slowdown after 2011
we rarely hear the terms BRIC and CIVETS anymore.

Another important example of international recognition regarding Indonesia's economy

are the recent upgrades of the country's credit ratings by international financial
services companies such as Standard & Poor's, Fitch Ratings and Moody's. Resilient
economic growth, low government debt and prudent fiscal management have been cited
as reasons for the upgrades and are key in attracting financial inflows into Indonesia:
both portfolio flows and foreign direct investment (FDI). These FDI inflows, which had
been relatively weak for Indonesia during the decade after the Asian Financial
Crisis had seriously shaken up the foundations of the country, showed a steep increase
after the global financial crisis of 2008-2009 (although somewhat weakening after 2014
due to Indonesia's prolonged economic slowdown in the years 2011-2015).

Although Indonesia is eager to reduce its traditional reliance on raw commodity exports
and boost the manufacturing industry (for example through the 2009 New Mining Law),
it is a difficult path particularly because the private sector remains hesitant to invest.
This transformation is important because falling commodity prices after 2011 (which
are the result of stalling economic growth of China) has impacted drastically on
Indonesia. Indonesia's export performance weakened significantly, implying fewer
foreign exchange earnings and reduced purchasing power, hence causing an economic
slowdown.
The Indonesian government under the leadership of Joko Widodo (who was
inaugurated as Indonesia's seventh president in October 2014) has implemented
several structural reforms that aim at long-term growth but cause some short-term
pain. For example, the majority of fuel subsidies have been scrapped successfully, a
remarkable accomplishment (as fuel subsidy cuts have always caused outrage among
the population) aided by the globe's low crude oil prices. Moreover, the government
places high priority on infrastructure development (evidenced by the sharply rising
government infrastructure budget) and on investment (evidenced by deregulation and
fiscal incentives that are offered to private investors).

But back to the basics: what are Indonesia's strengths that explain structural
macroeconomic growth?

• Abundant and diverse natural resources

• Young, large and burgeoning population (rapidly expanding middle class)
• Political stability (relatively)
• Prudent fiscal management since the late 1990s
• Strategic location in relation to the giant economies of China and India
• Low labour costs
• Being an emerging market, there is a lot that needs to be built/developed

Indonesia is a market economy in which the state-owned enterprises (SOEs) and large
private business groups (conglomerates) play a significant role. There are hundreds of
diversified privately-held business groups in Indonesia (a tiny fraction of the total
amount of companies active in Indonesia) that - together with the SOEs - dominate the
domestic economy. As such, wealth is concentrated at the top of society (and not
unoften there are close links between the corporate and political top of the country).

Indonesia’s micro, small and medium sized enterprises, which together account for 99
percent of the total amount of enterprises that are active in Indonesia, are important
too. They account for about 60 percent of Indonesia’s gross domestic product (GDP) and
create employment to nearly 108 million Indonesians. This implies that these micro,
small and medium sized companies are the backbone of the Indonesian economy.
There are signs that Indonesia's economic growth is starting to accelerate again after
the economic slowdown in the years 2011-2015. As such we may be at the beginning of
what can become another period of substantial economic growth. However, it should
also be pointed out that Indonesia is a complex country that contains certain risks for
investments and experiences difficulties due to the nation's unique dynamics and
context. In order to be aware of the risks involved we advise you to read our Risks of
Investing in Indonesia section and to keep track of Indonesia's latest economic, political
and social developments through our News section, Business section and Finance
section.

This section provides an outline of the current state of the Indonesian economy and
discusses a number of important chapters in the economic history of Indonesia:

GENERAL ECONOMIC OUTLINE

This section offers a detailed account regarding Indonesia's current economic structure
and composition based on recent macroeconomic indicators, developments and
achievements. It also presents an introduction to the three main economic sectors of
Indonesia (agriculture, industry and services) and expounds on the contribution of
these three sectors to Indonesia's national economy.

Read more about Indonesia's General Economic Outline

NEW ORDER MIRACLE

President Suharto's New Order government (1966-1998) was characterized by rapid

economic growth and a remarkable reduction in absolute poverty. Both these
achievements were reason that Indonesia became known to the West as an 'Asian
Miracle' in the 1980s and 1990s. This section puts the spotlight on the New Order's
economic development, while not losing sight of some negative aspects of Suharto's
prolonged authoritarian rule.

Read more about the New Order Miracle

ASIAN FINANCIAL CRISIS

The Asian Financial crisis in the late 1990s was one of the biggest watersheds in
Indonesian history. Starting out as a financial crisis it quickly expanded to become a
social and political one which marked the end of Suharto's rule (that was legitimized by
economic development). Indonesia would become the country that was hit hardest by
this crisis and it reversed much of the economic progress made under the New Order
regime.