Finance Minister Chatib Basri on Indonesia’s Economic Fundamentals
Indonesian Finance Minister Chatib Basri said that the lower pace of economic growth in China, the world’s second-largest economy, is a major concern for Indonesia as it leads to declining demand for commodities (and thus places downward pressure on commodity prices). As Indonesia is a major commodity exporter - such as coal, crude palm oil, nickel ore and tin - the country feels the impact of weak global demand for commodities. About 60 percent of Indonesia’s exports are commodities, mostly raw ones.
In an interview at CNBC in the context of the 2014 IMF/World Bank annual meetings in Washington, Basri stated that it is time that Indonesia stops being dependent on natural resources or cheap labour only. Instead the country - Southeast Asia’s largest economy - should boost the quality of human capital, improve the country’s currently weak infrastructure as well as governance. This will make the country more competitive on a global scale. Basri emphasized that infrastructure development is a vital ingredient to deliver higher economic growth in the future. President-elect Joko Widodo is expected to increase prices of subsidized fuel before the year-end in an effort to curb useless state spending on fuel subsidies, and if this money can be relocated to infrastructure development then it can give a boost to economic growth.
Basri was also asked whether the economy of Indonesia can grow at a pace of 6.5 percent year-on-year (y/y) again as it did in 2011. According to the Finance Minister, Indonesia cannot reach that growth level before 2017 as the government and central bank are currently focussed on safeguarding financial stability instead of seeking higher economic growth. The central bank was forced to raise its benchmark interest rate (BI rate) gradually in 2013 from 5.75 percent to 7.50 percent in an effort to curb high inflation (triggered by higher subsidized fuel prices implemented in June 2013), improve the wide current account deficit (which had hit a record high in the second quarter of 2013 particularly on expensive oil imports to meet domestic fuel demand) and support the rupiah exchange rate (which had depreciated over 25 percent against the US dollar over the course of 2013). Due to looming US interest rate hikes in mid-2015 and another possible subsidized fuel price hike in Indonesia before the year-end, the central bank of Indonesia (Bank Indonesia) is not expected to lower its BI rate anytime soon, thus limiting economic growth.
The higher interest rate environment in Indonesia is partly to blame for slowing economy growth. Since 2011, GDP growth in Indonesia has been slowing. In the second quarter of 2014 GDP growth was only 5.12 percent y/y, the slowest quarterly growth pace since the fourth quarter of 2009.
Indonesia's Macroeconomic Indicators:
| 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | |
| • Gross Domestic Product (annual percent change) |
4.6 | 6.1 | 6.5 | 6.2 | 5.8 | 5.2¹ | 5.6¹ |
| • Consumer Price Index (annual percent change) |
4.8 | 5.1 | 5.4 | 4.3 | 8.4 | 5.8¹ | 4.9¹ |
| • Public Debt (percent of GDP) |
28.6 | 27.4 | 26.6 | 27.3 | 28.7 | ||
| • Exchange Rate (IDR/USD) |
10,389 | 9,074 | 8,773 | 9,419 | 11,563 | 11,800¹ | 11,800¹ |
| • Current Account Balance (percent of GDP) |
0.7 | 0.2 | -2.8 | -3.3 | -2.9¹ | -2.4¹ | |
| • Population (in millions) |
241 | 244 | 247 | 250 | 253¹ | 255¹ | |
| • Poverty (percent of population) |
14.2 | 13.3 | 12.5 | 11.7 | 11.5 | 11.3 | |
| • Unemployment (percent of work force) |
7.9 | 7.1 | 6.6 | 6.1 | 6.3 | 5.7¹ | |
| • Foreign Exchange Reserves (in billion USD) |
66.1 | 96.2 | 110.1 | 112.8 | 99.4 | 111.2² |
¹ indicates a forecast
² at end-September 2014
Sources: World Bank, Statistics Indonesia, Bank Indonesia and International Monetary Fund (IMF)
Regarding the Indonesian rupiah exchange rate, Basri expects that the currency will be safe when the US Federal Reserve starts another round of monetary tightening as the current level reflects the country’s economic fundamentals. Moreover, all emerging currencies are losing ground to the US dollar, therefore recent rupiah depreciation does not reflect weakness of Indonesia specifically.
| Source: Bank IndonesiaBahas
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