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INDONESIA ECONOMY
The world's largest Muslim nation, Indonesia has achieved remarkable
economic development success over the past decade and, until the 1997-1998 Asian economic crisis, was considered
to be among the best performing East Asian economies. Indonesia grew at a rate of 7% between 1985 and 1995, and
reduced its poverty rate from 60% to 11% between 1970 and 1996. Indonesia is rich in natural resources, with oil,
gas, and textile being its main export commodities.
Indonesia has recently undergone significant changes in its political and structural reforms. It has pursued major
political liberalization and is scheduled to hold its first-ever direct presidential elections this year. It has
also embarked on a massive decentralization that should improve the local provision of public goods.
The government is currently making efforts to restructure its banking sector and offshore debt to facilitate its
recovery from the crisis. It has recently produced a White Paper that contains Indonesia's priority for economic
policies, which if firmly implemented would significantly improve the climate for productive private investment
in the country.
Source: US-Indonesia Business Council
Oct. 2004
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Economic Trends 2002
Summary and Introduction
The Megawati Administration made significant progress in stabilizing Indonesia's economy during its first year
in office. It rejuvenated Indonesia's economic reform program and restored Indonesia's relationship with the IMF,
which had deteriorated during the Presidency of former President Abdurrahman Wahid. From September 2001 to April
2002, the GOI pushed through several important economic reforms, including reducing fuel subsidies and selling
a majority stake in Bank Central Asia, Indonesia's largest formerly private bank. In April 2002, the Paris Club
of official creditors recognized the GOI's renewed commitment to economic reforms by agreeing to reschedule USD
5.5 billion in principal and interest payments falling due from April 1, 2002 to December 31, 2003.
The markets responded positively to the GOI's improved policy performance. Indonesia maintained positive GDP growth
through the world economic slowdown in 2001, with year-on-year (YoY) GDP growth bottoming out in the fourth quarter
of 2001 at 1.6 percent, and first and second quarter 2002 GDP growth figures exhibiting signs of a strengthening
economy. GDP grew 3.51 percent YoY in Q2 2002, improving on first quarter YoY growth of 2.47 percent. Higher spending
by government and consumers, up 9.4 and 6.3 percent YoY respectively, drove growth.
Despite the uncertain international environment, Indonesia's export performance began recovering in the first half
of 2002 from its Q4 2001 low. Non-oil and gas exports showed back-to-back increases in Q1 and Q2, with exports
in the latter quarter 18.6 percent above their levels in Q4 2001. Increased political stability and more decisive
monetary policy performance by Bank Indonesia (BI) led the rupiah to appreciate over 14 percent through the end
of August 2002, stabilizing near the Rp 8,800/USD level. During the same period, YOY CPI inflation rates fell from
a two-and-a-half year high of 15.1 percent in February 2002 to 10.6 percent in August.
The Government's FY 2002 budget implementation was on track through the first half of the year, with the full year
deficit projected to fall slightly below the GOI's Rp 42.1 trillion target (equivalent to 2.5 percent of GDP.)
In August 2002, the GOI unveiled a conservative Rp 354.1 trillion (USD 40.7 billion) draft FY 2003 budget that
forecasts a Rp 26.3 trillion deficit, equivalent to 1.3 percent of projected 2002 GDP. In recognition of the GOI's
improving fiscal position, several international rating agencies upgraded Indonesia's sovereign ratings in August
and September 2002.
GDP Growth: Future Prospects Uncertain
Despite the Megawati Administration's success in stabilizing the economy, concerns mounted in 2002 about Indonesia's
short and medium-term GDP growth prospects. Indonesia's YoY GDP growth rates have remained in the 3-3.5 percent
range since the beginning of 2001, with few signs of take-off to the 7.2 percent average GDP growth Indonesia experienced
from 1990-96. A sustained period of strong economic growth and low inflation would give the GOI much needed room
to consolidate its recovery from the 1997-98 financial crisis, reach a balanced budget, further reduce the country's
debt/GDP ratio, and continue corporate restructuring.
With household consumption already growing more than six percent a year and the outlook for robust export growth
clouded by an uncertain world economy, reviving business investment is the key to restoring GDP growth to pre-crisis
levels. However, investment statistics through the first eight months of 2002 were very weak. Foreign investment
approvals declined 39 percent from the same period in 2001 to USD 3.55 billion. The 39-percent decline came on
the back of a 42 percent decrease in foreign investment approvals in 2001. Provisional balance of payments (BOP)
statistics for 2001 indicate that while Indonesia's private capital deficit narrowed from its 2000 level, net foreign
investment remained strongly negative during the year at USD -5.9 billion.
Analysts cite a number of factors contributing to Indonesia's prolonged business investment slump. These include
slowing structural reforms, rapidly rising labor costs, the lack of an efficient and transparent legal system,
widespread official corruption, signs of impending infrastructure shortages, uncertainties stemming from Indonesia's
decentralization program, and competition from other labor-intensive economies in Asia, especially China and Vietnam.
Although the GOI has held dialogues on doing business issues with domestic and international business groups, through
mid-2002 it made little progress in formulating and implementing a meaningful reform program that would encourage
potential investors. Focusing on improving Indonesia's investment climate has emerged as the GOI's top short-term
policy challenge.
Despite the many challenges facing the GOI, Indonesia retains most of the advantages that fueled rapid economic
growth during the 1980s and early 1990s. These include generally adequate infrastructure, ample natural resources,
an adequately trained work force, a strategic geographical location in the heart of South East Asia, and a large
and expanding internal market of approximately 220 million people. These factors will remain attractive for many
U.S. firms, particularly if the GOI makes significant headway on the policy issues described above.
GDP Growth: A Tentative Expansion
Economic growth picked up moderately in the first two quarters of 2002, improving chances that the GOI will achieve
its 4-percent growth target for the year. According to Central Bureau of Statistics (BPS) figures, GDP grew at
3.51 percent YoY in the second quarter of 2002 after expanding 2.47 percent in Q1. Rising government and consumers
spending, up 2.3 and 1.2 percent respectively from Q1 levels, drove growth in the second quarter 2002. Consumer
spending continued its post-1999 pattern of strong growth reaching 5.9 percent for 2001. YoY Household consumption
grew 9.9 percent in the first quarter 2002 and grew 6.3 percent in the Q2 2002 compared with Q2 2001. On the production
side, growth was fairly evenly spread in the first two quarters, with manufacturing, transportation and communications,
and retail, hotels, and restaurants showing the most consistent growth.
Indonesia's quarterly GDP growth rate has increased in three consecutive quarters since Q4 2001, when growth bottomed
out at 1.6 percent.
When measured in dollar terms, Indonesia's exports in the first half of 2002 fell 6.7 percent to USD 27.3 billion
compared to the same period in 2001. Non-oil and gas exports declined 2.7 percent to USD 21.5 billion during the
first half of 2002, while oil and gas exports fell 19.5 percent to USD 5.63 billion. Second quarter 2002 non-oil
and gas exports remain 10.8 percent below their post-crisis peak in Q3 2001. However, YoY growth figures disguise
a modest export recovery since the final quarter of 2001, when total exports fell to their lowest level in more
than three years. Non-oil and gas exports rose in both Q1 and Q2, with exports in the latter quarter 18.6 percent
above their levels in Q4 2001. Total exports topped the USD 5 billion monthly in both June and July 2002 for the
first time since August 2001.
Indonesia's export mix remains predominantly low technology manufactured goods and commodities. Manufactured goods
represent approximately two-thirds of total exports. Given continuing economic uncertainty in Indonesia's export
markets, many analysts forecast flat full-year export performance in 2002.
Source:
US Embassy Jakarta
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Indonesian Living Standards Before and After the Financial Crisis.
Abstract: Rand Publication
The Asian financial crisis in 1997-98 was a serious blow to a thirty-year period of rapid growth in East and Southeast
Asia. This book uses the Indonesia Family Life Surveys (IFLS) from late 1997 and late 2000 to examine changes in
living standards for Indonesians from just before the start of the crisis to three years after. Indonesian Living
Standards Before and After the Financial Crisis, using the rich data in IFLS to provide a true-to-life look at
living conditions in Indonesia, is an important reference for policymakers working on economic issues affecting
Indonesia.
Book Summary
Source: Rand Corp. 2004
Permission is given to duplicate this electronic document for personal use only, as long as it is unaltered and
complete. Copies may not be duplicated for commercial purposes. |
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| Indonesia, a vast polyglot nation, faces economic development problems
stemming from recent acts of terrorism, unequal resource distribution among regions, endemic corruption, the lack
of reliable legal recourse in contract disputes, weaknesses in the banking system, and a generally poor climate
for foreign investment. Indonesia withdrew from its IMF program at the end of 2003, but issued a "White Paper"
that commits the government to maintaining fundamentally sound macroeconomic policies previously established under
IMF guidelines. Investors, however, continued to face a host of on-the-ground microeconomic problems and an inadequate
judicial system. Keys to future growth remain internal reform, building up the confidence of international and
domestic investors, and strong global economic growth |
| |
| GDP |
purchasing power parity$758.8 billion (2003 est.) |
| GDP - real growth rate |
4.1% (2003 est.) |
| GDP - per capita |
purchasing power parity - $3,200 (2003 est.) |
| GDPcomposition by sector |
agriculture: 16.6% |
| |
industry: 43.6% |
| |
services: 39.9% (2003 est.) |
| Investment (gross fixed) |
19.7% of GDP (2003) |
| Population below poverty line |
27% (1999) |
| Household income or consumption by percentage share |
lowest 10%: 4%
highest 10%: 26.7% (1999) |
| Distribution of family income |
Gini index: 37 (2001) |
| Inflation rate (consumer prices) |
6.6% (2003 est.) |
| Labor force |
105.7 million (2003) |
| Labor force - by occupation |
agriculture 45%, industry 16%, services 39% (1999 est.) |
| Unemployment rate |
8.7% (2003 est.) |
| Budget: |
revenues: $40.91 billion |
| expenditures |
$44.95 billion, including capital expenditures of NA (2003 est.) |
| Public debt |
72.9% of GDP (2003) |
| Agriculture - products |
rice, cassava (tapioca), peanuts, rubber, cocoa, coffee, palm oil, copra, poultry,
beef, pork, eggs |
| Industries |
petroleum and natural gas, textiles, apparel, footwear, mining, cement, chemical fertilizers,
plywood, rubber, food, tourism |
| Industrial production growth rate |
3.7% (2003 est.) |
| Electricity - production |
95.78 billion kWh (2001) |
| Electricity - consumption |
89.08 billion kWh (2001) |
| Electricity - exports |
0 kWh (2001) |
| Electricity - imports |
0 kWh (2001) |
| Oil - production |
1.451 million bbl/day (2001 est.) |
| Oil - consumption |
1.045 million bbl/day (2001 est.) |
| Oil - exports |
NA (2001) |
| Oil - imports |
NA (2001) |
| Oil - proved reserves |
7.083 billion bbl (1 January 2002) |
| Natural gas - production |
69 billion cu m (2001 est.) |
| Natural gas - consumption |
36.2 billion cu m (2001 est.) |
| Natural gas - exports |
32.8 billion cu m (2001 est.) |
| Natural gas - imports |
0 cu m (2001 est.) |
| Natural gas - proved reserves |
2.549 trillion cu m (1 January 2002) |
| Current account balance |
$7.336 billion (2003) |
| Exports |
$63.89 billion f.o.b. (2003 est.) |
| Exports - commodities |
oil and gas, electrical appliances, plywood, textiles, rubber |
| Exports - partners |
Japan 22.3%, US 12.1%, Singapore 8.9%, South Korea 7.1%, China 6.2% (2003 est.) |
| Imports |
$40.22 billion f.o.b. (2003 est.) |
| Imports - commodities |
machinery and equipment, chemicals, fuels, foodstuffs |
| Imports - partners |
Japan 13%, Singapore 12.8%, China 9.1%, US 8.3%, Thailand 5.2%, Australia 5.1%, South
Korea 4.7%, Saudi Arabia 4.6% (2003 est.) |
| Reserves of foreign exchange & gold |
$36.25 billion (2003) |
| Debt - external |
$135.7 billion (2003 est.) |
| Economic aid - recipient |
$43 billion Indonesia finished its IMF program in December 2003 but still receives
bilateral aid through the Consultative Group on Indonesia (CGI), which pledged $2.8 billion in grants and loans
for 2004. (2003 est.) |
| Currency |
Indonesian rupiah (IDR) |
| Currency code |
IDR |
| Exchange rates |
Indonesian rupiahs per US dollar - 8,577.13 (2003), 9,311.19 (2002), 10,260.8 (2001),
8,421.77 (2000), 7,855.15 (1999) |
| Fiscal year |
calendar year; note - previously was 1 April - 31 March, but starting with 2001, has
been changed to calendar year |
| |
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| Communications Indonesia |
|
| Telephones - main lines in use |
7.75 million (2002) |
| Telephones - mobile cellular |
11.7 million (2002) |
| Telephone system |
general assessment: domestic service fair, international service good |
| domestic |
interisland microwave system and HF radio police net; domestic satellite communications
system |
| nternational: |
country code - 62;
satellite earth stations - 2 Intelsat (1 Indian Ocean and 1 Pacific Ocean)
Radio broadcast stations:
AM 678, FM 43, shortwave 82 (1998) |
| Television broadcast stations |
41 (1999) |
| Internet country code |
id |
| Internet hosts |
62,036 (2003 |
| nternet users |
8 million (2002) |
| Transportation |
|
| Railways |
total: 6,458 km |
| narrow gauge |
5,961 km 1.067-m gauge (125 km electrified); 497 km 0.750-m gauge (2003 |
| Highways |
total: 342,700 km |
| |
paved: 158,670 km |
| |
unpaved: 184,030 km (1999 est.) |
| Waterways |
21,579 km |
| |
note: Sumatra 5,471 km, Java and Madura 820 km, Kalimantan 10,460 km, Sulawesi (Celebes)
241 km, Irian Jaya 4,587 km (2004) |
| Pipelines |
condensate 672 km; condensate/gas 125 km; gas 8,183 km; oil 7,429 km; oil/gas/water
66 km; refined products 1,329 km (2003) |
| Ports and harbors |
Cilacap, Cirebon, Jakarta, Kupang, Makassar, Palembang, Semarang, Surabaya |
| Merchant marine |
|
| total |
718 ships (1,000 GRT or over) 3,192,847 GRT/4,319,739 DWT |
| by type |
bulk 47, cargo 398, chemical tanker 13, container 57, liquefied gas 6, livestock carrier
1, passenger 10, passenger/cargo 13, petroleum tanker 128, refrigerated cargo 2, roll on/roll off 15, short-sea/passenger
9, specialized tanker 12, vehicle carrier 7 |
| foreign-owned |
France 1, Germany 1, Greece 1, Honduras 1, Hong Kong 2, Japan 3, Malaysia 1, Monaco
2, Panama 1, Philippines 2, Singapore 12, Switzerland 1, United Kingdom 2, United States 1 |
| registered in other countries |
109 (2003 est.) |
| Airports: |
661 (2003 est.) |
| Airports - with paved runways: |
total: 154 |
| |
over 3,047 m: 4 |
| |
2,438 to 3,047 m: 13 |
| |
1,524 to 2,437 m: 44 |
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914 to 1,523 m: 49 |
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under 914 m: 44 (2003 est.) |
| Airports - with unpaved runways |
total: 507 |
| |
2,438 to 3,047 m: 1 |
| |
1,524 to 2,437 m: 5 |
| |
914 to 1,523 m: 23 |
| |
under 914 m: 478 (2003 est.) |
| Heliports |
22 (2003 est.) |
| |
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| Military |
|
| Military branches |
Indonesia Armed Forces (TNI): Army (TNI-AD), Navy (TNI-AL, including Marines, Naval
Air arm), Air Force (TNI-AU) |
| Military manpower - military age |
18 years of age (2004 est.) |
| Military manpower - availability |
males age 15-49: 66,458,805 (2004 est.) |
| Military manpower - fit for military service |
males age 15-49: 38,728,029 (2004 est.) |
| Military manpower - reaching military age annually |
males: 2,196,424 (2004 est.) |
| Military expenditures - dollar figure |
$1 billion (FY98) |
| Military expenditures - percent of GDP |
1.3% (FY98) |
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Source: World Fact Book 2004 - Indonesia
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Economic Summary 2000.
Indonesia has a market-based economy that was increasingly dominated by the private sector. The government still
plays a significant role in the economy, however, through state-owned enterprises and administered prices on some
basic goods, including fuel and electricity. In the aftermath of the financial and economic crisis that began in
mid-1997, the government took custody of a significant portion of private sector assets.
In the mid-1980s, the government began eliminating regulatory obstacles to economic activity. The steps were aimed
primarily at the external and financial sectors and were designed to stimulate employment and growth in non-oil
exports and revenues. During the thirty years of Soeharto's "New Order" government, Indonesia's economy
grew from a per capital GDP of $70 to a per capita GDP of over $1,000 by 1996. Annual real GDP growth averaged
close to 7 percent from 1987-97. Indonesia was recognized as a newly industrializing economy and emerging major
market. By employing a restrictive monetary policy and a conservative fiscal stance, inflation was held in the
5 to 10 percent range, the rupiah was stable and predictable, and the government avoided domestic financing of
budget deficits. Much of the development budget was financed by concessional foreign aid.
By the onset of the financial and economic crisis in mid-1997, unfinished deregulation steps included elimination
of non-tariff barriers, privatization of state-owned enterprises, and removal of domestic subsidies, barriers to
domestic trade, and export restrictions. In addition, development of institutions that would guarantee predictable
regulatory behavior and discourage corruption, collusion, and nepotism had been sorely neglected.
In response to the regional financial problems that emerged in July 1997, Indonesia floated the rupiah, raised
key domestic interest rates, and tightened fiscal policy. In October 1997, Indonesia and the IMF reached agreement
on an economic reform program aimed at macroeconomic stabilization and elimination of some of the most egregious
economic policy deviations such as the National Car Program and the clove monopoly, both controlled by Soeharto's
youngest son. The economic reform program was strengthened in January 1998, with additional structural reform measures
the centerpiece of the new measures. Continued uncertainty about President Soeharto's commitment to the program
undercut its effectiveness. Although Government implementation of the program's monetary policy element improved
after March 1998, confidence in Indonesia's willingness and ability to pursue necessary reforms began to recover
only after Soeharto resigned.
As of mid-1999, the economic program had shown encouraging signs of exchange rate and interest rate stabilization.
There were some indicators of renewed growth, especially as weather patterns returned to normal. Indonesia eliminated
the National Car Program, removed important import monopolies, liberalized financial market access, and announced
an expanded privatization program. As the worst of the crisis past, the government in tandem with major donors
began to reform the social safety net programs that had been hastily implemented with an eye to improving targeting
of the poor and reducing leakages. The government had taken major steps on banking sector restructuring, closing
some banks, taking over others, and assisting with the recapitalization of state-owned banks and the strongest
private sector banks. The "Jakarta Initiative" was launched to promote voluntary corporate debt restructuring,
but the process was in its early stages as of mid-1999. The Bankruptcy Law was amended, but early cases provoked
controversy. Some steps were taken toward investigating accusations of corruption by former President Soeharto
and family members and associates.
The effects of the financial and economic crisis were severe. Real GDP contracted by an estimated 13.7 percent
in 1998. Inflation reached 77 percent for the year. The rupiah, which had been in the Rp 2,400/USD1 range in 1997
reached Rp 17,000/USD1 at the height of the 1998 violence, returning to the Rp 6,500-8,000/USD1 range in late 1998.
Export earnings languished for a variety of reasons, including flagging demand in major Asian markets, low commodity
prices, lack of trade finance, and uncertainty about Indonesia's reliability as a supplier. Although the drought
forced Indonesia to import record amounts of rice, overall imports dropped precipitously in response to the unfavorable
exchange rate, reduced domestic demand, and absence of new investment. Although reliable unemployment data are
not available, formal sector employment contracted significantly. The outlook for 1999 indicated that the bottom
may have been reached. Prices rose by less than 2 percent in the first six months of the year, with inflation widely
predicted to be less than 10 percent for the year. The rupiah's stabilization brought relief to the business community
and the government budget.
Indonesia's public sector external debt rose from $54.2 billion in March 1998 to $67.2 billion by mid-1999. This
figure was expected to increase further as funding from the international financial institutions and other donors
helped finance the balance of payments and enabled the government to maintain an expansionary fiscal stance. Private
sector external debt stood at approximately $81.5 billion.
Oil and Minerals Sector
In the 1998 calendar year the oil and gas sector, including refining, contributed approximately 9% to GDP and is
expected to provide 14.8% to domestic revenues in FY1999/00. Although the sector's share of export earnings and
government revenue has since dropped to about 10%, it remains an important part of the economy in which many U.S.
companies have heavily invested. Crude and condensate output will average 1.0 million barrels per day (bpd) in
FY 1999/00. With domestic demand for petroleum fuels expanding, Indonesia will become a net importer of oil by
the next decade unless new reserves are found. In 1998, Indonesian imports of crude oil and petroleum products
totaled $2.7 billion dollars while Indonesian exports of crude oil and oil products totaled $7.9 billion dollars.
The Asian financial crisis has taken a tremendous toll on the Indonesian economy's terms of trade. Not only have
Indonesia's oil prices tumbled by 30%, but its markets in East Asia are themselves experiencing a sharp slowdown,
affecting demand.
The state owns all oil and mineral rights. Foreign firms participate through production sharing and work contracts.
Contractors are required to finance all exploration, production, and development costs in their contract areas;
they are entitled to recover operating, exploration, and development costs out of the oil and gas produced.
Although production traditionally centered on bauxite, silver, and tin production, Indonesia is expanding its copper,
nickel, gold, and coal output for export markets. Total coal production reached 41 million tons in 1996, including
exports of 27 million tons. In mid-1993, the Department of Mines and Energy reopened the coal sector to foreign
investment. Indonesian coal production in the range of 70-80 million tons by the end of the decade is possible.
Investment
Indonesia made numerous changes to its regulatory framework to encourage economic growth. This growth was financed
largely from private investment, both foreign and domestic. U.S. investors dominated the oil and gas sector and
undertook some of Indonesia's largest mining projects. In addition, the presence of U.S. banks, manufacturers,
and service providers expanded, especially after the industrial and financial sector reforms of the 1980's. Other
major foreign investors included Japan, the United Kingdom, Singapore, the Netherlands, Hong Kong, Taiwan, and
South Korea.
The economic crisis made continued private financing imperative and highlighted areas where additional reform was
needed. Frequently cited areas for improving the investment climate were establishment of a well functioning legal
and judicial system, adherence to competitive processes, and adoption of internationally acceptable accounting
and disclosure standards. Despite improvements in the laws in recent years, Indonesia's intellectual property rights
regime required additional amendment; enforcement was the key IPR concern. Under Soeharto, Indonesia had moved
toward private provision of public infrastructure, including electric power, tollroads, and telecommunications.
The financial crisis made resolution of private infrastructure project problems a major issue.
Although Indonesia continued to possess the attributes of a large labor force, potential for domestic market growth,
abundant natural resources, and modern infrastructure, private investment in new projects largely ceased during
the crisis. Portfolio investment continued to offer opportunities. The possibility opened up to invest in the banking
sector as it restructured. The government's stated intention of accelerating the privatization of state-owned enterprises
to increase efficiency and raise budgetary revenues attracted investor attention. The transfer of assets and non-performing
loans to the Indonesian Bank Restructuring Agency was expected to generate opportunities to invest in existing
companies.
Source: Economic
Trends Report, US Embassy Jakarta |
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