Indonesia has had a great 2017 with a well-performing economy. Inflation, albeit under the target of six percent, is stable at just over five. Standard&Poor has upgraded Indonesia’s government bonds to investment grade in May, the last major rating agencies to do so. Indonesia’s major commodities, crude oil, coal, and gas has increased by 44, 49, and 21 percent – respectively – in terms of net exports. Volatility of the Indonesian currency has recently been stabilized to seven percent under the Governor of Bank Indonesia, Agus Martowardojo. The IMF has projected that Indonesia’s economy will grow at a faster rate in 2018 to five percent due to increase in foreign investment, and twelve percent higher credit by 2020 available to banks.
However, there are certain risks that needs to be cautioned. Global uncertainty, partly due to lower growth in China, Indonesia’s largest trading partner, and internal political strife. The internal uncertainty from the simultaneous regional elections in 17 out of 34 provinces in Indonesia in July, could strengthen the growing influence of radical Islam in the Indonesian society, which might cause a worsening of economic performance for the nation.
Yet, in recent years there has been a rise in e-commerce business in Indonesia. With the increase of social media usage for small and large businesses alike to advertise their service, this is one of the key industries where there is serious potential for growth. Tokopedia, the nation’s largest e-commerce platform, has received US$1.1 billion from Alibaba Group, making its valuation higher than the main telecommunication firms in the country. Traveloka, an online travel booking site has received US$350 million from Expedia. Together with Bukalapak, Indonesia’s version of eBay and Go-Jek, these four firms are start-ups that have currently a valuation of over US$1 billion.
Go-Jek in recent months has received investments from private equity and venture capital firms such as Warburg Pincus, and Rakuten Ventures, as well as Google. It started as a hail-riding service which uses motorcycles instead of cars. Now it has diversified itself to provide services as well, such as food delivery and courier service. It manages to use the limitation of public infrastructure and surplus of motorcycles on the streets to cater smaller businesses, as well as consumers. The firm is valued almost at US$4 billion, which makes it the most valued start-up in Indonesia. It is currently processing its IPO proposal.
In addition, there is an increase in the urbanisation rate across many different cities in Indonesia, not exclusively just in the capital of Jakarta, which should provide balanced regional development. The stable economic growth has given firms opportunity to increase their workforce, as the working-class population will comprise of approximately 68 percent of the Indonesian population by 2020. With larger investment from property conglomerates such as Ciputra, and Sinar Mas Group, which are set to invest on secondary cities such as Bandung and Surabaya, alongside smaller cities such as Kupang, and Pangkal Pinang, this will further aid the boosting of regional economies.
On the other hand, economic growth is still concentrated on Indonesia’s main islands: Java, Sumatra, Borneo, Sulawesi, and Bali. Outside this area, particularly in the eastern region of the country, there is a large fragmentation of the retail market due to the overreliance on warungs, and lack of efficient infrastructure which problematizes logistical distribution. Indonesia is ranked 53rd on the Logistics Performing index. This also implies that the logistics costs as a percentage of GDP is one of the highest within key Southeast Asian markets. Moreover, there are overcomplicated regulations, and excessive red-tape, which makes the realisation of any projects difficult, and foreign trade agreements hard to finalize. One of the recent examples of this is the Chinese-financed US$6 billion Jakarta to Bandung high-speed rail.
Currently, the government under the President Joko Widodo has selected 247 priority infrastructure projects, such as a highway linking all main cities in Java, where almost half of the Indonesian population live, and various types of power generators in smaller islands. These projects are estimated to cost around 32% of Indonesia’s GDP. Joko Widodo has shown commitment to realise as many of these projects as possible. Land reclamation has always been an issue and, hence, the government established the Committee of Acceleration of Priority of Infrastructure Delivery (KPPIP), which has secured financing through state-owned enterprises and the private sector.
The Chinese economy is forecasted to grow between 6.3 to 6.5 percent in 2018, the lowest since 1990. China is Indonesia’s biggest trading partner, with an increase in over US$10 billion of valued trade between the two nations, in comparison to 2016. This means that the slowdown of Chinese economic growth could also hamper Indonesian development. The National Statistical Bureau states that for each 1% increase of the Chinese GDP, Indonesia’s GDP would increase by 0.1 percent, due to such strong economic ties between the two countries. To combat this, the Bank of Indonesia has enacted further quantitative easing by adjusting its 7-day repo rate to 4.25 percent, a reduction of 50 basis points in comparison to December 2016. Promising signs are that the Bank’s international reserves have increased by US$9.6 billion due to higher foreign currency proceeds, and the intervention on the FX market by Bank of Indonesia is has meant that their performance has aligned with their target.
