Economy
Indonesia has the largest economy in the region of Southeast Asia and is classified as a newly industrialized country. As of 2019 Indonesia is the world’s 16th largest economy by nominal GDP estimated to be US$1,100-1,111 Billion. The country has a mixed economy in which state-owned enterprises and large private business groups play (conglomerates) vital roles. There are hundreds of diversified privately held business groups in Indonesia that together with state-owned enterprises dominate the domestic economy. Since the country gained its independence, the structure of the economy changed considerably although government policies in the 1950’s and 1960’s promoted agricultural self-sufficiency and the exports were mostly raw commodities.
During the 1960’s the economy deteriorated dramatically as a result of the political instability and the inexperience of the government in implementing macro-economic policies which resulted in severe poverty with 1,000% annual inflation, shrinking exports, factories operating in minimal capacity and almost no new investments. A gradual process of industrialization and urbanization began in the late 1960’s continued throughout 1970’s. During this decade, the sudden rise of the oil prices helped Indonesia to sustain high economic annual growth rates averaging over 7%.
The industrialization and urbanization process were accelerated in the 1980’s as falling oil prices forced the Indonesian government to diversify its economic policy away from oil exports, towards exports of manufactured products. Significant role for the transformation of the economy played the reduction of the trade barriers from the mid-1980’s making the Indonesian economy more globally integrated, although the economic growth slowed to an average of 4.5% per annum between 1981-1988. Despite the 1990 oil price shock during which the Indonesia GPD rose at an average rate of 7.1% (1989-1997) the country continued the industrialization of its economy and the export of manufactured products.
This period of economy growth stopped suddenly in 1997 due to the Asian financial crisis which affected the economy severely causing a real GDP contraction by 13.1% in 1998, inflation that reach 72% while the exchange rate of the Indonesia Rupiah/US Dollar was around 15,000 Rupiah for 1 US Dollar for brief periods during the first half of 1998.
In October 1997 Indonesia and the IMF reached an agreement on an economic reform program which was aiming to macroeconomic stability. A year later in August 1998 the two sides agreed on an Extended Fund Facility (EFF) that included significant structural reform targets. Another EFF program was agreed and signed with IMF in January 2000 including a range of economic, structural reform, and government targets. Since the crisis erupted, the government took custody of a significant portion of the private sector assets, through the acquisition of non-performing bank loans and corporate assets through the debt restructuring process.
These companies were sold for privatization several years later. The recovery of the economy started in 1999 and the growth of the economy accelerated to over 4-5% per annum. By 2003 Indonesia was stable enough to allow the expiration of the economic reform program that had been sponsored by the IMF. A new development strategy involving liberalization in some areas and limitation of foreign ownership in others has aimed to establish Indonesia as a fully self-sufficient country in the 21st century.
The following years and more specifically at the end of 2004, Indonesia faced a mini crisis because of the sudden rise of the international oil prices and the imports. The annual inflation jumped to 17% in late 2005, but the growth of the economy accelerated to 5.1% in 2005 and reached 5.6% in 2005. Unfortunately, this growth was driven primarily by the domestic consumption which accounts for ¾ of Indonesia’s GDP. Foreign investments continued to suffer by bureaucracy, and corruption. In 2005 the government initiated a 20-year development plan, spanning from 2005-2020 divided to three 5-year medium term plans, called RPJMN (Rencana Pembangunan Jangka Menengah Nasional) each one with different development priorities.
As it has been mentioned earlier the most dramatic development on the economy of the country tool place in 1997 when the GDP (at current US$, World Bank national accounts data, and OECD National Accounts data files) was reduced to US$215.74 Billion from US$227.37 Billion in 1996 and to just US$95.44 Billion in 1998 at the peak of the economic crisis. (at constant 2010 US$ prices the GDP of Indonesia in 1996 was US$471.39 Billion, in 1997 it was US$493.54 Billion and in 1998 it was US$428.75 Billion).
Following the recovery of the economy of the country in 1999, the GPD (at current US$ prices) increased throughout the next years with the exception of
- 2001, when it was reduced by -2.78% compared to 2000,
- 2013, by -0.6% compared to 2012,
- 2014, by -2.38% compared to 2013,
- 2015, by -3.37% compared to 2014,
Between 1998 and 2019 the GDP of the country (at current US$ prices) was increased by 10.7 times (at constant 2010 US$ prices the GDP was increased by 1.8 times) marking an amazing record for an economy that lost 55,77% of its GDP at current prices or 13.13% of its GDP at constant 2010 US$ prices between 1997 and 1998.
The Indonesian strengths that explain structural macroeconomics growth are:
- 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 labor costs
- Being an emerging market, there is a lot that needs to be built/developed.
According to the World Bank the GDP of the country in 2019 was US$1,119 Billion (current US$ prices) increased by 7.38% compared to 2018 (The GDP in 2018 was US$1,042 Billion at current US$ prices) and US$1,204 Billion (at constant 2010 US$ prices) increased by 4.96% compared to 2018 (The GDP in 2018 was US$1,147 Billion at constant 2010 US$ prices).
According to the Bank of Indonesia the composition of the GDP (at current prices) of the country in 2018 is as follows:
- Manufacturing: 19.86%
- Wholesale and Retail Trade Repair of Motor Vehicles and Motorcycles: 13.02%
- Agriculture, forestry and fishery: 12.8%
- Construction: 10.5%
- Mining and Quarrying: 8.08%
- Transport and Storage: 5.37%
- Financial Services: 4.15%
- Information and Communication: 3.76%
- Public Administration, Defence and Compulsory Social Security: 3.65%
- Education Services: 3.24%
- Accommodation and Food Services: 2.78%
- Real Estate: 2.74%
- Other Services: 1.81%
- Business Services: 1.8%
- Electricity: 1.18%
- Health Services and Other Activities: 1.06%
- Water supply Waste Management and Remediation Activities: 0.06%
According to the World Bank, the Trade Balance of Indonesia for 2018 was negative and the country had a deficit of US$8.49 Billion. The value of the imported goods was US$188.71 Billion and of the exported US$180.21 Billion.
The most important international trade partners of Indonesia during 2018 were:
- East Asia and Pacific. The value of the Indonesian exports was US$104.64 Billion (58.07% of the total exports) and the value of the imports was US$128.04 Billion (67.85% of the total imports). Trade deficit of US$23.4 Billion
- Europe and Central Asia. The value of the Indonesian exports was US$20.45 Billion (11.35% of the total exports) and the value of the imports was US$128.04 Billion (10.08% of the total imports). Trade surplus of US$1.44 Billion
- North America. The value of the Indonesian exports was US$19.38 Billion (10.76% of the total exports), and the value of the imports was US$12.05 Billion (6.39% of the total imports). Trade surplus of US$7.33 Billion
- Middle East and North Africa. The value of the Indonesian exports was US$5.83 Billion (3.24% of the total exports) and the value of the imports was US$10.33 Billion (5.48% of the total imports). Trade deficit of US$4.5 Billion
- Latin America and Caribbean. The value of the Indonesian exports was US$3.52 Billion (1.96% of the total exports), and the value of the imports was US$4.06 Billion (2.15% of the total imports). Trade deficit of US$542.17 Million
According to Société General report the main export of goods customers of Indonesia in 2018 were:
- China with 15.1%
- Japan with 10.8%
- U.S.A with 10.2%
- India with 7.6%
- Singapore 7.2%
- South Korea with 5.3%
- Malaysia with 5.2%
- Philippines with 3.8%
- Thailand with 3.8%
- Vietnam with 2.5%
According to Société General report the main import of goods customers of Indonesia in 2018 were:
- China with 24.1%
- Singapore with 11.4%
- Japan with 9.5%
- Thailand with 5.8%
- U.S.A with 5.4%
- South Korea with 4.8%
- Malaysia with 4.6%
- Australia with 3.1%
- India with 2.7%
- Saudi Arabia with 2.6%
According to Société General report Indonesia was a major exporter of following products:
US$180.2 Billion of products exported in 2018
|
Coal, briquettes, ovoids and similar solid fuels manufactured from coal |
11.4% |
|
Palm oil and its fractions whether or not refined |
9.2% |
|
Petroleum gas and other gaseous hydrocarbons |
5.9% |
|
Petroleum oils and oils obtained from bituminous minerals, crude |
2.8% |
|
Copper ores and concentrates |
2.3% |
|
Natural rubber, balata, gutta percha guayule chicle and similar in primary forms or in plates, sheets or strip |
2.2% |
|
Lignite, whether or not agglomerated |
1.8% |
|
Motor cars and other motor vehicles principally designed for transport of persons |
1.8% |
|
Industrial monocarboxylic fatty acids, acid oil for refining. Industrial fatty for alcohols |
1.7% |
|
Footwear, with outer soles of rubber, plastics, leather or composition leather and uppers of leathers |
1.7% |
According to Société General report Indonesia was a major importer of following products:
US$188.7 Billion of products exported in 2018
|
Petroleum oils and oils obtained from bituminous minerals |
9.1% |
|
Petroleum oils and oils obtained from bituminous minerals, crude |
4.9% |
|
Electrical apparatus for line telephony or line telegraphy including line telephone sets with cordless, handsets and telecommunication apparatus for carrier-current line systems or for digital line systems, videophones |
2.3% |
|
Parts and accessories for tractors motor vehicles, for the transport of ten or more persons, motor cars for the transport of goods and special purpose vehicles |
2% |
|
Petroleum gas and other gaseous hydrocarbons |
1.6% |
|
Automated data processing machines and units, magnetic or optical readers, machines for transcribing data on data media in coded form and machines for processing such data |
1,5% |
|
Wheat and meslin |
1.4% |
|
Gold including gold plated with platinum, unwrought or not further worked than semi manufactured or in powder form |
1.1% |
|
Oil cake and other solid residues whether or not ground or in the form of pallets resulting from the extraction of soya ben oils |
1.1% |
|
Electronic integrated circuits and micro assemblies |
1.1% |
State Budget, Deficit, Debt
The non-balanced State Budgets are one of the biggest problems of Indonesia. According to the Bank of Indonesia, the State Budget of Indonesia for 2018 and 2017 closed with significant deficit of several Trillion of Indonesian Rupiah (IDR). Regarding the State Budget of 2018 and 2017 they closed with a deficit of IDR 259.9 Trillion and IDR 341 Trillion respectively.
According to the Bank of Indonesia in 2018 the state spent IDR 2202.2 Trillion although the state budget that was approved by the Government and the Parliament included the expenditure of IDR 2220.7 Trillion. On the other hand, the state revenues for this year reached IDR 1942.3 Trillion although the budget of 2018 was expecting higher revenues estimated to reach IDR 1894.7 Trillion and the deficit was expected to be IDR 325.9 Trillion. Eventually the deficit of the state budget was IDR 259.9 Trillion.
In 2017 the Government and the Parliament approved the annual State Budget which included expenditure of IDR 2133.3 Trillion, revenues of IDR 1736.1 Trillion and deficit of IDR 397.2 Trillion. Eventually, according to the State Budget, as it was implemented, the State revenues in 2017 were IDR 1666.4 trillion, the expenditure IDR 2007.3 Trillion and the deficit reached IDR 341 Trillion. Although the Government tried hard to increase the revenues and hold the expenditure, big deficits was a characteristic of both State Budgets for 2018 and 2017.
Regarding the General Government Gross Debt, according to Société General as a percentage of the GDP it is estimated to reach in 2019 approximately US$30.28 Billion, in 2018 it is estimated to reach US$30.09 Billion, increased by 2.3% compared to 2017 when it reached US$29.4 Billion. The Foreign Direct Investments in Indonesia according to Société General in 2018 reached US$21.98 Billion, in 2017 they reached US$20.57 Billion and in 2016 they reached US$3.92 Billion.