FT: Indonesia’s Economy Faces Gathering Headwinds

November 11, 2013, 3:08 pm | Admin

The Financial Times reported recently on slowing GDP growth and its implications for Indonesia’s economy. Read the article on the paper’s website here (sign-in required).
Indonesia’s Economy Faces Gathering Headwinds

By Ben Bland, Jakarta, Nov. 6, 2013 — Growth in southeast Asia’s biggest economy has slipped to its slowest pace in four years, but no one seems to have told the young Indonesians enthusiastically snapping up Nike sneakers, Levis and designer hijabs from online retailer Zalora.

The German-backed start-up, which launched in Indonesia last year, says that sales are doubling every four months as the number of people shopping online expands at a breakneck pace as incomes rise and traffic jams worsen.

“Of course we would rather have the wind behind us but the potential in Indonesia is still huge,” says Magnus Grimeland, the chief executive of Zalora Indonesia.

Indonesia’s economy faces gathering headwinds, from a widening current account deficit and a sliding currency to increasing protectionism and political uncertainty ahead of next year’s landmark elections, when President Susilo Bambang Yudhoyono steps down after a decade at the helm.

On Wednesday the government statistics agency revealed that gross domestic product growth had fallen to the lowest level since 2009, slipping to 5.6 per cent in the third quarter.

That dip underlines the emerging consensus that Indonesia is entering a “new equilibrium” of slower economic expansion after five years of annual GDP growth averaging 6 per cent.

Hopes that Indonesia was on the brink of achieving China-style growth rates of 7-8 per cent a year now look wildly optimistic.

Fauzi Ichsan, an economist at Standard Chartered in Jakarta, says the latest figures are a welcome reality check as Indonesia needs to go through a period of slower growth in order to rebalance the economy by curbing the surging imports that have left the country with a worryingly large current account deficit.

“This is what needs to be done to tackle the current account deficit,” he says. “The quantitative easing programme in the US will end at some point and when they start the ‘taper’, it will become even more difficult for us to fund this deficit.”

Domestic consumption and capital expenditure, which have underpinned the Indonesian growth story since prices for the country’s commodity exports dropped,are expected to slow further in the coming months as households and companies feel the effects of higher borrowing costs, after the central bank in June began to raise interest rates aggressively.

However, international investors from minnows such as Zalora to giants such as General Electric remain confident about the long-term potential of Indonesia, with its 250m people and large and growing middle class.

Although the currency instability and slower pace of growth will make conditions tougher, they argue that from internet shopping to air travel and power plants to healthcare, there are still many under-exploited parts of the economy ripe for picking.

John Rice, vice-chairman of American conglomerate GE, says that he is not overly concerned about slowing GDP growth in Indonesia, Vietnam and other emerging markets that have fallen out of favour with more short-term stock market and bond investors.

“In the pecking order, completing power projects, putting in healthcare, having good air and rail transportation, those end up being fundamental requirements,” says Mr Rice, who is leading GE’s push to expand the company’s global sales in these and other areas. “Projects may slow down, they may be a little more difficult to get financing but there’s just as much need for them as there ever was.”

Jean-Dominique Sénard, the chief executive of French tyremaker Michelin, says that the slowdown will not affect his company’s plan to build a $435m synthetic rubber factory in Indonesia alongside a local petrochemicals group, part of a wider strategic shift towards emerging Asian markets.

“Maybe growth has dropped a little but when you compare it to mature countries, you think this is the centre of the world,” he says. “We don’t invest for the next six months but for the next 40 years.”

Last modified on February 1, 2017, 3:10 pm | 1513