A strong domestic economy and abundant natural resources have sheltered Indonesia from a flagging global economy. However, downward pressure on commodity prices dampened the country’s export revenues and took its toll on the country’s growth prospects. Yet, the economy managed a growth rate of 6.2 percent in 2012, owing to robust private consumption. While this marks a deceleration from the previous year, the economy has performed well against the backdrop of a weak global macroeconomic environment.
Indonesia’s deceleration in 2012 was the result of a significant slowdown in export growth. Exports declined by 6.6 percent in 2012 to $190 billion as demand from the country’s main trading partners ebbed and prices for Indonesia’s main export commodities—palm oil and coal—declined. Thus, export revenues decreased despite a 3.1 percent increase in export volumes. Meanwhile, imports rose 8 percent to $191.7 billion, owing to a 118.2 percent increase in gas imports and a 9.1 percent increase in non-oil imports. In addition, imports of raw materials and consumer goods also posted a healthy increase.
An uptick in foreign direct investment (FDI) insulated the Indonesian economy from the impact of slower export growth. FDI flows rose 23 percent in the fourth quarter of 2012 to $5.9 billion, pushing FDI in 2012 up 26 percent from the previous year to nearly $23 billion. Surprisingly, the mining sector was the biggest recipient of FDI despite several new regulations that limit foreign ownership and restrict exports. Furthermore, the transport, storage, and communications sectors and the metals, machinery, and electronics industries also attracted sizable foreign capital flows. Indonesia’s government is encouraging foreign investments in the transportation sector in order to improve its infrastructure, which is often cited as an obstacle to achieving higher growth. In addition, the Ministry of Industry has decided to develop Indonesia’s chemical and steel manufacturing industries, given the contribution of these sectors to the country’s economic growth. These sectors will probably attract higher foreign investments in the coming quarters.
Indonesia’s economy benefitted from resilient consumption spending in a fairly stable domestic macroeconomic environment.
Meanwhile, in January 2013, inflation increased by 4.6 percent compared to the previous year. Food prices rose 7.3 percent primarily due to damages and disruptions cause by the flood, marking a five-month high. Furthermore, the government’s restrictions on beef imports led to a steep rise in the price of beef and resulted in increased international pressure against the country’s protectionist policy. Food inflation and a rising cost of living led to protests against the government’s plans to delay the wage hike. However, in most other categories, inflationary pressures appear to be subdued, and inflation remained within the central bank’s target range of 4.5 percent. In fact, core inflation stood at 4.3 percent in January 2013, down from 4.4 percent in December 2012. The central bank kept its bank rate unchanged in its monetary policy meeting on January 10, 2012, but it will likely revisit its policy stance if inflation increases sharply in the coming quarters.
Indonesia’s economy benefitted from resilient consumption spending in a fairly stable domestic macroeconomic environment. Despite legal and regulatory risks and infrastructure bottlenecks, Indonesia remains a favored destination for global investors, owing to its relatively high GDP growth and large domestic market. Indonesia’s economy may find it difficult to accelerate if exports do not stage a recovery, but the government is taking steps to increase the country’s trade ties with the Middle East and Africa in order to boost export growth. Meanwhile, Indonesia ranked 100th out of 182 countries on the Corruption Perception Index in a report released by Transparency International in December 2012. Corruption poses a significant challenge for firms operating in Indonesia and could potentially undermine their competitiveness. Yet, the economy is expected to continue its upward trajectory and will likely grow 6.4–6.5 percent in 2013.