ECONOMIC TRENDS ON INDONESIA, 2002
 
U.S. Embassy Jakarta

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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.

Implications for U.S. Business 

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 YoY GDP growth rate has increased in three consecutive quarters since Q4 2001, when growth bottomed out at 1.6 percent. Table 1 outlines Indonesia's Q2 2002 real GDP performance by production and expenditure category:

Table 1: Indonesian Real GDP, Q2 20021 vs. Q2 2002

A. By Production Category

A. By Expenditure  Category  

 Source:  Central Bureau of Statistics (BPS). 

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.

Table 2.  Indonesian Exports by Quarter, 1997-2002

note :
(1) USD billions.
(2) YoY percentage change of non-oil and gas exports, an indicator of manufacturing performance.  
Source: BPS.

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.

Next :
Uncertain Prospects for 2003

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