Indonesia Set for Trillion-Dollar Economy in Bittersweet Triumph


(Bloomberg.com)Indonesia is on track to become a trillion-dollar economy and should be the envy of Southeast Asia. Yet on some key measures, the region’s biggest economy is falling behind.

The nation lags its neighbors on infrastructure development, faces a fiscal shortfall that’s heaping pressure on the state budget and still has 28 million people living in poverty. That’s even after reforms saw the economy’s value more than double over the past decade to $932 billion, with President Joko Widodo’s government forecasting growth this year of about 5 percent.

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Size isn’t everything. Even after eight rate cuts since the beginning of last year, the economy is struggling to fire up: loan growth remains muted, while the central bank expects low inflation to linger for some time. The picture is made more complex by a wide divergence in growth across the archipelago of more than 17,000 islands, with rates ranging from negative to more than 7 percent.

“This is a pretty large economy that has a lot of potential but the trick really is how to get to that place where growth becomes more sustainable at relatively elevated levels. That’s more important than the overall size of the economy,” said Euben Paracuelles, an economist at Nomura Holdings Inc. in Singapore. “From that perspective, their work is cut out for them.”

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Sustaining growth is crucial to luring overseas investors, who are returning to Indonesia 20 years after the Asian financial crisis. Foreign reserves are at a record high of $129 billion while bond market inflows are near record levels. S&P Global Ratings in May joined the other two main rating companies in awarding Indonesia investment grade status, citing a more prudent approach to budgets.

Graduation into the trillion dollar club “signifies how Indonesia now is laddering up in the middle-income group,” said Perry Warjiyo, deputy governor at Bank Indonesia. “Under the leadership of President Joko Widodo, moving in that direction also signifies the fundamentals of the economy are quite strong and resilient.”

The following three charts show the challenges the president -- known as Jokowi -- and his government now face in matching quantity with quality.

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