Indonesia – The Trillion
Dollar Economy
James Castle
Kuta, Bali
1 February 2013
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Today’s Talk
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Background - The Long View
A Snapshot of Today
The Impact of the Global Crisis
The Economy
Social Conditions
Politics
Some Questions from You
Conclusions
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Some Solid Fundamentals
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Indonesia’s macro-economic management over the past
decade has been very good.
Conservative fiscal management, lower tax rates and
better tax collection have generally kept the country’s
annual budget deficits below 2% of GDP and reduced
government debt to around 25% of GDP from over 100%
in the aftermath of the Asian financial crisis just over a
decade ago.
This has helped keep the currency stable and interest
rates relatively low on an historic basis. This, in turn, has
enabled Indonesian business to maximize the benefits
that strong global commodity markets have offered and
brought annual investment levels back from well under
20% of GDP to over 30%.
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… and let us not forget
Some Accomplishments - Enhancing social cohesion and
political stability with…
 The establishment of a viable democracy
that has conducted three successful
national elections and literally thousands of
local elections that were free and fair
 The peaceful and voluntary removal of the
military from a direct role in political life
 A vibrant free press
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Plus Some Core Strengths
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Indonesia’s current impressive economic progress is a
commodity export – domestic consumption story
It is the world’s largest exporter of palm oil and the
second largest exporter of thermal coal, tin and cocoa.
It has 3.5 billion barrels of proven oil reserves and over
110 trillion cubic feet of natural gas reserves
Young population – over 50% of Indonesia’s 240 million
people are under the age of 29
and
Indonesia should become a
trillion dollar economy by 2014
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Indonesia Today - McKinsey
 16th largest economy in the world
 45 million members of the Consuming
Class
 53% of population in cities, producing 74%
of GDP
 55 million skilled works
 $0.5 trillion market opportunity in
consumer services, agriculture and
fisheries, resources, and education
McKinsey Global Institute: The Archipelago Economy:
Unleashing Indonesia’s Potential; Sept 2012
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Indonesia in 2030 - McKinsey
 7th largest economy in the world
 135 million members of the consuming
class
 71% of population in cities producing 86%
of GDP
 113 million skilled workers needed
 $1.8 trillion market opportunity in
consumer services, agriculture and
fisheries, resources, and education
McKinsey Global Institute: The Archipelago Economy:
Unleashing Indonesia’s Potential; Sept 2012
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Back to the Present:
2012 - A Tough Year. 2013 More of the Same
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Persistent global uncertainty
Falling commodity prices
Ballooning fuel subsidy
Growing current account deficit
Merchandise trade deficit
Weaker Rupiah
Slower growth
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Why S&P said “No”
Positives
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Low central govt deficit
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Declining public debt
burden
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Constraints
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Strengthening external
liquidity
Policy slippage: failure to reduce
fuel, electricity subsidies;
questionable industrial and trade
policies
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Resilient economic
performance in global
downturn
Structural & Institutional
impediments to higher growth
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Shallow domestic capital markets
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Under-spending capital budget;
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Implementation risk on
infrastructure and energy
development
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Social Indicators
Still Very Positive
 Inflation down
 Per capita income up
 Numbers of unemployed & those
living below the poverty line down
 Consumer credit availability at
highest levels ever
 Income redistribution via regional
autonomy
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Governance/ Business
Environment / Competitiveness
Some slippage over the past year
 Indonesia ranked 50th this year compared to
46th in 2011-112 survey
 Other ASEAN rankings: Singapore 2nd;
Malaysia 25th; Thailand 38th; Philippines 65th;
Vietnam 75th
 BRICs: China 29th; India 59th; Brazil 48th;
Russia 67th
 MISTs: Mexico 53rd; South Korea 19th; Turkey
43rd
WEF: Global Competitiveness Index (2012-13)
MIST countries are linked by rising consumer spending
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Infrastructure Challenges National
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Rail 54% – Accounts for less
than 10% of passenger and less
than 1% of freight transport.
Jakarta is the largest city in the
world without intra-city rail
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Roads 61% - 35% of district
roads and 10% of national roads
are classified as “Heavily
Damaged” Ports 77%
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Indonesia has only 2
international hub ports
Merak Crossing -12 days
Source: McKinsey
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Infrastructure Challenges Jakarta
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Population of Greater Jakarta
(Jabodetabek) will grow from 24
million today to over 32 million
in 2020
8.2 million more people will
require over 2 million additional
housing units with 47% more
commuting trips
Worsening public health due to
increasing levels of air and
water pollution – 377m m3 more
sewage and 17m m3 of waste
generated
Source: McKinsey
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Consequences of SubOptimal Growth
Rp 35,500,000
Per Capita GDP 2012
Ave Growth Rate
Population Growth
Per Capita GDP 2020
Per Capita GDP 2030
6.00%
1.04%
8.00%
1.04%
52,000,000
84,000,000
60,500,000
118,000,000
-14%
-29%
What does slower growth mean to young Indonesians?
If you are 20 years old today, when you are
38, instead of earning Rp 118 million, you will
be earning only Rp 84 million.
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Questions from the participants (1)
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What might foreign investors expect in the years ahead?
How will Indonesia fare within the region and the world?
Forecasts on the Indonesian economy, strengths and
possible weaknesses
What might foreign investors expect in the years ahead?
Since hotels depend on the health of the economies of
source markets – how goes Indonesia, Australia,
Singapore, Malaysia, Japan, Europe and America?
Fuel and Power prices? Will Indonesia abolish subsidies?
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Questions from the participants (2)
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How will that impact buying power of the
Indonesian market (now 55% of Bali arrivals) and
the cost of doing business (e.g. PLN)?
The Indonesian national debt and the need for
revenue. What will happen on taxes, subsidies,
etc?
Will Indonesia meet the tremendous demands for
infrastructure development to stay competitive in
the region?
Indonesian tourism promotional budgets among
the lowest in ASEAN? Is this likely to change?
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Questions from the participants (3)
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How realistic are expectations in some quarters for
changes in property ownership rules for foreigners and
foreign corporations?
How goes to government’s efforts to eradicate
corruption?
How will AFTA potentially effect the way hotels in
Indonesia do business? More foreign staff?
Exodus of talent?
If Minister Pangestu is chosen to head the WTO, what
might that mean to Indonesia?
Coming elections: Smooth or rough sailing?
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Conclusions
Advantages
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Stable Politics
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Strong Macroeconomic
Fundamentals
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Established track record of
prudent fiscal mgmt
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Favorable Demographics:
30% population is 15< years
old
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Valuable commodities
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Strong investor interest
Disadvantages/Challenges
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Weak rule of law/governance
Infrastructure bottlenecks
Inefficient govt bureaucracy
Persistent inflation
Human capital/skills
shortages
Lack of political will to
confront subsidies and
creeping economic
nationalism
Source: Adapted and modified from IMF Article IV summary
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Prospects for Prosperity
 Over the past five years, Indonesia has
shown that it has the domestic strength to
continue to prosper despite the worst
peacetime global financial climate in nearly a
century.
 Indonesia’s momentum should carry it
forward for the next several years. But, if not
addressed, policy failures in vital sectors will
keep growth at sub-optimal levels.
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Prospects for Prosperity
 The risks today – weak global economy, major
leadership changes in 2014 – are the greatest
since 2001 when Indonesia’s first democratically
elected president was impeached less than two
years into his term
 Electioneering, over-confidence and protectionist
trade and investment policies are making the
country much more vulnerable to the inevitable
commodity downturn than it needs to be.
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Prospects for Prosperity
 Nevertheless, if the 2014 election goes smoothly
(as we think it will) and infrastructure investment
continues to increase (very likely as the election
draws closer) . . .
 . . . Indonesia should be able to maintain its
position as one of fastest-growing G-20 economies
for some time – and become a trillion dollar
economy by 2014.
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THANK YOU
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