The star emerging market economy of the moment isn’t India


The global economy is in turmoil again, with advanced economies on the brink of a sharp slowdown or even recession. Russia’s war, food and fuel crises, supply chain disruptions, China’s zero-Covid devastation and fiscal tightening led by the Federal Reserve’s monetary tightening are making it difficult for almost all economies. Low-income countries like Sri Lanka and to some extent Pakistan are struggling with sovereign debt crises.

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While many Asian economies, including India, generally don’t look all that bad, one Southeast Asian is proving to be the star. Indonesia (smaller than India with a population of 274.8m and a GDP of $1,065bn) is recovering from Covid disruptions at a rapid pace.

Indonesia, Southeast Asia’s largest economy, performed better-than-expected in the April-June quarter, driven by a commodity-driven export boom and resilient spending, despite global inflationary pressures, financial market volatility and the easing of fiscal stimulus measures taken during the Covid-19 crisis GDP growth of 5.4% yoy beat all forecasts and is the fastest growth in four quarters. The economic recovery picked up pace in late 2021 and is strengthening this year, supported by domestic demand and favorable global commodity prices.

Inflation, which averaged 1.6% last year and 4.7% this August, is among the lowest in the world. The rupiah is the best performing Asian currency this year (the Indian rupee is the second best performer, but mainly because the central bank has been frantically issuing dollars from its foreign exchange reserves to defend it against a strengthening dollar).

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India, on the other hand, has been growing below its potential for years, although it is currently the fastest growing economy in the world. Its economic reform program launched in 1991 has been in reverse gear, with the incumbent government scaling back trade liberalization policies and attempting to reintroduce quasi-licensing permit-type measures such as those included in the draft Telecoms Act for services such as Gmail, WhatsApp and Signal.

The Asian Development Bank (ADB) expects Indonesia’s economy to grow by 5.4% in 2022 and 5% in 2023. ADB believes Indonesia is weathering threats to growth well and consumer spending is resilient. The Asian Development Outlook 2022 update just released says that resilient consumer demand has more than offset lower government spending. Inflation is expected to hover around 6% by June 2023 (due to higher commodity prices and recent fuel price hikes) and decline to below 4% by the end of 2023.

Exports are booming (exports up 30% yoy to $28 billion in August) for the second straight year. Not only because commodity prices are also rising (Indonesia is a big exporter of coal and palm oil), but also because Indonesia’s exports of textiles, clothing, shoes, machinery, furniture and electronics are rising. The trade surplus rose to $15.55 billion in the June quarter, up almost 150% from the same period last year, despite a temporary ban on palm oil exports.

Travel and personal consumption spending, which contributes half of GDP, gained momentum during the Eid celebrations as lockdown restrictions eased.

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The country’s fuel subsidies have helped suppress inflation, which has kept Indonesians from losing purchasing power as much as people in other countries. With inflation under control, Indonesia’s central bank hiked interest rates to 3.75 percent in August for the first time in three years, as inflation topped target levels in sync with global trends of rising prices.

With an unenviable record on corruption and environmental protection, and long-standing challenges including low tax revenues and flat financial markets, how did Indonesia steer its way to prosperity?

The resilience of Indonesia’s economy is attributed (by the International Monetary Fund, among others) to measures to maintain macroeconomic and financial stability despite the severe impact of the pandemic, supported by significant policy buffers accumulated over years of strong macroeconomic performance.

The country’s response to Covid has been a bold and comprehensive and well-coordinated policy package that has successfully maintained economic and financial stability. As the recovery began, they began withdrawing the extraordinary support measures in a timely manner.

Indonesia’s ambitious structural reform agenda, currently underway, includes the passage of the Tax Reform Law, a carbon tax to mitigate climate change and a commitment to return to the pre-pandemic budget deficit ceiling of 3 percent of GDP by 2023 without too drastic spending adjustments. Like India, Indonesia is also striving for digitization.

Indonesian policymakers want their reserves – a third of the world’s and as large as Australia’s largest – of nickel, the mineral needed to make batteries, to be used to develop a global electric vehicle manufacturing base. Foreign companies have started refining nickel ore in the country after Indonesia banned its export in 2020. The country is building eight plants to produce battery-grade nickel for electric vehicles. South Korea’s LG and Hyundai are building the country’s first battery cell plant for electric vehicles. Hyundai is building an EV factory. Indonesia is eyeing Tesla’s Elon Musk for big bang investments in electric vehicles, the next big global industry.

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In five years, Indonesia’s nickel-dependent exports have grown from $1.1 billion to nearly $21 billion.

The country is also focused on building human capital, for which it has recruited companies to reform educational institutions and state-owned companies that dominate sizable parts of its economy. Indeed, his reformed labor regulations to encourage job creation have led to inflows of foreign investment from manufacturing companies looking to locate some of their manufacturing facilities outside of China.

Indonesia is also building physical capital – toll roads, airports, ports and new dams.

At the heart of Indonesia’s transformation is the new capital under construction, Nusantara, four times the size of the current capital Jakarta, which is sinking due to rising sea waters. By its centenary in 2045, Indonesia hopes to be the fourth largest economy in the world.

However, challenges remain: improvements in education, women’s labor force participation and governance frameworks, and energy subsidies.

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