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JAKARTA - Indonesia is one of the "rising stars" of emerging Asia and some economists believe this vast nation will one day become a regional superpower, behind only China and India, as global economic activity increasingly shifts towards east Asia, away from the faltering developed nations of the west and Japan.
The country is delivering a torrid 6 percent annual GDP growth rate. Indeed, the Jakarta Stock Exchange has soared almost 40 percent this year, recently touching a new record closing high. The Asian Development Bank expects Indonesia to grow its economy by 6.1 percent this year, and 6.3 percent in 2011.
"Economic recovery in many Western countries affected by the global financial crisis is uncertain," Deloitte Asia Pacific CEO Chaly Mah told The Jakarta Post in a recent interview. "It’s relatively patchy. They are still struggling with economic challenges, and the unemployment rate remains high. There is still no clear sign of economic growth there."
Indonesia, boasting a population of 240-million, also features a huge working class population (estimated at 58-million), an expanding manufacturing base, moderate labor costs, a sound financial services sector, tremendous natural resources (including oil and gas reserves), as well as a relatively stable political system.
Exports of commodities are booming, buoyed by reforms and free trade agreements with China and other Asian countries. "Indonesia has been an open economy for many years, even before the 1998 Asian crisis." Mah noted. "This is a strong point when compared to other emerging markets." Milan Zavadjil, the International Monetary Fund's representative in Indonesia, said the country ranks just below China and India in attracting foreign investment.
The nation withstood the recent global crisis fairly well, due to its significant domestic demand, and because its banking sector did not participate in mortgage debt securities or other complex financial instruments. "Indonesia had a very small fiscal deficit, very small borrowing requirements, a low external government and consumer debt and adequate foreign exchange reserves," said Zavadjil. "The banks were well capitalized and liquid."
However, Indonesia remains a largely poor society, burdened by unemployment, corruption and insufficient infrastructure, especially at the country's air and sea ports. Thus, its evolution into a true economic giant will probably be a struggle. When the central bank of Indonesia convenes next week, it is likely to keep its key interest rate unchanged at 6.5 percent.
"GDP growth remains strong, but the economy is expanding close to its trend rate of 6 percent [per annum] rather than at a faster pace," said a note from Capital Economics (CE) in London. "In addition, the annual gain in consumer prices has slowed due to lower food inflation at a time when the soaring rupiah is holding down import costs."
Bank Indonesia said it thinks the 6.5 percent level is high enough to keep inflation pressures contained over the next 12 months. Moreover, 6.5 percent is already high for the region while bank reserve requirements will be lifted from 1 November, to 8 percent from 5 percent.
However, CE believes the tightening strategy adopted by BI is potentially dangerous and demand-side inflation pressures will climb at some point, meaning the current reference rate at 6.5 percent "looks to be on borrowed time."
CE expects the central bank to start raising rates in early December and that by the end of 2011 this rate will in the 7-8 percent range. Also, CE believes the rupiah currency -- which has been allowed to soar more than any other currency in the region in real effective trade-weighted terms -- will rise further against the US dollar over the next 12 months.
"Inflation risks are probably being under-played," CE noted. "The annual gain in headline consumer prices slowed to 5.8 percent in September from 6.4 percent in August. It is probable that food inflation has peaked and will continue to cool." However, CE added, core inflation should continue climbing higher on the back of resilient domestic demand.
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