Indonesia's economy flourishing; 1997 financial crisis a distant memory

While it is largely ignored by the West, Indonesia is a huge, teeming nation of thousands of islands and 250-million people. The country's economy -- the biggest in Southeast Asia -- was largely untouched by the recent global financial crisis, due to its tremendous domestic consumption (accounting for about 60 percent of GDP) and rich commodity sector.

The benchmark Jakarta Composite Index has climbed more than 20 percent year-to-date, while the rupiah currency has risen almost 5 percent on the U.S. dollar. According to the Investment Coordinating Board the country attracted $3.7-billion in foreign direct investment in the second quarter, a 51 percent improvement from a year-ago. Indonesia is expected to lure more foreign funds this year than the $14.9-billion it received in 2008.

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Moreover, China has an insatiable appetite for Indonesia's treasure of natural resources, including palm oil, copper and timber.

However, despite all the sparkling economic data, Indonesia remains a poor country with serious problems and risks.

"There are still challenges to overcome: infrastructure woes, the country’s widespread poverty and a lacking governmental system of checks and balances, " said Taizo Ishida, portfolio manager at Matthews International Capital Management, who recently visited Indonesia.

Few infrastructure projects have been built since the 1997-1998 Asian financial crisis, and the educational system needs an overhaul. There are also political dangers with separatist groups and Islamic fundamentalists.

Indeed, Indonesia suffered mightily during the crisis, when the economy came to the edge of collapse.

"[Indonesia's] real GDP contracted 13.7 percent and its currency plummeted to one-seventh its previous value almost overnight during [that] crisis," Ishida stated.

However, the country then embarked on an astonishingly peaceful transition from dictatorship to quasi-democracy. In 1998, President Suharto resigned after 32 years, and the military's domination of national affairs gradually subsided, leading ultimately to the July 2009 landslide election triumph of President Susilo Bambang Yudhoyono, who has instituted many reforms.

"Indonesia's inhabitants now seem generally more united and enjoy a political stability that was missing for a long time, and the country appears to be 'back in business' with good support from its population," Ishida added. "This gives me confidence in the future of [Indonesia]."

Sukhy Ubhi, international economist at Capital Economics in London, believes Indonesia’s rapid economic growth will be sustained.

"We expect continued strong growth in coming quarters, led by domestic private sector demand," he said.
"We maintain our forecast that monetary tightening will begin in the fourth quarter and that the rupiah [currency] is likely to strengthen further. Indonesia’s relatively low reliance on external demand means that it should be largely unaffected by the slowdown in global growth that we envisage."

Ubhi expects Indonesia's economy to grow by 6.0 percent this year and 6.2 percent in 2011.

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