The Development Potential of Indonesia and What It Means to China
Amidst the inflationary pressure, energy crisis, and geopolitical turmoil ravaging the global economy, economies such as Europe, the United States, China, and Japan are all facing variegated issues and challenges, yet one emerging market country, namely Indonesia, has stood out for its economic success in recent years.
Indonesia has finally walked out of the dark shadow of the COVID-19 pandemic back to the growth track. In the second quarter of this year, its economy grew by 5.44% year-on-year, ranking first among major developed economies and emerging market economies, even higher than the average growth rate of G20 countries (5%). The Asian Development Bank (ADB) predicts that Indonesia’s full-year economic growth may reach 5.2% and 5.3% in 2022 and 2023, respectively. In other economic indicators, Indonesia also performed rather well. As of now, its latest inflation data is about 4.7%; the manufacturing purchasing managers’ index (PMI) is 51.7. In the third quarter of this year, the country’s government budget revenue increased by 49% to USD 120 million; its tax revenue up 58% to USD 78 million; while its bank credit rose by 10.7%. Indonesia sees a trade surplus for 28 consecutive months, with the cumulative surplus from July to September amounted to USD 14.79 billion. In terms of exchange rates, against the backdrop of a strong dollar, the Indonesian rupiah has only depreciated about 5.4% against the USD this year, showing a stable overall performance.
Figure: Indonesia’s Economic Growth Rate (in %)
Yet, this is not always the case for Indonesia. Since its independence in the 1940s, Indonesia has experienced turmoil for decades, and its fragile economy has maintained a slow rate of around 2% for a long time. In fact, just over a decade ago, Indonesia was included in the “Fragile 5” list by Morgan Stanley economists, stating that it faced huge pressure from currency depreciation and severe dependence on foreign investment. Hit by the financial crisis, Indonesia braved successive bank paralysis and a plummeting exchange rate and had even changed three Presidents in merely three years in the late 1990s and early 2000s, which did not prevent its economic growth from plummeting.
What then, drove the huge change in the Indonesian economy for the past ten years, enabling it to grow against the trend amid high global prices, volatile exchange rates, and interest rate hikes?
Considering various factors, political stability is the most crucial element in the rise of Indonesia.
The country had a longstanding problem of having a government that lacked regulatory capacity until the incumbent President Joko Widodo took office in 2014. Unlike the previous leaders, the first thing Jokowi, as he is fondly called, did after he was elected was to invite his former political opponents and leaders of other political factions to join the cabinet. One example is Prabowo Subianto, who was previously Jokowi’s presidential election competitor in 2018 and is now the defense minister. This kind of “melting pot” government is uncommon even in the West. Former Singaporean foreign minister George Yeo called it “democracy with Javanese characteristics” and publicly praised it as the reason for Indonesia’s political stability.
Jokowi too is good at listening to the opinions of the public, and often goes to the grassroots to understand the issues. A June poll showed that he is now one of the world’s most popular leaders, with 68.4% of Indonesians approving of his performance. It is extremely rare in a democratic country to have such a high approval rate after eight years in power. Before Jokowi abolished the fuel subsidy, his approval rating was even as high as more than 78%. Some of his supporters have even called for a constitutional amendment to allow him to serve a third term.
With the stable political and social situation and the improvement of government administrative efficiency, Indonesia has not only seen major improvements in its domestic investment but has also continued to attract a large amount of foreign investment. Data shows that in his past eight years in office, Jokowi’s government has presided over the construction of 16 airports, 18 ports, 38 dams, and nearly 2,000 kilometers of highways. By comparison, in the four decades before his presidency, Indonesia had only about 780 kilometers of roads in total. In terms of foreign direct investment, foreign direct investment (FDI) in Indonesia increased by 39.7% year-on-year to IDR 163.2 trillion in the second quarter of 2022, the largest increase in the past 10 years.
Noteworthily, Indonesia’s attractiveness to foreign investment has increased significantly, and this is related to the country’s rich natural resources.
As the largest country in Southeast Asia, Indonesia possesses a huge amount of oil, coal, natural gas, palm oil, forest resources, and some metal deposits. Taking coal as an example, data shows that in 2021, the country’s coal production exceeded the 800 million tons mark for the first time, reaching 804 million tons, an increase of 52.87 million tons or 7% year-on-year; of which, only 165 million tons were used for domestic consumption where the rest were for export.
The advantage of natural resources has given Indonesia a long-term edge over the upstream supply chain. Yet, Indonesia wants to do more. Since Widodo took office, Indonesia has repeatedly restricted the export of mineral raw materials, attracting downstream foreign-funded enterprises to set up factories in Indonesia for smelting and processing with the intention of driving local industrial development and employment growth. In recent years, as nickel metal has been sought after due to the development of the new energy vehicle industry, Indonesia, as a major global producer, has naturally benefited from this. According to data from the United States Geological Survey, as of 2020, the world’s nickel resource reserves are about 94 million tons, of which Indonesia ranks first with about 21 million tons, accounting for 22% of it. In 2020, Indonesia implemented a policy of completely halting the export of nickel ore, which prompted a number of companies including Tesla, LG New Energy, Panasonic, and CATL to set up in Indonesia, and created a smelting industry chain with an annual output of nearly USD 20 billion locally.
Finally, tourism and the digital economy are also the drivers of Indonesia’s future economic growth.
In terms of tourism, prior to the outbreak of the COVID-19 pandemic in 2018, Indonesia received 15.8 million inbound foreign tourists, the tourism industry contributed 6% to its GDP and created about 13 million direct and indirect jobs, equivalent to 10.3% of the total workforce. Although the impact of the pandemic in the past two years was acutely felt, with the strong support and policy stimulus of the Indonesian government, Indonesian tourism sector expects the tourism industry to improve significantly in 2022. In terms of the digital economy, in 2021, the output value of Indonesia’s digital economy was approximately USD 70 billion. According to the e-Conomy SEA 2022 Report, it is expected that by 2025, the total value of Indonesia’s digital economy will reach USD 146 billion, with an annual growth rate expected to reach 20%.
On the whole, as an emerging market country with a population of 262 million (making it the fourth most populous country in the world) and rich in natural resources, once the political and social situation is stable, Indonesia’s development prospects will be significant and can be expected to become the market with the largest growth among ASEAN countries with regional and global influence.
Indonesia will host the G20 summit in November this year, which will bring new opportunities for the country. The G20 meeting will allow Indonesia to showcase its new development image to the world, enhance its economic status, and project itself as a proactive and important emerging player in the international community. For some Chinese analysts who have been to Indonesia recently, seeing the booming Indonesian market and numerous transportation trucks on the highway, this recalls the prosperous scenes of China’s Pearl River Delta region in the 1980s and 1990s during its heyday of opening-up and construction.
Researchers at ANBOUND believe that with its steady growth momentum, Indonesia has become a country that China cannot afford to ignore. China and Indonesia have maintained a relatively close cooperative relationship in recent years. According to data from China’s Ministry of Commerce, as of 2021, China has been Indonesia’s largest trading partner for nine consecutive years. Since 2019, China has also become Indonesia’s second-largest source of foreign investment. Chinese enterprises’ investment in Indonesia covers power, mining, automobile manufacturing, emerging online industries, and the financial sector. In particular, it should be pointed out that the Jakarta-Bandung high-speed railway, which Chinese companies have invested in technology and capital to assist Indonesia to build, is 142 kilometers long. It is expected to be put into trial operation in November this year, becoming the first high-speed railway in Southeast Asia. It is the first Chinese project with the entire system and industry chain implemented overseas. This landmark major infrastructure project is expected to become one of the important symbols of Indonesia’s development achievements in recent years. The investment cooperation between the two countries is expected to deepen in the future.
With increasingly turbulent international geopolitical situations and complicated geo-economic relations, the economic relations of Europe and the United States with China will continue to be in a cold period. As it stands, the U.S. containment of China’s technology and economy will become the norm. Under such circumstances, China needs to locate new external growth space and close economic partners. In recent years, ASEAN has become its largest trading partner where Indonesia’s position in it has become more and more crucial. Considering all these, Indonesia is likely to become an important partner of China in ASEAN in the future. Based on geopolitical and geo-economic risk assessments, researchers at ANBOUND believe that if Indonesia can continue to maintain political stability and economic growth, it may even become a meaningful alternative to India for many Chinese companies.
So long as it maintains political stability, Indonesia, with its rich natural resources and developed tourism, is able to attract continuous growth in foreign investment. Hence, this largest ASEAN country shows vast potential and promising development prospects. Against the backdrop of international geopolitical and geo-economic turmoil, Indonesia is likely to further develop bilateral economic, trade, and investment cooperation with China. An Indonesia with stable politics and stable economic growth deserves the attention of China and Chinese enterprises.
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