The Economic Struggles of the World's Fourth-Largest Country

Despite being the world’s fourth-most-populous country with a population of 252 million, Indonesia is often overlooked as one of the world’s largest emerging markets.  Moreover, despite a recent run of strong economic growth, Indonesia has failed to attract the levels of foreign investment, or develop the extensive trade ties, that many other large emerging markets have been able to do.  Now, Indonesia is facing another challenge as its economy has slowed significantly in recent months, threatening to bring an end to what had been a period of strong and steady growth for the world’s forgotten giant emerging market.

In the first quarter of this year, Indonesia’s economic growth rate fell to 4.7% on a year-on-year basis, the lowest rate of economic growth in Indonesia since 2009.  The key factor in this slowdown was the fact that export demand continued to weaken in the early part of 2015, as demand growth rates in key export markets such as China and Japan remained sluggish.  Moreover, the prices of many of Indonesia’s key natural resource exports continued to fall in recent months, further dampening export growth.  Meanwhile, this downturn in exports is beginning to weigh on domestic demand, which has been growing at a very healthy pace in recent years as a larger middle class began to emerge in Indonesia.

Looking ahead, the remainder of 2015 is likely to prove to be a challenge for what has been one of the world’s most successful emerging markets in recent years.  First, export demand is forecast to remain relatively weak over the course of this year as China’s economy slows and other key export markets record slightly lower rates of growth.  Second, natural resource prices are unlikely to rise significantly in the coming months due to this slowdown in China and the fact that demand levels in many other key markets remain weak.  Finally, Indonesia’s expanding domestic market is likely to suffer as a result of the sharp depreciation of the country’s currency, the rupiah, in recent months as well as a loss in consumer and business confidence.  As a result, Indonesia’s economic slowdown appears set to continue over the remainder of 2015.  

Over the longer-term, we remain optimistic that Indonesia can once again record economic growth rates in excess of 6% per year, provided that political stability can be maintained in Indonesia and the country’s domestic market can return to the high levels of growth recorded in previous years.  For example, major investments in infrastructure and education will help to expand Indonesia’s manufacturing sector and the country’s lower labor costs will attract the types of foreign investment that will help to further diversify the country’s economy and its exports.  Meanwhile, Indonesia’s location at the heart of the world’s fastest growing economic region will prove to be a major benefit over the longer-term, helping Indonesia to avoid the serious downturns that have been witnessed in other large emerging markets such as Brazil and Russia in recent years.