Looking For Trouble in Indonesia
    Category: Column By : Eric Lascelles Read : 1026 Date : Tuesday, April 16, 2013 - 14:31:11

    I was recently in Jakarta to speak at an economic summit on the potential threats to Indonesia's economy. This proved to be a surprisingly difficult exercise, as Indonesia has done much to shield itself from trouble. To its considerable credit, Indonesia has managed a remarkable combination of smooth yet rapid economic growth for several years, regularly outpacing its neighbors.

    Indonesia has nimbly deflected any number of threats over the past 15 years. The global crisis of 2008 was little more than a blip, despite a drop-off in global demand and commodity prices. A key source of Indonesia's resilience is the flexibility afforded by a rock-bottom public debt load, paired with sizeable foreign exchange reserves. Each is the product of 15 years of fiscal discipline.

    A second source of stability is the diversity of Indonesia's economy. The nation's generous endowment of natural resources and substantial manufacturing sector provide important offsets to one another. A large consumer base provides a more generalized anchor of stability. Finally, Indonesia's relatively small trade orientation offers insulation against foreign shocks.

    Of course, Indonesia has taken some hard lumps. The 1996 Asian financial crisis still looms large in the country's psyche, and avoiding a repeat of this experience demands constant vigilance. The margin for error is particularly small at a time when the global economy is suffering a tepid recovery. As such, it is useful to evaluate what could go wrong.

    Some threats emanate from outside the country. Take the possibility of a sharp decline in commodity prices. Despite the consolation prize of a suddenly affordable energy subsidies, Indonesia would nonetheless reel if the lower commodity prices persisted for an extended period. A disproportionate share of growth over the past several years has been on the wings of rising commodity prices. Indonesia could easily find itself growing at just 4% per year instead of the customary 6% if conditions worsen.



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