Indonesia is on the way back to its usual growth path
Indonesia's economy will grow by 4.5 percent in real terms in 2022, according to the latest forecast from the International Monetary Fund's (IMF) World Economic Outlook in April. In the following year it should even be 6 percent. The World Bank is more optimistic and already forecasts between 4.6 percent and 5.1 percent for 2022.
Industrial production is largely back to normal, people are back in the office and restrictions on public life are minimal. Still, the crisis has left its mark: millions of people have fallen into poverty, and millions more have not made the leap out of poverty that normal economic development would have promised.
Debt has increased significantly, and the state budget foresees a deficit well above the normally applicable three percent limit for the third time in a row in 2022. The large state-owned companies had to go into debt and can no longer manage many of the planned investments. Major infrastructure projects designed to improve people's mobility and facilitate the movement of goods are likely to be delayed or fall by the wayside.
In addition to infrastructure projects, numerous large-scale industrial projects are also planned for the coming years. For example, the construction of numerous ore smelters in the east of the country, a huge industrial park in North Kalimantan, a large chemical plant on the west coast of Java, coal gasification plants on Sumatra and several refineries. In addition, electromobility is to be promoted with the help of state support in order to become less dependent on oil imports.
Investment: reform of investment and labor law
But Indonesia not only needs large-scale industry. Above all, the country needs more labor-intensive manufacturing to bring the countless people in the informal sector into regular employment and imparts technical skills. The investment environment has so far been unfavorable. That should change. In October 2020, Parliament passed the so-called omnibus law - the largest reform project in recent decades. It includes the reform of investment law and labor law.
Hundreds of economic sectors have been opened up to foreign ownership. Tax incentives are designed to direct funds into export production. Companies can now act more flexibly on the labor market because protection against dismissal and severance pay rules have been relaxed and minimum wages have been curbed. Specialist lawyers rate the reform as a big step, even if the archipelago does not yet reach the attractiveness of Thailand or Malaysia. It remains to be seen whether the reform will actually bear fruit. Foreign business people have only been able to travel to the country again since spring 2022.
Commercial law firms are reporting that foreign companies are showing increased interest in Indonesia, especially in the area of easier sales. There are also new candidates for the settlement of production companies. The dissatisfaction of many foreign companies in China, of which the archipelago wants to offer a new home, promises further potential.
Consumption: Consumers are cautious
Private consumption will play a key role in the recovery. It contributes more than 50 percent to gross domestic product (GDP) and is therefore an indispensable pillar of the economy. After 20 uninterrupted years of economic prosperity, consumers were optimistic until the corona crisis.
In the Corona year 2020, private consumer spending collapsed by 2.6 percent and thus more than the economy as a whole. The recovery has been rather sluggish: the increase in consumption of 2 percent in 2021 lagged well behind the overall growth of 3.7 percent. Many larger purchases that are financed by loans are likely to be postponed into the future.
Foreign trade: 2022 new records in imports and exports in sight
Indonesia's foreign trade shrank by just 10 percent in 2020, but record foreign trade is on the books for 2021: imports and exports each increased by almost 40 percent. The reason for this was the high world market prices for raw materials. With the two main export goods of coal and palm oil, revenues that could never be achieved before were seen. In the first three months of 2022 there is a further increase compared to the same period last year by more than 30 percent.
German deliveries of goods to Indonesia in 2021 could not make up for the losses of the previous year. Corona vaccines accounted for a quarter of the increase. Germany's share of the island nation's imports fell to a new low of 1.6 percent, while China's share rose to a record 28.7 percent. For almost all larger product groups outside the automotive industry, China remains by far the most important supplier of goods.