Up and coming economies in Asia - Indonesia

02 January 2019

As Southeast Asia’s largest economy, Indonesia is on a path of promising growth, but will its weakening currency be too much of a problem for the up-and-coming economy?


Source: AXCO

Indonesia experienced a strong economic growth in 2017 where it grew by 5.1%, its highest GDP growth rate in four years. Its growth was driven by higher domestic demand, stronger investments and net exports, recovery in commodity prices and public expenditures.

Total government spending in 2017 grew fastest in the past three years, wherein capital expenditures increased by 18%. Over the last two years, the Indonesian government slashed many subsidies that were unproductive, which increased its infrastructure development fund. In 2017, the economy’s GDP crossed USD 1 trillion, thereby making it a new entrant as a trillion-dollar economy. It is the first country in both Organization of Islamic Cooperation (OIC) and Association of South East Nations (ASEAN) to achieve such status.

However, its currency woes are causing much concern. The Indonesian rupiah reached its lowest value since the 1998 Asian Financial Crash, at almost 14,930 per US dollar, opening the reigning political party to its rivals’ criticisms in this front. Experts, however, are not too worried: the country’s strong fundamentals and robust macro-fiscal management are proving to maintain a net capital inflow as investors remain attracted to ASEAN’s largest economy.

Under President Joko Widodo’s leadership, Indonesia’s sovereign bonds reached investment grade ratings and its debt-to-equity ratio sits at 29%—comparing favourably to Thailand’s 42% and Malaysia’s 54%. Since 1997, Indonesia has sustained a GDP growth rate of 4.2% per annum, making it only behind Turkey, India and China within G20 major economies. The government has maintained good relationships with both China and the US and has also liberalised various central and state regulations to allow foreign investments in the country. With such developments, experts believe that Indonesia should be an appropriate candidate to be included in BRICS.

The overall insurance premiums in Indonesia increased at a compounded annual growth rate (CAGR) of 4.9% from 2013–2017. Currently, the country remains an attractive destination for foreign insurers due to an increasingly affluent population and low insurance penetration levels. As a national level coverage, both the insurers and government are evaluating the feasibility of introducing a new fish farm insurance cover. The non-life insurance sector is predicted to grow by at least 5% in 2018. Currently, the Indonesian government is working to develop mandatory motor third party liability business, natural disaster insurance and insurance of state property. These products would increase the need for reinsurance and hence the reinsurance industry is expected to grow by more than 10% in 2018. As per EY, the insurance market is expected to grow by 16% CAGR from 2015–2020.

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