The country faces strong growth thanks to a domestic market makeover by president Yudhoyono, which puts it in a good position to deal with the global downturn.
Indonesia's economy looking good
JAKARTA // Yulia Astuti runs a chain of beauty salons in Jakarta that cater especially for Muslims, and in most of her branches, women are flocking in for a makeover. "I haven't made any special research on how the economy is specifically affecting our business, but based on the facts, business has grown and the turnover in most of our outlets is getting bigger," Ms Astuti said.
Indonesia's strong domestic market has put it in a good position to deal with the global downturn, as shown by the growing clientele at Ms Astuti's salons. Her main challenge is not to do with turnover; it is more to do with cultural issues regarding working in a beauty salon. She sometimes struggles to find staff, as sometimes the profession is looked down upon. For the future, Ms Astuti is examining the possibility of setting up a chain of beauty academies.
"We are very optimistic, this kind of business will keep on growing, and we have learned the needs of Muslim women for beauty-related services. There have not been many players either, while the market in Indonesia remains very big," she said. Indonesia is the fourth most-populous nation in the world, with 226 million people, and about 85 per cent of the population follows Islam, making it the world's most-populous Muslim country.
Fauzi Ichsan, a senior economist at Standard Chartered Bank in Jakarta, said the strength of Indonesia's domestic market had done much to help it weather the recessionary storm. The importance of the domestic market was recognised by Susilo Bambang Yudhoyono, the president of Indonesia, in a speech last month. "In future, we must strengthen our domestic economy, our domestic market and not just depend on strong exports as the source of our economic development," he said.
"Because of this, an export-oriented economic strategy is clearly not our choice." Mr Yudhoyono, 59, won a landslide victory in July and starts a new term in office in October. He is a popular leader and his reformist credentials have done much to boost Indonesia's standing internationally. However, corruption, widespread poverty and a reputation for red tape means it has not benefited from inward investment in the way that countries such as China and India have done.
Indonesia is a big exporter of commodities such as rubber, nickel, coal and gas, but only about 30 per cent of its GDP is based on exports, much less than neighbours such as Thailand and Malaysia, which have suffered more from the global crisis. The government predicts growth of about 4 per cent this year, making it one of the best-performing economies in the region. The rupiah is Asia's best-performing currency this year, and the stock market is also rallying strongly despite the global downturn.
Poverty levels are falling too, to 14.1 per cent in March from 16.7 per cent in 2004, while the jobless level fell to 8.1 per cent in February from 9.9 per cent in 2004, Mr Yudhoyono said in his speech. "We must become a nation that can fulfil our own basic needs. A nation that is not trapped by a burdensome debt. A nation that is not dictated to either politically, economically or militarily by any other country," he said.
This cannot happen by itself, however. Earlier this year, the government announced a 73.3 trillion rupiah (Dh27.14 billion) stimulus package, including spending on infrastructure, to help support national economic growth and kick-start domestic demand as the global slowdown hit exports. "Improving the infrastructure is a major challenge for Indonesia, and accelerated infrastructure development will also boost economic growth," Mr Ichsan said.
However, it is not just a question of turning cash into roads in central Java. Upgrading the country's poor infrastructure network is a problem because of the huge size of the Indonesia archipelago. Many of the regions are strongly autonomous, with knotty layers of bureaucracy, which means planners have to get through a huge number of central and local government agencies. New anti-corruption rules means that many bureaucrats are worried about getting involved in public projects in case they are accused of dipping into the funds.
On top of this, Indonesia has some of the toughest labour laws in the region, and buying up land for infrastructure projects is a fraught process. The economy has managed to stay on course despite incidents that could have badly dented sentiment, particularly the near-simultaneous suicide bombings on Jakarta's JW Marriott and Ritz-Carlton hotels, which killed nine people and wounded 53 in July. The bombings came after four years of relative calm in Indonesia.
The rupiah fell the most in three weeks and stocks dropped after the bombings, but the basic trend remains intact. "There is no reason why Jakarta's reputation internationally should suffer. After all, people still go to New York, London and Madrid after al Qa'eda struck there," Mr Ichsan said. Erry Riyana Hardjapamekas, who was involved in setting up Indonesia's Corruption Eradication Commission (KPK), and works with the international anti-corruption watchdog Transparency International, believes the main challenges the economy faces are governance, entrepreneurship, infrastructure and law enforcement.
"Governance is a function of how serious and how sustainable the commitment and real actions of Indonesian authorities in eradicating corruption, using both repressive and preventive measures, as well as introducing the many remaining reforms which have to be done," Mr Hardjapamekas said. The president recognised this in his speech. "Efforts to develop good governance and eradicate corruption must continue to be increased. We expect that the law and justice will continue to be upheld, so that corruption, collusion and nepotism continue to be eradicated. We will strive to create a nation of good governance," he said.