New trading era kicks off

Indonesia has much potential but also many challenges

The rupiah may decline by 6.2 per cent against the greenback over the next 12 months, according to a Bloomberg survey.
The rupiah may decline by 6.2 per cent against the greenback over the next 12 months, according to a Bloomberg survey.PHOTO: REUTERS

The establishment of the Asean Economic Community means growth prospects for the new common market of 625 million people have never looked better. Rupali Karekar looks at what 2016 may have in store for five of the biggest economies of the 10-member bloc.

A Cabinet reshuffle, at least five stimulus packages, regulatory reforms and a thoroughly battered rupiah later, Indonesia emerged from 2015 with weak consumer spending and poor gross domestic pro-duct (GDP) growth.

This year will continue to be a challenge to South-east Asia's biggest economy, given falling commodity prices, resistance to reforms, failure to revive infrastructure investment and tighter global monetary conditions, said Bank of America Merrill Lynch analysts.

A weaker currency in the light of interest rate rises in the United States is also a key risk to the economy, which is forecast by the World Bank to grow 5.3 per cent this year.

Indonesia has much to bring to the Asean Economic Community (AEC). More than half of its population of 250 million live in cities and the middle class is projected to double to 80 million by 2020.

But there are concerns that low business investment spending and unskilled workers may make Indonesia only a consumer, instead of an investor, in the AEC.

Indonesia's currency declined the most among Asian emerging markets last year.  The rupiah is tipped to drop 6.2 per cent against the US dollar over the next 12 months, according to a Bloomberg survey.

"Over 2016, investment and government spending... will boost GDP growth figures, but domestic and external headwinds will remain firmly in place, suggesting that near-term economic recovery is on its way, but will be unimpressive," said BMI researcher Raphael Mok.

A version of this article appeared in the print edition of The Straits Times on January 06, 2016, with the headline 'Indonesia has much potential but also many challenges'. Print Edition | Subscribe