Indonesia is well placed to share in the most significant theme shaping the world economy: the shift in the balance of economic and financial power from the West to the East. The countries that succeed in this shift will fit into one of three categories.
They will have the financial resources, such as China or, say, Qatar. They will have natural resources, including water, energy and commodities and will include the likes of Brazil, Canada, and many countries across Africa.
The third group will be those that have the ability to adapt and change and, in my view, will include the US and the UK.
Indonesia is likely to be fortunate enough to span two of these three groups. It has the ability to continue to adapt and change and, in the process, attract sufficient investment to develop its natural resources.
Whilst this is the longer-term shift, the world economy in 2010 will also be shaped by two more immediate factors: the impact of debt and deleveraging in the West; and exit strategies following the huge policy stimulus unveiled over the last year.
Thus the outcome in 2010 depends on the interaction between the fundamentals, policy and confidence. Of these, confidence is the hardest to call. It may well turn out more positive.
There is much speculation as to whether it will be a U, V or W shaped recovery. In the West it may well be a U or an L, but across Asia the fundamentals look better and it may be a V as economies recover more strongly than those in the West.
Whatever the likely shape, an important point is often overlooked and that is that levels matter. Picture any room.
Two years ago the world economy was on the ceiling. Last March it was on the floor. Now, it is at the level of a table thanks to a sizeable, synchronized and successful global policy stimulus.
In terms of levels, we are better than we were but some way off the previous peak.
The world economy is US$61 trillion in size, with the $14.4 trillion, Japan $4.7 trillion and China $4.4 trillion. The ten economies of ASEAN are $1.5 trillion, bigger than India’s $1.2 trillion. Within this Indonesia is $512 billion.
The West accounts for two-thirds of the world economy. If the West is not booming the world will not boom. And there is no way the West is going to boom.
The old model is broke where savings would flow “uphill” from Asia and the Middle East to fuel debt-binges in the West. Change is inevitable. The US consumer faces sluggish wages, high unemployment, house prices well off their peak and worries about pensions and will no longer drive the world economy. As a result, it will be a modest recovery with the big worries in 2010 being what will happen when the policy stimulus wears off?
I expect 2010 to show a gradual recovery, highlighting that recessions end, policy works but there is a price to be paid. Expect the world economy to grow 2.7 percent in 2010, after contracting 1.9 percent fall in 2009.
Within this, the strongest growth rates will be seen across emerging economies, particularly Asia, Africa and the Middle East. Expect Indonesia to grow 5.5 percent after 4.4 percent in 2009.
The likely future pace and scale of change, and the catch up potential is huge for economies such as Indonesia and others across the emerging world. Moreover, Western firms and savers are continuing to look to invest in these faster growing, lower cost economies. China may grow 10 percent and India 7.5 percent in the year ahead.
Indonesia has been a particularly strong performer through the global recession. The economy’s resilience can be explained by three factors - its domestically driven nature, the policy stimulus seen in many areas including infrastructure spending and its previous ability to benefit from its rich commodities.
The key among these was the domestically driven nature of the economy highlighted by its low dependence on exports, which partially insulated it from the global turmoil.
Expect private consumption to remain resilient in 2010. Although interest rates will rise they will still be relatively low. Wage and consumer credit growth should be solid and employment will increase.
Indonesia should also enjoy a rising trade and current account surplus. Import bills may rise but so too should receipts from commodity exports. The country still looks well placed given Asia’s resource needs.
The rupiah should rally in this.
Finally the big challenge: that is for Indonesians to seize the opportunities thrown up by the global economic turmoil. Indonesia is a key member of the G20 which has been tasked with reshaping the global financial landscape.
Having cemented its status as the world’s third-largest democracy, it now must capitalize on its hard-earned political stability and international influence to attract foreign investments.
This would require implementing the economic reforms that the government has promised. Indonesia will then be well on its way to securing its place in the emerging world order.
Dr. Gerard Lyons is Chief Economist at Standard Chartered Bank.
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