RI has work cut out to catch China, India

Urip Hudiono, The Jakarta Post, Jakarta

Indonesia is on the right track to once again becoming one of Asia's fastest growing economies, but still has a lot to do if it wants to rival China and India, say analysts from UBS AG.

According to UBS, Indonesia should promote exports and investment based on its comparative advantages in natural resources, complementing the needs of Chinese and Indian industry, while at the same time gradually building up its own industrial base.

UBS senior economist for Southeast Asia Philip Wyatt said Indonesia had lately been experiencing more favorable macroeconomic conditions, particularly as regards inflation, and the savings and investment ratios.

"But Indonesia must remember it is trying to catch up with fast-moving giants, so it must do more," Wyatt said during an investor forum organized by the Swiss-based investment bank Wednesday.

While Indonesia had managed to reduce inflation and its key interest rate recently, Wyatt pointed out that inflation in China and India was running at 5 percent at the most. In Indonesia, however, the government was predicting inflation of around 6 percent and a central bank key rate of 8.5 percent for this year.

In fact, Indonesia has just emerged from a recent inflationary spike. By comparison, both China and India have more stable inflation records. This is significant bearing in mind that inflation expectations affect the personal savings and investment ratios -- respectively, the proportion of income being saved, and that being used for more growth-spurring investment and consumption.

China and India have personal savings ratios of between 0.5 and 0.4, and investment ratios of between 0.4 and 0.3, while Indonesia is stuck at 0.3 and 0.25, respectively.

Despite the bad news, Wyatt said Indonesia did have a number of trump cards up its sleeve.

With vast supplies of commodities, such as natural gas, coal, metals, rubber and crude palm oil, Indonesia has been enjoying growing exports on healthy global demand and prices, and is already a main raw materials supplier to both Chinese and Indian industry.

Indonesia is the second largest coal supplier to China after Vietnam, while India's Tata Group recently invested in a local coal mining firm to secure supplies for its steel mills.

Compared with China and India, Indonesia also has a higher external trade ratio -- the comparison between the volume of exported goods and that supplied to the domestic market. But UBS noted that structural rigidities, such as those in the labor, fiscal and investment fields, were hampering export growth and needed to be addressed.

UBS chief economist for Asia Jonathan Anderson said almost all countries in the region would feel the heat from China as an exporter of low-end manufactured goods. Accordingly, Indonesia needed to focus more on its agricultural sector, and develop added-value exports.

He said 7 or 8 percent growth would be feasible if Indonesia took such a path, which would enable the country to develop resources-based, labor intensive industries. However, in order to do so, proper supporting policies would first need to be put in place.