Indonesia Ready to Join the Rising Powers Club

JAKARTA - Indonesia, an emerging market, is becoming one of the world's top performers.

Morgan Stanley recently suggested the country could be included among the likes of Brazil, Russia, India and China, which together make up the BRIC group of fast-growing economies in the developing world. And nobody really disagreed.

Whether BRIC will become BRICI anytime soon is yet to be seen. But the fact is that Indonesia has maneuvered through the economic crisis with a deftness unmatched elsewhere in the region - and the international community has noticed.

It has a relatively healthy economy, with a growth rate of just under 5 percent, far higher than anyone predicted considering the state of the world economy. That economic growth, coupled with Indonesia's remarkably stable democracy, bodes well for the world's fourth most-populous country.

This week, Indonesia will hold its second-ever direct presidential elections. In all likelihood they will be peaceful, and President Susilo Bambang Yudhoyono, the market-friendly reformer, will be re-elected. This stands in stark contrast to the political upheaval elsewhere in Southeast Asia, particularly in Thailand and Malaysia.

It's an impressive feat for a country that just 10 years ago was the major victim of a debilitating banking crisis and was embroiled in a revolution that saw four presidents in four years.

Now, Indonesia is the third-fastest growing economy in the region, behind India and China. In dollar terms, Jakarta's main stock index is up more than 72 percent since March, and up 67 percent year-to-date.

Yudhoyono's reformist agenda is often credited with this jump in fortunes, and it is his current minister of finance, Sri Mulyani, who set the ball rolling.

"I think we will come out of this crisis with a better perception of our economic strength from abroad," Mulyani said in an interview with GlobalPost. "Our role in the G20 put the country on the spot. And our role within ASEAN, as the biggest economy in Southeast Asia, which makes us the de facto leader, has elevated our international role."

A lot has been said about the importance of foreign investment here. Mulyani quickly revamped the tax and customs offices to help attract more investment. Other major reforms are in the works.

But it is the strength of the country's domestic markets that carried it through the worst of the crisis. When the world's economies collapsed and international investors pulled out of Asia late last year, Indonesia did not go into a tailspin - unlike, say, Singapore, which is almost wholly dependent on foreign investment.

Foreign direct investment accounts for only about 25 percent of gross domestic product here. And so it's the country's 240 million consumers who are driving the economy.

Bank Indonesia, which dramatically raised rates last year to fight inflation, has since continuously slashed them. Analysts believe there will be more cuts as inflation eases. Rates could be cut to less than 6 percent within months, bolstering even further the all-important domestic consumption.

In a twist of fate, it is the nation's status as still developing that is contributing to its success. Half of the population lives on less than $2 a day and only a tiny sliver could be considered wealthy. As a result, Mulyani's tax breaks - the central part of her $6 billion stimulus plan passed in December - quickly moved from people's pockets back into the market.

Chatib Basri, an Indonesian economist and adviser to the president, said the country's young population also helped.

"These factors mean cash moves very quickly through the Indonesian economy. Poorer Indonesians don't stow their money away; neither do young people. So the large tax breaks offered by the finance ministry helped a great deal to prop up the economy during this crisis," he said.

In another important move, the country offered its first-ever Islamic bond sale in April, raising $650 million and attracting almost $4 billion in bids, further strengthening government reserves.

Despite being the world's largest Muslim-majority country, Indonesia had always lagged far behind Malaysia and the Middle East in the Islamic finance market. But not for long, according to Mulyani.

Islamic finance is governed by a series of Islamic laws - such as the prohibition on paying interest, gambling with derivatives and investing in industries considered haram, such as pornography and pork. It is a sector that's growing more than 10 percent annually.

"I think the potential is very big. Certainly we see that linking with Malaysia and the Middle East is very important," Mulyani said. "And especially with our very successful Islamic bonds issuance earlier this year gives us a lot of confidence. It presented us as potentially one of the major players in the world in terms of Islamic finance."

Going into the crisis, Indonesia suffered more from negative perceptions than it did from struggling fundamentals. Now, as the country emerges from the crisis, it is bringing with it a new reputation.

"There is still a lot to do to support this reputation. But the recognition is there from the international community and it will help create more energy and more momentum for even stronger changes," Mulyani said.