Indonesia needs a more diversified economy, more FDI and needs to tackle endemic corruption, an official in U.S. Congress told Borderless.
Indonesia breathed a sigh of relief on Wednesday when the U.S. Fed decided to continue pumping massive amounts of cash into the economic system.
The program of buying $85 billion in bonds each month has caused foreign investment in Indonesia’s markets to skyrocket. But experts said the trend could have negative consequences down the road, as markets could suddenly sink if the U.S. pulls the plug on its money machine, and Barclays predicts the Fed could cut the flow of cash by $15 billion starting in December.
Officials and economists told Borderless that Indonesia cannot depend on excess cash forever, and is badly in need of reforms if it expects to fuel growth in the long run.
Why is this important now more than ever?
Because with a falling rupiah, flagging growth and declining investor confidence, there is concern about Indonesia’s economic woes in the lead-up to the 2015 launch of the ASEAN Economic Community.
Past crises have shown how economic and financial problems can spread quickly, and that has raised eyebrows.
“While the Fed’s decision (Wednesday) to maintain its current policy will buy extra time for emerging markets, the Indonesian economy suffers from structural deficiencies that must be addressed in order to fuel real long-term growth,” an official in U.S. Congress told Borderless on condition of anonymity.
“In terms of joining the ASEAN Economic Community, the government must tackle the scourge of corruption that is endemic in almost every sector of the economy,” the official said.
Furthermore, with 60 percent of the economy fueled by domestic consumption, the country has to do more to attract additional foreign direct investment into the country. After all, if the main goal of the AEC is to form a more competitive single market, structural deficiencies must be addressed, the official added.
Indonesia’s domestic economy also needs to be more diversified. Without FDI, Indonesia will have a hard time moving up the value chain. FDI brings in not only monetary investment – and thus jobs – but also technology transfer and best practices, the official said.
“There’s a public perception that Indonesia doesn’t need FDI, since their economy is so driven by domestic consumption,” the official said. “Going into next year’s elections, talk of trade is unpopular but most of the country’s business and policy elites know they need reforms.”
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