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World economies

INDONESIA has the largest economy in Southeast Asia. After contracting 13pc during the 1997-98 Asian financial crash, the consumption-driven and resource-rich economy registered uninterrupted growth for 13 years, even during the global financial crisis, surging an average 6.3pc annually since 2010.

Last year, when its GDP hit $846bn and foreign direct investment jumped 26pc to a record $23bn, Indonesia became the 16th biggest economy.

Consulting firm McKinsey’s recent report reveals that about 90m Indonesian will join the middle classes by 2030, a major increase from an estimated 40m in 2010. The country could become the world’s 7th-largest economy, overtaking Germany and the UK by 2030. To achieve 2030 goal, the McKinsey estimates that the country has to boost productivity growth to 4.6pc a year, 60pc higher than it has been during the past decade.




The economy continues to stay on a sound growth track. registering growth close to 5pc last year. In 2015, it was 4.8pc. Though still ahead of the global average, this marks the country’s slowest rate of expansion in more than five years.

Efforts to spur growth in 2015 through higher spending and major infrastructure projects produced mixed results in a year dominated by weaker commodity prices.

Last year’s growth was respectable for a commodity exporting country but was not enough to absorb 3m youth entering the work-force and reverse the recent trend of slower poverty reduction. If the government carries on with its attempts to start stalled infrastructure projects, increasing public outlays will provide stimulus to investment.

In 2016, the economy lost some steam in the first-quarter. However, recent data suggest that economic activity picked up towards the end of second-quarter, expanding by 5.18pc, on year-on-year basis compared to a downwardly revised 4.91pc growth in the previous quarter.

The second-quarter growth was the strongest since 2013 fourth-quarter, driven by a faster increase in private consumption and government spending while investment eased and exports fell at a slower pace. Thus in the first-half of 2016, the economy grew by 5.04pc, faster than a 4.70pc expansion in the same period a year earlier.

The government stimulus, loose monetary policy and falling inflation will help shore up growth. For full-year, the central bank has trimmed growth to 5pc, below the government’s 5.2pc target.

The economy continues to face a number of headwinds. Drag on the economy will come in the form of low commodity prices, which despite their rebound since the start of the year, remain depressed by historical standards.

With lower prices hitting government revenues hard, the fiscal policy will need to be tightened as the government tries to balance the books. Indonesia’s 2016 budget deficit reached 1.83pc of GDP in the first-half, compared with the full-year target of 2.35pc.

Vietnam

VIETNAM is a development success story. Political and economic reforms launched in 1986 have transformed the country from one of the poorest in the world, with per capita income around $100, to lower middle income status within a quarter of a century with per-capita income of around $2,100 by end-2015.

Vietnam’s per-capita GDP growth has been among the fastest in the world, averaging 5.5pc a year since 1990, and 6.4pc per-year in the 2000s. Its economy continued to strengthen in 2015, with estimated GDP growth rate of 6.7pc for the whole year.

Social outcomes have improved dramatically across the board. The fraction of people living in extreme poverty dropped from more than 50pc in the early 1990s to 3pc currently. Concerns about poverty are now focused on the 15pc of the population who are members of ethnic minority groups, but account for more than half the poor.

Not only are incomes higher, but the Vietnamese people are better educated and have a higher life expectancy than most countries with a similar per-capita income.

Vietnam will continue to push economic reforms over the next four years by improving the efficiency of public investment, facilitating banking restructure through mergers and acquisitions of weak commercial banks and quickening state firms’ privatisation, as approved by the Prime Minister.

Vietnam’s economy is forecast to expand 6.7pc in 2016, the same pace as in 2015, fuelled by manufacturing and record foreign investment. The government is targeting a growth of 6.8pc for 2017, up slightly from 6.7pc expected this year through higher labour productivity and competitive capacity.

As an emerging economy, Vietnam has struggled to keep its trade deficit under control and expects to keep it below 5pc in 2017. Over the last five years, Vietnam’s exports have more than doubled as cheap labour and low-cost infrastructure have drawn foreign direct investment into the manufacturing sector.

Last-year Vietnam’s exports soared to $162bn from $72.24bn in 2010. But Vietnam reported a trade deficit of $3.2bn after three consecutive years of surplus.

The country’s policymakers have set a target of increasing its annual export by 8-10pc in 2017. The government has also unveiled plans to stop inflation from rising above 5pc, keeping the growing budget deficit under control by raising revenues and reining on public spending.

Meanwhile, revenues from oil are expected to account for only 4pc of 2017 total budget revenue as slumping crude oil prices take their toll. Government statistics show that crude-related revenue, which made up 30pc of the nation’s budget in 2005, fell to 20pc in 2010 and accounted for about 10pc in 2015.

In the second-quarter, GDP expanded 5.6pc over the same period of the previous-year.

The slightly stronger second-quarter growth was supported by acceleration in the industrial and services sectors as well as a less pronounced decline in the agricultural sector.

Published in Dawn, Business & Finance weekly, August 15th, 2016

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