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Asia

'Asian tiger' Indonesia treads warily

Indonesia has shown steady growth in recent years, with a rapidly expanding middle class that has an increasing hunger for consumer goods. However, experts warn there are traps for this Asian tiger to avoid.

Conny Wiguna is very excited. She is waiting for a Chanel Flap bag worth 3,000 euros (3,970 US dollars), which she ordered from a shop at a luxury mall in Jakarta.

"The original price is only about 2,300 euros, but I have no time to go shopping abroad - I am too busy with my business. Collecting bags is my hobby," says the 43-year-old. In her closet, she has more than 60 expensive handbags; several of them made by Western brands such as Prada and Louis Vitton.

Conny is one of Indonesia's burgeoning middle class - a growing section of society that is pushing personal consumption to new levels.

Indonesian Finance Minister Muhammad Chatib Basri believes the birth of this new middle class is the main motor of economic growth. He points to research by the McKinsey Institute, which projects that the number of people who could be deemed part of the "global consumer class" is set to more than treble over the next two decades. By 2025 alone, Chatib Basri anticipates there could be some 135 million consumers able to spend more than 10 US dollars per day.

general view shows a A group of buildings seen from a street in Indonesia's capital city (Photo: BAY ISMOYO/AFP/Getty Images)

Despite relentless growth, a huge gap remains between Indonesia's rich and poor

"The figure of 135 million consumers is higher than the combined consumer base of Malaysia plus Singapore and Australia," said Chatib Basri.

The statistics shows the power of this new class. Sales of other luxury goods, ranging from smartphones to luxury cars, continue to increase. BMW achieved a sales record of 41 percent growth in Indonesia last year.

Clouds on horizon

Chatib Basri's optimism is strengthened by the predictions of various international research organizations and think tanks. In the last two years, economic research institutions have predicted that Indonesia will break into the top ten of the world's economic powers by 2030. The McKinsey Global Institute estimates that, by 2030, the size of Indonesia's economy could surpass that of even Germany.

However, there are some clouds on the horizon. The economy has this year been faced with slowing growth and high inflation, as well as a plunge in the value of the Indonesian rupiah on currency markets.

The World Bank forecasts that economic growth for 2013 will be 5.9 percent, below previous projections of 6.2 percent. However, many economists still have faith in Indonesia's underlying economic strength.

In addition to the presence of the new middle class, Indonesia's economic strength is also supported by demographic factors. The country's employment-to-population ratio now stands at more than 60 percent.

A worker prepares bundles of rupiah bank notes in Bank Mandiri in Jakarta in this July 9, 2013 file photo. Indonesia's annual inflation rate surged to 8.61 percent in July, the fastest pace in 4-1/2 years, due to much higher transport costs after fuel prices were hiked an average of 33 percent in late June, the statistics bureau said on August 1, 2013. REUTERS/Supri/Files (INDONESIA - Tags: BUSINESS) A general view shows a group of buildings seen from a street in Indonesia's capital city on June 29, 2012. The World Bank announced it was ready to provide Indonesia with a $2 billion loan, a backstop against any future financial shocks in one of Asia's fastest growing economies. AFP PHOTO / Bay ISMOYO (Photo credit should read BAY ISMOYO/AFP/Getty Images)

The Indonesian rupiah has fallen considerably in value

"Compared with people of an unproductive age, the working-age population in Indonesia is growing. Besides that, debt management is quite good and the financial sector is healthy as well," said Haryo Aswicahyono, an economist at the centre for Strategic and International Studies.

Fuel subsidy acts as brake

But Aswicahyono warns that there are several issues which could become stumbling blocks for Indonesia. Among of them is the burden of fuel subsidies. Indonesia's fuel subsidy bill is one of the highest in the world. After months of political haggling, the government announced cuts in fuel subsidies in June 2013, causing petrol prices to rise by over 40 and diesel by over 20 percent. Even after these reductions, fuel subsidies still cost the public purse 21 billion US dollars.

Aswicahyono claims that the fuel subsidies have caused rising public debt, and the decline in the rupiah's exchange rate.

Fuel subsidies are unjust, says economist, Ari Perdana, who works for the National Team for Accelerating Poverty Reduction TNP2K. "Richer people who consume more fuel enjoy greater allocations of subsidies," said Perdana. "Meanwhile the gap between rich and poor is growing."

Indonesian President Susilo Bambang Yudhoyono (Photo:Daniel Hartley-Allen, Pool/AP/dapd)

Voters will next year decide on a successor to President Yudhoyono

The number of rich people in Indonesia is amongst the highest in the world. Currently there are more than 100,000 people who are worth more than one million dollars. Ironically, a 2012 World Bank study notes that one of four Indonesians is living below the poverty line, or earning less than 30 dollars per month.

Political jitters

Senior economist Pande Raja Silalahi mentions that one of the biggest barriers to the Indonesia economy is political. A general election is due in 2014. Politicians are tending to focus on populist issues rather than effective regulation, with a negative impact on the economy. "There are many political pressures to design and implement populist policies rather than improve economic efficiency," said Pande Raja Silalahi.

There is some level of political uncertainty ahead of presidential and legislative elections in 2014, with investors exhibiting a "wait-and-see" attitude. President Susilo Bambang Yudhoyono's center-right Democratic Party faces a tough time, having been hit by a series of scandals.

Likewise, Conny is hesitant to expand her business until then. "I will wait for the results of election first," she said.

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