Asia Economy

This will be Asia's next trillion-dollar economy

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Indonesia is on track to become Asia's next trillion-dollar economy in two years, according to IHS, joining the ranks of China, Japan, India, Australia and South Korea.

"The Indonesian economy has the capacity for robust long-term economic growth of around 5.4 percent per year over the 2016 to 2020 time horizon," said Rajiv Biswas, chief economist, Asia-Pacific at IHS.

This will take Southeast Asia's largest economy from its current gross domestic product (GDP) of $870 billion to $1.14 trillion by 2017.

Thereafter, GDP is projected to double again by 2023 to an estimated $2.1 trillion – surpassing Australia, which is currently a $1.52 trillion economy.

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"On a global comparison, the Indonesian economy will also be larger than Russia, Spain or the Netherlands in 2023," said Biswas.

Indonesia's economy has proved resilient despite commodity price headwinds and monetary policy tightening thanks to steady domestic consumption, supported by the country's rapidly expanding middle class.

The economy expanded 5 percent in 2015, with growth projected to accelerate in 2015 and 2016, driven by a recovery in exports helped by the lower exchange rate and pickup in government investment, according to the OECD.

Shifting dynamics

Indonesia's economic ascent over the next decade has significant geopolitical implications, said Biswas.

The country will have a far greater voice in international political and economic institutions as a result of its increased economic might, including in the G-20, IMF, World Bank and United Nations, he said.

"The rise of Indonesian GDP will also create rapidly growing bilateral trade and investment opportunities in a wide range of market segments across many industries, including resources, manufacturing and services," he said.

Indonesia's GDP per capita is forecast to rise to $8,700 by 2025 from $3,400 - becoming one of the largest emerging consumer markets in the world.

Hurdles to overcome

Despite Indonesia's favorable economic performance over the last decade it still needs to tackle major economic development challenges, including improving its business climate and creating employment opportunities for the large number of workers entering its job market each year.

"Indonesia's youthful demographic structure means that around 2.4 million people will join the population of working age every year over the next decade, requiring sustained rapid jobs growth to fulfil the expectations of young job seekers and to avoid any potential risks of social discontent or unrest," said Biswas.

The government also needs to work on diversifying the economy away from a heavy reliance on commodities exports.

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"Large declines in the price of key Indonesian export commodities since 2011, notably for thermal coal, have resulted in a significant deterioration in Indonesia's current account deficit, with near-term prospects for thermal coal prices remaining weak," he said.

"Therefore a key priority for Indonesia will be to diversify its export base towards manufactures, which will also help to generate significant employment growth in manufacturing and related domestic supply chains."