The Indonesian Paradox: A Rising Star's Growing Pains
The recent riots in Indonesia over rising living costs have brought the country into sharp focus, exposing the social strains that accompany rapid development in a nation of more than 280 million people. At the same time, the newly announced trade deal with the United States underscores how far Indonesia has travelled since the upheavals of the late 1990s, positioning itself as a key emerging economy whose decisions resonate well beyond its borders.
The agreement, embraced by the current leadership, reduces tariffs on Indonesian exports to the US to 19% from an originally proposed 32%. Crucially, energy commodities and critical minerals have been exempted entirely, a concession that fits neatly with the government’s strategy of industrialising and capturing more value from its resource wealth. In return, Indonesia has pledged to buy $15 billion worth of US energy commodities, $4.5 billion in agricultural goods and 50 Boeing 777 aircraft. The package supports American industry while strengthening Indonesia’s integration into global supply chains.
That Jakarta can strike such a deal reflects a remarkable recovery. The Asian Financial Crisis of 1997-98 devastated the economy, collapsing the rupiah and triggering capital flight. In response, Indonesia overhauled its banking sector, tightened fiscal discipline and built up foreign reserves. The results are evident: the IMF expects annual growth of 4.7% for this year and next, a pace few would have predicted during the country’s darkest days.
Demographics remain central to this resilience. With a population of 284 million, domestic consumption offers a cushion against external shocks, while an expanding workforce underpins production. Even as population growth slows, the scale of the domestic market continues to drive demand.
Mineral downstreaming has become the flagship policy of the government. By requiring that nickel, bauxite and copper be processed locally, Indonesia has attracted record foreign direct investment in metals, encouraged technology transfer and created jobs. The IMF has endorsed the strategy, citing its stabilising effect on external accounts, while the exemption for critical minerals in the US trade deal confirms its international recognition.
Still, the costs of this development are visible. The protests underline the social tensions that persist: inequality, uneven job creation and mounting environmental concerns. The challenge of translating growth into broad-based prosperity remains. Yet the progress is undeniable. Net foreign liabilities, once more than 100% of GDP, have narrowed to around 19%. On our rating system, that marks an improvement from one star to four, signalling a far stronger capacity to withstand shocks than in the past.
Markets have already priced in much of this success. Indonesian sovereign bonds trade at extremely tight spreads, with the 2051 issue trading at just 74 basis points over comparable US Treasuries. That is very expensive for a BBB credit. By contrast, the 2052 issue of CFE, the Mexican state-owned electricity company, trades at a spread of 224 basis points and carries the same Baa2 rating from Moody’s. This highlights how far Indonesian risk premia have compressed but also how inefficient credit markets can be.
The contrast with the US is also striking. America’s net foreign asset position has slid from a four-star rating in 1998 to just two stars today, with net foreign liabilities of $20 trillion, or 75% of GDP, leaving it reliant on foreign financing. One of the lessons of the Asian financial crisis and the 2008 financial crisis is that dependence on foreign capital can prove extremely damaging in times of stress. The US dollar may be the world’s reserve currency, but if foreign investors decide they no longer wish to hold such risks, they are under no obligation to do so. While the US net foreign asset position has deteriorated, Indonesia, once synonymous with fragility, now offers a case study in recovery, even if its social strains and stark wealth divides remain hard to ignore.
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