Asia continues to grow, but holds its breath

Emerging economies such as China, India and Indonesia have been on a roll for the past few year.

Their GDP has been growing at a robust pace while the US and Europe have been struggling to recover from the financial crisis of 2008. Today, while these economies are still growing, the pace beginning to slacken. Trepidation is the dominant mood.

In this special report, prepared to coincide with Wharton’s Global Alumni Forum in Jakarta, Knowledge@Wharton explores these issues in detail. The report features an overview of the strengths and challenges of the fast-growing Indonesian economy as well as trends in consumer pending and commodities trading, the twin engines of growth in that country. In addition, the report analyses what a slowdown in China might mean for the world economy and examines the key issues facing China’s financial system. It also looks at Microsoft’s growth strategy in India and the lesson holds for companies that seek new opportunities in emerging markets in these challenging times.

Indonesia’s economy is surging forward, but challenges abound

In the middle of Jakarta stands a statue of Krishna and Arjuna, central characters in the Mahabharata, the Indian epic. They are on a chariot pulled by 11 horses in full gallop. It is an appropriate metaphor for the Indonesian economy, which has surged forward to its highest level in years. While growth is expected to be 6.1% in 2012, on June 7 the Jakarta Globe reported the government reckons it to be 7.2% next year. (World Bank estimates previously had suggested 6.4% growth in GDP in 2013.)

That’s not all. By the end of this year or early next year, Indonesia may join the club of 15 countries with an annual GDP of more than $1 trillion. In 2011, foreign direct investment reached a record $19.3 billion and exports grew by 29%, reaching $203.62 billion. Fitch Ratings in December granted Indonesia an investment-grade credit rating after 14 years of junk status, and Moody’s Investors Service followed in January.

Indonesia’s net foreign debt is now less than 10% of GDP, and a real possibility exists that the country might become a net creditor by the end of next year. Moreover, Indonesia’s stock market is booming. It was one of Asia’s best-performing markets, gaining 3.2% at a time when other exchanges suffered due to the global financial crisis.

In April, the World Bank noted that “despite both domestic and international risks, Indonesia’s economic fundamentals are solid.”

Indonesia has seen rapid economic growth before — but the country also faces several risks and challenges. Experts at Wharton and elsewhere wonder whether this growth is sustainable. Philip M. Nichols, a professor of legal studies and business ethics at Wharton, is upbeat.

He believes Indonesia’s large internal market has enabled the country to weather the global economic crisis relatively unscathed. According to him, Indonesia is finally beginning to climb out of the “institutional hole” that it found itself in pre-1997 when rapid growth papered over deep faults and eventually led to a crash.

Indonesia’s large internal market — two-thirds of its consumption is internal — makes its economy resilient. Furthermore, the country has better institutions, less distortion and greater reliance on markets.

Indonesia is in the middle of an unprecedented consumer boom. Scooters, cars, smartphones, ice-creams and skincare products are all in demand. The middle class is growing, and newly affluent Indonesians are spending. Big brand names are visible on televisions, billboards and on Jakarta’s streets. When it comes to commodities, the growth of China and India has given a fillip to the Indonesian economy. Both demand coal and gas while the entire world is hungry for palm oil.

Read the rest of the report here.