Outlook for 2011-15

• The president, Susilo Bambang Yudhoyono, has a strong mandate to pursue his reformist policy agenda, having won re-election comfortably in July 2009, but his reforms are encountering resistance from vested interests.
• Indonesia will elect a new president to succeed Mr Yudhoyono in 2014. A requirement of the election law means that the next president is likely to be the nominee of one of the country's three main political parties.
• Bank Indonesia (BI, the central bank) will proceed with a policy of "normalising" interest rates by gradually tightening policy.
• The fiscal deficit will widen in 2011 to 1.3% of GDP, but it will then narrow during the remainder of the forecast period owing partly to the inability of the civil service to utilise fully the sums allocated to it for capital expenditure.
• The Economist Intelligence Unit forecasts that real GDP growth will accelerate to an average of 6.3% a year in the forecast period, driven mainly by private consumption and fixed investment.
• We expect the current account to record an average annual surplus equivalent to just under 1% of GDP in the forecast period. The income account will stay in deficit, owing to the repatriation of earnings by foreign-owned companies.

Monthly review

• A court in the capital, Jakarta, has sentenced a low-level tax official, Gayus Tambunan, to seven years in prison for bribery. Mr Tambunan's case had exposed egregious examples of official corruption.
• In late January Mr Yudhoyono made a three-day state visit to India, strengthening ties between two of the leading members of the G20 group of the world's major economies.
• The central bank has raised interest rates for the first time since late 2008. On February 4th BI's governors increased the policy rate, the BI rate, by 25 basis points to 6.75%, the highest level since mid-2009.
• The government has suspended import duties on a range of foodstuffs, while the state procurement agency, Bulog, has replenished its stocks of rice, in an attempt to contain fast-rising food prices.
• Indonesia's economy grew at the fastest pace in six years in the fourth quarter of 2010, with real GDP expanding by 6.9% year on year, according to Statistics Indonesia (BPS). For the year as a whole the economy grew by 6.1%.
• In January the rate of inflation accelerated to the fastest pace in 21 months, with consumer prices rising by 7% year on year, according to BPS.

After successfully guiding Indonesia through the 2008-09 global financial crisis, the president, Susilo Bambang Yudhoyono, showed that he had retained the backing of voters by winning a second term in the July 2009 election. However, Mr Yudhoyono has since lost some of that support. All too often in the most telling tests of his leadership, Mr Yudhoyono has chosen to side with conservatives rather than reformers, in an apparent attempt to preserve the unity of the governing coalition in the House of People's Representatives (DPR, the legislature). Mr Yudhoyono's Democratic Party (PD) performed well in the April 2009 parliamentary election, becoming the largest party in the DPR, but it fell short of an overall majority. Faced with these circumstances, the president followed his natural instinct to rule by consensus, building a six-party coalition that controls two-thirds of the seats in parliament. Mr Yudhoyono's current coalition has proved to be even less effective than the one that he led during his first term, owing to the conflicting views of the various parties on a number of reform issues.

Divisions within the ruling coalition have been most apparent in relation to the scandal surrounding a medium-sized local lender, Bank Century, which the authorities rescued from collapse at the height of the financial crisis in late 2008. Opponents of the most prominent reformer in the cabinet, Sri Mulyani Indrawati, who was finance minister at the time, used the ballooning cost of the bail-out as an opportunity to try to force her from her post. Despite being absolved of blame for the high cost of the rescue, Ms Mulyani left the government in May 2010 to become a managing director of the World Bank, fuelling speculation that Mr Yudhoyono asked her to go (or at least did not ask her to stay) in an attempt to repair relations with Golkar and the Prosperous Justice Party (PKS), two major parties in the coalition. Such speculation was heightened by the appointment, soon after Ms Mulyani's resignation, of the Golkar chairman, Aburizal Bakrie, as managing chairman of the governing coalition. Mr Bakrie, who is one of the country's richest pribumi (ethnic-Indonesian) businessmen, had been Ms Mulyani's chief opponent. Rivalry between the two escalated in late 2008, when Ms Mulyani refused to allow stockmarket rules to be manipulated in favour of companies owned by Mr Bakrie and his relatives, and began to investigate alleged tax evasion by mining firms owned by the Bakrie family.

Some commentators have argued that Ms Mulyani's resignation has made the coalition more stable by ending the in-fighting between two of the country's most powerful figures. The Economist Intelligence Unit is less sanguine. If, for the sake of coalition unity, the government abandons its efforts to hold vested interests to account, the prospects for an improvement in standards of governance will worsen. If, however, Mr Yudhoyono and leading reformers in the government continue to confront vested interests, then it may be only a matter of time before conflict erupts again within the coalition. Until recently Mr Yudhoyono's actions during much of the period since Ms Mulyani's resignation seemed to suggest that the president had decided to appease vested interests. But in mid-January Mr Yudhoyono appointed the vice president, Boediono, and the head of a presidential taskforce on so-called judicial mafia, Kuntoro Mangkusubroto, to take charge of efforts to eliminate tax evasion. The move followed the sentencing of a former tax official, Gayus Tambunan, whose trial exposed egregious examples of official corruption, to seven years in prison for bribery. Mr Yudhoyono's appointment of two senior figures to oversee cases of tax evasion suggests that the president may not have surrendered to vested interests after all.

The appointments could, however, have consequences for the ruling coalition. Among the companies that Mr Tambunan has testified to taking "fees" from are three mining firms owned by the Bakrie family. Golkar members of the DPR are already leading the calls for an investigation to establish whether the government should be censured for allowing corruption to continue unchecked at the tax department. It is likely that Golkar would attempt to use such an investigation to discredit Boediono and his probe into the companies that are alleged to have paid bribes to Mr Tambunan, including the Bakrie-owned firms. As a consequence, the unity of the coalition would be tested again.

The threat of separatist violence in Indonesia's northernmost province, Aceh, has diminished in the past few years, with a peace accord signed with the separatist Free Aceh Movement (GAM) in 2005 and orderly local elections in 2006. However, separatist tensions continue to simmer in the eastern province of Papua. Most importantly for foreign investors, the terrorist threat will remain severe. Indonesia suffered a series of bombings in 2002-05 that were specifically aimed at foreign targets. The first major attack in almost four years, at the JW Marriott and Ritz-Carlton hotels in Jakarta in July 2009, killed nine people, demonstrating that the threat of large-scale bombings persists. Violence against religious minorities, such as Ahmadi Muslims and Christians, is increasing, with the police doing little to prevent it, if not actively promoting persecution of these groups.

Indonesia will elect a new president to succeed Mr Yudhoyono in 2014. Parliamentary elections will also be held in that year and will have an important bearing on the outcome of the presidential poll. According to the election law, only political parties (or groups of parties) that win at least 20% of seats in parliament or 25% of the vote in the legislative election are eligible to nominate presidential candidates, meaning that the next president is likely to be the nominee of one of the country's three main parties-the PD, Golkar and the Indonesian Democratic Party-Struggle (PDI-P). Mr Bakrie is a strong contender for the Golkar nomination, but he would be a controversial choice owing to the possibility of conflicts of interest arising from his extensive business empire. Speculation has increased recently that Ms Mulyani is considering a bid for the presidency, possibly in partnership with the PD chairman, Anas Urbaningrum. A contest between Mr Bakrie and Ms Mulyani would present voters with a clear choice between conservatism and reform. But it is not certain that Ms Mulyani will declare herself a candidate and, even if she were to do so, she is less popular among Indonesian voters than she is with foreign investors, making her victory far from assured.

Indonesia has become more prominent in international organisations in recent years, serving as a non-permanent member of the UN Security Council in 2006-08 and taking a seat at meetings of the G20 group of the world's major economies. There is an opportunity for warmer relations with the US, given that the US president, Barack Obama, spent several years in Indonesia as a child. Ties with China are also likely to strengthen. Chinese businesses have become major foreign investors in a variety of industries in Indonesia. Moreover, owing to the likelihood that the world's advanced economies will grow relatively slowly following the 2008-09 global recession, Indonesia will rely heavily on China as a market for its exports. However, there will be opposition to closer economic ties with China, as demonstrated by the backlash among local manufacturers against the free-trade agreement between that country and the Association of South-East Asian Nations (ASEAN) that fully came into effect at the start of 2010. Indonesia's foreign policy will continue to be influenced by the principle of non-alignment, and the government will resist becoming too closely associated with either the US or China. There will be intermittent disputes with Malaysia and Singapore over a range of long-standing issues. At the start of 2011 Indonesia took over the chair of ASEAN, a position that it will hold for one year.

Reforms aimed at addressing the shortcomings of Indonesia's business environment will move forward in a stop-start manner, reflecting the conflicting views on reform within the ruling coalition. The anti-corruption drive will continue, but the Anti-Corruption Commission (KPK) will face constant opposition, as will other statutory bodies tasked with tackling graft. Several changes, including comprehensive reform of the country's restrictive labour laws and removal of energy subsidies, may prove politically infeasible. Reform of the inefficient civil service, which was cited by the president as a priority for his second term, is making only slow progress. The government has, however, submitted draft legislation to parliament on land acquisitions. If passed, the legislation would make it easier for the state to acquire land for development purposes, thus removing one of the major bottlenecks to much-needed infrastructure upgrades.

As a consequence of the inability of the civil service to spend fully the funds allocated to it, the government generally fails to operate an effective counter-cyclical fiscal policy, and macroeconomic management therefore has to be achieved primarily through monetary policy. Bank Indonesia (BI, the central bank) will tighten policy by raising interest rates this year in an attempt to contain the inflationary pressures generated by robust economic growth. In June 2010 BI introduced restrictions on foreign purchases of short-term central bank bonds, arguing that substantial short-term foreign investment inflows were putting the stability of Indonesia's currency, the rupiah, at risk because of the potential for a sudden reversal of investor sentiment. Although the authorities remain eager to attract long-term foreign investment, restrictions on short-term flows could be tightened.

We expect the fiscal deficit to widen to the equivalent of 1.3% of GDP in 2011, from an estimated 0.8% in 2010. This compares with the target of 1.8% of GDP in the budget for this year, which was approved by the DPR in October. Although the current finance minister, Agus Martowardojo, is continuing with the carrot-and-stick system introduced by Ms Mulyani of increasing the budgets of government ministries that meet their spending targets and reducing allocations to those that miss them, underspending remains a problem. Final results for 2010 have yet to be published but, speaking in early January, Mr Yudhoyono said that the deficit in that year was equivalent to only 0.6% of GDP. The inability of ministries to spend all the funds allocated to them will continue to restrict expenditure, and we therefore expect the deficit to shrink during the remainder of the forecast period, to stand at 0.3% of GDP in 2015. The ratio of public debt to GDP is forecast to drop further in the next few years, and this could result in Indonesia's sovereign debt rating rising to investment grade. This would make it cheaper for the government to raise funds in international markets.

Monetary tightening will continue for the remainder of the year, following the decision by BI's governors on February 4th to raise the main interest rate, the BI rate, by 25 basis points to 6.75%. The rate rise, the first since October 2008, signals the start of the process of "normalising" interest rates. In recent meetings the central bank had left the BI rate at 6.5%, the lowest level that the rate has reached since its introduction in 2005, owing to concerns about the effect that interest rate increases would have on capital inflows (given that interest rates in major economies are likely to remain low). But consumer price inflation accelerated to 7% year on year in January, a 21-month high, and inflation has remained above BI's 4-6% target range since November, convincing the governors that higher interest rates are essential. Although it waited until early February before raising interest rates, BI began to tighten monetary policy in September 2010, when it increased the commercial banking sector's primary rupiah reserve requirement to 8%, from 5% previously. It has also announced a rise in the banking sector's US dollar reserve requirement to 8% by June 1st, up from 1%. We expect the BI rate to average 7.3% in 2011 and 8.5% in 2012-15.

Download the numbers in Excel

Indonesia was affected less severely by the 2008-09 global recession than many neighbouring economies, largely because exports account for a relatively small proportion of the country's GDP. Moreover, economic growth accelerated in 2010, with real GDP expanding by 6.1% for the year as a whole and by 6.9% year on year in the fourth quarter, the fastest pace for six years. The economy will grow by 6.2% in 2011 and 6.4% in 2012, before expanding at an average annual rate of 6.3% in 2013-15. Private consumption will remain a major driving force behind GDP growth in 2011-15, expanding by an average of 5.5% a year as employment growth accelerates and real wage increases pick up. Fixed investment will expand by 8.7% a year on average in the forecast period, supported by strengthening demand conditions. Exports expanded strongly in 2010, largely because of healthy demand from China for Indonesia's commodity exports, but growth in overseas sales will slow in 2011 in line with a weaker global economy. Exports of goods and services will then expand by around 10.4% a year in 2012-15. Owing to a recovery in import demand, the external sector will make only a modest contribution to GDP growth in 2011-15.

Some downside risks to our forecast still exist. The most serious concern is that fiscal austerity programmes in Western economies might lead to an unexpectedly rapid slowdown in global economic growth. In addition, the loose monetary policy stance of Western central banks-and particularly the Federal Reserve in the US-has caused heavy flows of capital into Asian countries, creating concerns that asset price bubbles could develop in these economies. Such bubbles create risks, particularly if assets are used to back higher levels of borrowing; in such circumstances, the bursting of bubbles can trigger a process of deleveraging that hurts a country's real economy. Indonesia was a recipient of strong flows of foreign finance in 2010, and it will continue to attract substantial inflows in 2011. As a result, it is likely that asset prices will rise and that credit growth will accelerate. However, Indonesian companies and households are not highly leveraged, and a period of strong lending growth could benefit the economy, particularly if funds are invested in productive areas, such as improvements to the country's dilapidated infrastructure.

Download the numbers in Excel

On an annual average basis, consumer price inflation accelerated to 5.1% in 2010, up from 4.8% in 2009, a nine-year low, as domestic prices responded to an increase in international crude oil and non-oil commodity prices. Although BI has embarked on a process of normalising interest rates, inflationary pressures in 2011 will build as economic activity starts to push against capacity constraints in the local economy. So too will a further increase in international commodity prices, notably for crude oil and grains. Although the rupiah's continued appreciation against the US dollar will limit inflation, as will the government's decision in late January to suspend import duties on a range of goods, particularly foodstuffs, price pressures are evidently increasing. As a result, we have revised up our forecast for average inflation this year to 7.3%, from 6.7% previously, above BI's 4-6% target range. The rate of inflation will then slow, to an average of 6.3% a year in 2012-15. The primary risk to our forecast comes from the possibility that high international oil prices could force the government to raise administered fuel prices to keep the budget deficit under control, especially as the government's assumption that oil prices (dated Brent blend) will average US$80/barrel this year is looking unrealistically low.

The rupiah appreciated by 14.4% against the US dollar on an annual average basis in 2010, and by the end of that year it had reached Rp8,991:US$1, more than regaining the ground lost during the onset of the global financial crisis in late 2008, when the currency plunged as international investors fled risky emerging markets. Interest from international investors in carry trades (whereby speculators borrow in countries where interest rates are low, such as the US and Japan, in order to purchase assets in countries with higher rates, such as Indonesia) has been an important factor in the rupiah's appreciation. Healthy domestic economic growth has been another factor encouraging foreign investment in Indonesian assets. Large capital inflows are expected in 2011, when Indonesia's GDP growth and interest rates will compare favourably with those in Western economies, but BI will continue to intervene to prevent the currency from appreciating too sharply. The rupiah is forecast to strengthen by 1.8% on an annual average basis in 2011, before weakening gradually in 2012-15. The currency will remain vulnerable to sudden swings in sentiment.

A recovery in merchandise exports, led by commodities, caused the trade surplus to rise in 2010 to US$35.9bn, and we forecast that the surplus will continue to grow in 2011-15, to stand at US$49.7bn in the final year of the period. The deficit on the income account widened in 2010, as foreigners expanded their holdings of Indonesian securities, leading to a rise in interest and dividend payments. The income account will remain in the red throughout the forecast period, as foreigners continue to repatriate earnings while Indonesian investments abroad still earn relatively low returns. Limited employment opportunities at home in the forecast period will force more workers to seek jobs abroad, leading to an increase in inward remittances and thus pushing up the surplus on the transfers account. We expect the current account to record a surplus equivalent to 0.9% of GDP a year on average in the forecast period.

Download the numbers in Excel

On January 19th a court in the capital, Jakarta, sentenced a low-ranking tax official, Gayus Tambunan, to seven years in prison for bribery and other offences. Prosecutors had sought a 20-year sentence and, after the verdict was read out, Mr Tambunan thanked the judges for their leniency. The bribery incident occurred in March 2010, when Mr Tambunan paid a judge to acquit him after he had been accused of helping companies to evade taxes. He then fled to Singapore, but was eventually arrested and put on trial for a second time. Ahead of his second trial, Mr Tambunan provided evidence of a conspiracy to defraud the state of vast tax revenue, implicating former colleagues in the tax department, as well as around 150 local companies. Firms whose accounts Mr Tambunan managed included three mining companies, Bumi Resources, Kaltim Prima Coal and Arutmin, all of which are owned by the family of the chairman of the Golkar party, Aburizal Bakrie. (The Golkar party is a key member of Indonesia's governing coalition.) During questioning, Mr Tambunan allegedly confessed to receiving bribes from these firms in exchange for favourable tax treatment.

The case, which has become a cause célèbre in Indonesia, has exposed the failings of the government's efforts to curb corruption. It has also inflicted particular damage on the credibility of the president, Susilo Bambang Yudhoyono, who was re-elected in 2009 partly on the basis of promises to curb graft. Following the court's decision, Mr Yudhoyono ordered the investigation of companies allegedly linked to Mr Tambunan, as part of a 12-point programme to combat tax evasion. As part of the measure, Mr Yudhoyono asked the vice-president, Boediono, to co-operate with a task force on "judicial mafia", led by a former government minister, Kuntoro Mangkusubroto, to oversee all ensuing tax investigations. He also said that the Anti-Corruption Commission (KPK) and the Financial Transaction Reports and Analysis Centre (PPATK) would play a greater role in future investigations. Boediono and Mr Mangkusubroto are well-respected figures. Their oversight, as well as the involvement of the KPK and PPTAK, has raised hopes that future tax investigations will be pursued more rigorously. However, any investigation of the Bakrie-owned firms could put further strain on the governing coalition.

Three soldiers who were accused of torturing civilians in Papua have been found guilty only of disobeying orders and have been handed sentences of between eight and ten months, highlighting the continued impunity of the Indonesian Military (TNI). The abuses came to light in October 2010, through a video depicting the interrogation of two native Papuans. One of the men is naked and bound and has a burning stick applied to his genitals, while the other man has a knife held to his neck and is threatened with decapitation. The video provoked an international outcry, forcing Mr Yudhoyono to give assurances that the perpetrators would be brought to justice.

However, Mr Yudhoyono appeared to backtrack prior to the sentencing, describing the incident as minor and saying that the TNI had not committed any gross human rights violations since 2004. He also questioned why he had to explain the incident to the UN, the US and the EU, highlighting the government's sensitivity to criticism on the issue of human rights. An international human rights organisation, Amnesty International, said that the sentences did not match the severity of the crime. Human rights campaigners have long argued that the military must be held accountable in civilian courts. Military personnel who commit crimes are currently subject only to closed-door court-martial proceedings.

Mr Yudhoyono made a three-day state visit to India in late January, strengthening ties between two leading members of the G20 group of major economies. Visiting the Indian capital, New Delhi, Mr Yudhoyono attended India's Republic Day military parade as a guest of honour. He also oversaw the expansion of military co-operation agreements and the signing of new commercial agreements that seek to channel Indian investment worth US$15bn into mining and infrastructure projects in Indonesia. The two countries are seeking to increase annual bilateral trade to US$25bn by 2015, up from US$12bn in 2010. The visit built on the achievements that were made during Mr Yudhoyono's previous trip to India in 2005, when he signed a joint declaration on strategic partnerships.

Commercial deals that have been signed during Mr Yudhoyono's latest visit will pave the way for investment by India's growing swathe of large domestic companies that are now striking out on international ventures. There are a number of investment projects planned for Indonesia by Indian firms, including a US$4bn project to build two airports, a US$1.8bn investment programme to build a coal railway and a port, and a US$3bn project to build a steel mill. In addition to bilateral co-operation, commercial ties between Indonesia and India have been boosted by a free-trade agreement between India and the Association of South-East Asian Nations (ASEAN), which took effect in mid-2009.

The president travelled directly from India to the World Economic Forum, a gathering of business and government leaders, in Davos, Switzerland, using his speech to the forum to set out Indonesia's vision for "21st century globalism", which calls for co-operation between developed and developing economies. He underlined the important role of the G20 group and regional organisations, such as ASEAN, in fostering international co-operation, and highlighted the main challenges for globalism: rising food prices and their impact on poverty, hunger and social and political stability; peace and security, including non-traditional threats, such as disease and terrorism; and the urgent need for transition to low-carbon development in response to climate change. The president also held bilateral meetings with the UK prime minister, David Cameron, the French president, Nicolas Sarkozy, and the German chancellor, Angela Merkel, as well as with a former US president, Bill Clinton, and a former UK prime minister, Tony Blair.

Bank Indonesia (BI, the central bank) raised its benchmark rate by 25 basis points to 6.75% in February, in a move aimed at restoring market confidence in BI's commitment to controlling inflation. The central bank cut its benchmark rate, the BI rate, to 6.5% in August 2009, the lowest level since the rate was introduced in 2005, to support economic growth, and it had left the rate unchanged at that level until the recent rise. The decision to leave the rate on hold for so long meant that it had become increasingly apparent that BI's policy stance was not in line with that of other central banks in Asia, and there was a growing perception that it was failing to act sufficiently aggressively amid signs of rising inflationary pressures. However, two consecutive months of inflation of around 7%, above the upper end of the central bank's 4-6% target range, as well as expectations of further food and fuel price rises in the coming months, left BI's governors with little choice but to raise the bank's benchmark rate in February.

A major factor influencing the decision to raise rates may have been signs that portfolio investors were becoming anxious about the impact of inflation on positions taken in the local stock and bond markets. A short but sharp slump in the main stock index, the Jakarta Composite Index, in early January, after BI had resisted pressure to raise interest rates at the start of that month, provided a reminder of how vulnerable Indonesia remains to the flight of foreign capital. Short-term capital inflows into local markets reached US$13bn in 2010, according to BI, with foreign investors holding 30% of the stock of government bonds, 30% of central bank promissory notes, and accounting for 60% of market capitalisation on the local bourse. The scale of these holdings leaves the country highly vulnerable to any reversal in investor sentiment. However, higher interest rates may now make the country even more attractive to foreign investors and further short-term capital may be drawn into the country.

The government has taken steps to address growing concern over food security amid fast-rising prices. The La Niña weather pattern, which cools the Pacific Ocean, brought heavy rain to Indonesia throughout 2010, resulting in crop failures. According to a UN body, the World Meteorological Organisation, La Niña is expected to continue to influence global weather patterns until at least the end of the first quarter of 2011. Poor domestic harvests, as well as tightening international supply, have pushed up domestic prices for 12 staple commodities over the past year, according to the co-ordinating minister for people's welfare, Agung Laksono. Green chillies have experienced the sharpest price increase, rising by 314% year on year in January. The cheapest grade of rice had risen by 22.6%, to Rp7,500 (80 US cents) per kg, while premium rice grades had risen even more sharply. Rice purchases constitute the largest single item of expenditure in poor households' budgets, and a prolonged period of high prices would therefore erode rapidly recent gains in reducing poverty.

Concerns over poverty may explain the speed and scale with which the state procurement agency, Bulog, moved to replenish its stockpiles after the poor harvest in 2010. In late January the agency surprised markets with the purchase of 820,000 tonnes of Thai rice to be shipped to Indonesia in February and March, after initially tendering for only 170,000 tonnes. The order, which comprised 650,000 tonnes of 15% broken grade rice and 170,000 of 5% broken grade, commanded prices of between US$490 and US$545 per tonne, respectively.

During the 2008 food price crisis, when international rice prices rose to over US$1,000 per tonne, Indonesia benefited from a bumper rice harvest that kept domestic prices low. However, in 2011 the country will be exposed to rising international prices. A good crop in Vietnam, a major exporter, as well as reduced demand in the Philippines, which is consistently the world's largest rice importer, should prevent prices from reaching the highs of 2008. However, Bangladesh has recently tripled its forecast import requirements in 2011, and so Bulog's early procurement of stocks appears prudent.

The government has also temporarily suspended import duties on 57 food products, with effect from January 24th. Staple foodstuffs, including rice, wheat and soya beans, were all included in the exemptions, but duty will continue to be paid on imports of sugar. By early February wheat prices had risen by 82% year on year to US$862 per tonne, while soya bean prices had increased by 58% to US$1,438 per tonne. Indonesia imports all of its wheat, an essential ingredient in noodles, as well as 70% of its soya beans. Animal feed material and fertilisers are also exempt from import duties until the end of the year. Taxes on exports of palm oil have also been raised to 25%, up from 20%, with effect from February 1st, a measure intended to offset the rising cost of cooking oil in the domestic market.

Indonesia's economy grew at the fastest pace in six years in the fourth quarter of 2011, with real GDP expanding by 6.9% year on year, according to the national data provider, Statistics Indonesia (BPS). Growth was broadly based, with all of the main components of GDP making positive contributions. Private consumption expenditure, the most important component of the economy, accounting for around 60% of nominal GDP, fuelled the fourth-quarter expansion. Although private consumption growth slowed in the period, to 4.4% year on year from 5.2% in the third quarter, it still contributed 2.6 percentage points to the economy's overall growth. Government consumption expanded by 8.3% year on year, up from 4.3% in the previous quarter, as state ministries rushed to spend their budgets before the end of the year, making a 1-percentage-point contribution to growth. Meanwhile, gross fixed investment expanded by 8.6% year on year, down from 9.3% previously, and contributed 2.1 percentage points to growth. It was not only domestic demand that supported the economy's fourth-quarter expansion, net exports also made a significant contribution (1.6 percentage points), with exports of goods and services rising by 16.2% year on year. Imports were up by 16.9%.

Download the numbers in Excel

For the year as a whole, Indonesia's economy expanded by 6.1%, up from 4.5% in 2009, exceeding the official growth target of 5.8%. It was also the fastest pace of annual growth since 2007. Private consumption expanded by 4.6% year on year, down from 4.9% in 2009; government consumption grew by 0.3%, compared with an expansion of 15.7% in 2009; and gross fixed investment expanded by 8.5%, up from 3.3% in 2009. Meanwhile, exports of goods and services rose by 14.9% year on year, compared with a contraction of 9.7% in 2009, and imports were up by 17.3%, following the previous year's contraction of 15%. One notable development in 2010 was that Indonesia's nominal GDP per head (based on BPS's population estimates) exceeded US$3,000 for the first time, lifting the country into the world's low-middle-income group of economies.

Strong demand from Indonesia's growing number of middle-class consumers has been a driving force behind economic growth in recent years, aided by low interest rates and a strengthening of the rupiah. This strong domestic demand, which remained resilient even at the height of the 2008-09 global financial crisis, helped to ensure that Indonesia was one of only a few major economies that avoided recession during that period. These middle-class consumers are now helping to spur a renaissance in the country's manufacturing industries. Production at large and medium-sized factories in Indonesia rose by 4.4% in 2010, according to BPS, with firms catering to the demands of middle-class consumers driving this strong growth.

Sales of cars and motorcycles have been especially strong. Car sales in 2010 rose by 57% to 764,710 units, up from 486,061 units in 2009, according to the Indonesian Association of Automotive Industries (Gaikindo), boosted by the rising spending power of Indonesia's consumers and low interest rates. Motorcycle sales rose by 26% to 7.4m units in 2010, according to the Indonesian Motorcycle Industry Association (AISI). Producers of consumer goods are also expanding rapidly. An Anglo-Dutch consumer products firm, Unilever, recently announced plans to invest up to US$400m in Indonesia by 2013, and a Swiss company, Nestlé, is spending US$200m to boost its presence in the local market.

In January the rate of inflation accelerated to the fastest pace in 21 months, with consumer prices rising by 7% year on year, according to BPS. A 16.2% year-on-year rise in food prices was the main contributor to the inflationary pressures. On a month-on-month basis, the rate of inflation stood at 0.9%, with food prices contributing 0.6 percentage points to the overall increase in prices. According to the Ministry of Trade, in January the price of rice rose by 3.4% year on year, and the cost of red chillies was up by 20.7%. Inflationary pressures are likely to gather pace in the coming months, particularly after the planned restriction of sales of subsidised fuel to private cars in Jakarta from April 1st. However, the main rice harvest, which takes place in February-March, should help to damp down food prices.

Despite the acceleration in headline inflation, core inflation, which excludes volatile food and fuel prices, slowed slightly in January, to 4.2% year on year, down from 4.3% in December. Core inflation is a key measure tracked by BI when making decisions on interest rates. The central bank had previously indicated that it would raise interest rates only if core inflation approached 5%, maintaining that rises in consumer prices had been caused by temporary factors influencing non-core goods and services.

Download the numbers in Excel

Download the numbers in Excel

Download the numbers in Excel

Download the numbers in Excel

Please see graphic below

Please see graphic below

Please see graphic below

Land area

1,904,443 sq km

Sea area (exclusive economic zone)

3,166,163 sq km (before deductions for sea area now under the control of Timor-Leste)

Total area

5,070,606 sq km

Population

240m (US Census Bureau 2009 estimate)

Main towns

Population in '000 (2000 census)

Jakarta (capital): 8,385 Medan: 1,792

Surabaya: 2,589 Palembang: 1,442

Bandung: 2,142 Semarang: 1,345

Climate

Tropical

Weather in Jakarta (altitude 8 metres)

Hottest months, April-May, 24-31°C (average daily minimum and maximum); coldest months, January-February, 23-29°C; wettest months, January-February, 300 mm average rainfall

Languages

Indonesian (Bahasa Indonesia), as well as some 250 other regional languages and dialects. English has replaced Dutch as the main second language and is widely spoken in government and business circles

Measures

Metric system

Currency

Rupiah (Rp). Average exchange rate in 2010: Rp9,088:US$1

Time

Western Zone 7 hours ahead of GMT, Central Zone 8 hours ahead, Eastern Zone 9 hours ahead

Fiscal year

January 1st-December 31st (since 2001)

Public holidays

New Year, January 1st; Chinese New Year, February 3rd; Mouloud, February 15th; Hindu New Year, March 5th; Good Friday, April 22nd; Waisak Day, May 17th; Ascension Day, June 2nd; Lailat Al Miraj, June 29th; Independence Day, August 17th; Eid al-Fitr, August 30th-31st; Eid al-Adha, November 6th; Islamic New Year, November 27th; Christmas Day, December 25th

Official name

Republic of Indonesia

Form of government

Power has historically been concentrated in the hands of the president, but recent constitutional amendments have given the legislature an expanded role

Executive

The presidency is the highest executive office, with authority to appoint the cabinet

Head of state

The president, Susilo Bambang Yudhoyono

National legislature

The People's Consultative Assembly (MPR) consists of a 550-member House of People's Representatives (DPR) and a 128-member Regional Representatives' Council (DPD)

National elections

April 2009 (DPR); July 2009 (presidential). Next elections: 2014 (DPR and presidential)

National government

Mr Yudhoyono's second-term government contains representatives of the Democratic Party (PD), Golkar, the National Mandate Party (PAN), the Prosperous Justice Party (PKS), the National Awakening Party (PKB) and the United Development Party (PPP)

Main political organisations

There are three nationalist secular parties: the PD, Golkar and the Indonesian Democratic Party-Struggle (PDI-P). The other main parties-the PPP, the PKB, the PAN and the PKS-have an Islamic orientation

President: Susilo Bambang Yudhoyono

Vice-president: Boediono

Key ministers

Agriculture: Suswono

Co-ordinating minister for the economy: Hatta Radjasa

Co-ordinating minister for people's welfare: Agung Laksono

Co-ordinating minister for political, security & social affairs: Djoko Suyanto

Culture & tourism: Jero Wacik

Defence: Purnomo Yusgiantoro

Education: Muhammad Nuh

Energy & mineral resources: Darwin Saleh

Finance: Agus Martowardojo

Foreign affairs: Marty Natalegawa

Forestry: Zulkifli Hasan

Health: Endang Rahayu Sedyaningsih

Home affairs: Gamawan Fauzi

Industry: M S Hidayat

Justice & human rights: Patrialis Akbar

Manpower & transmigration: Muhaimin Iskandar

Public works: Djoko Kirmanto

Religious affairs: Suryadarma Ali

Social affairs: Salim Segaf Aljufri

Trade: Mari Pangestu

Transport: Freddy Numberi

Central bank governor

Darmin Nasution