Cheap oil helps Indonesia

Lower subsidies cut government costs and could help build infrastructure

Cheap oil has helped Indonesia eliminate punishing subsidies and while the move is likely to bump inflation up, it will also free up a about US$21 billion that the government can now spend on infrastructure or social programs.

All this is good news for the economy, which is still making a comeback from a mini-crisis in 2013. Growth this year is expected to be in the 5.5% range, around the same level as Malaysia. Inflation could average out to 4%.

Speaking during the Asian Financial Forum in Hong Kong, the deputy governor of Bank Indonesia Perry Warjiyo said the country’s central bank is more likely than not to keep its policy rate steady at 7.75%. As this piece in Asia Insight, a Market News International publication, points out things are looking good for the largest economy in Southeast Asia.

Country watchers like to joke that Indonesia is the largest country nobody has ever heard of and they might have a point. Despite having a population of 253 million people, which would make it the fourth most populous country in the world behind China, India and the United States, Indonesia is often overlooked as a potential  economic powerhouse. This is the more surprising when considering that it is the 16th largest economy in the world by nominal GDP at US$867 billion in 2013, just one spot behind Mexico. On the other hand, Mexico’s economy is almost 50% larger.

Still, investors are ever-so-slowly making their way back into the country after fleeing in 2013 out of fears of a capital account crisis. Stronger finances and stable growth and inflation prospects should help speed up their return.