publication December 13, 2018

December 2018 Indonesia Economic Quarterly: Strengthening Competitiveness

Indonesia has weathered substantial global volatility thanks to sound macroeconomic fundamentals and strong policy coordination, according to the World Bank’s December 2018 Indonesia Economic Quarterly

World Bank Group


 
  • Investments rebounded on the back of stronger construction investment. While private consumption eased slightly, a surge in government consumption kept total consumption growth on an even keel.
  • The Rupiah depreciated through October, with the currency reaching a trough of IDR 15,237 per USD on October 30. Year-to-September, the currency depreciated 8.2% in nominal terms and 7.6% real effective terms,
  • Despite high oil prices in the third quarter, headline consumer price inflation fell from an average of 3.3% year-on-year in the second quarter to an average of 3.1% in the third quarter. The lower headline reading was largely driven by low administered price inflation on the back of a high base-effect due to the electricity tariff hikes last year.
  • . Stronger domestic demand, due to increased social spending and a strong labor market, is expected to more than offset the drag from the external sector.
  • Downside risks to Indonesia’s growth outlook remain substantial. Global trade tensions between the United States and China may have subsided but could return if ongoing negotiations are not successful. The resumption of such disputes pose significant risks to Indonesia through a weaker external sector and dampened commodity prices. The tightening cycle of the U.S. Federal Reserve also heightens the risk of capital outflows and financial volatility among emerging market economies, including Indonesia.
  • . Recommendations for a policy agenda include:
    • Reverse the increase in import barriers, including tariff and certain non-tariff barriers, which raise prices to consumers and firms, making the latter less competitive.
    • Conclude free trade agreements, which can catalyze policy reforms and enhance market access for Indonesian products.
    • Reduce significant restrictions to foreign investors, which limit investment and competition harming the competitiveness of the protected sectors.