- Indonesia’s growth performance has remained robust in the face of global economic weakness but, with risks remaining high, the economy’s resilience to future shocks can be further strengthened through a continued focus on crisis preparedness, on facilitating investment and on improving the quality of public spending
- The global economy has weakened and the outlook remains cloudy.
- However, despite the challenging external conditions, Indonesia’s economic growth has so far proved robust. GDP growth in the second quarter of 2012 was 6.4 percent year-on-year, up slightly from 6.3 percent in the first quarter. Strong consumption and investment demand both contributed to growth.
- However, Indonesia is clearly feeling the effects of the weaker global environment. Net exports were a significant drag on growth in the second quarter and the current account deficit widened. Monthly export values have also continued to weaken but some of the pressure on the trade balance may be partly self-correcting as demand for intermediate and capital goods imports used as inputs for export production comes down
- Domestic equities rallied in the third quarter and Indonesia attracted sizable portfolio investment, assisting Bank Indonesia to rebuild foreign exchange reserves. The Rupiah weakened slightly further against the dollar. This should facilitate the ongoing adjustment of Indonesia’s external balances.
- More recently, domestic indicators paint a mixed picture, with credit growth remaining strong but some data pointing to a moderation in domestic demand.
- The World Bank projects 6.1 percent GDP growth for Indonesia in 2012 (up 0.1 percentage points from the July IEQ projection, due to the strong growth seen in the first half of 2012) and 6.3 percent GDP growth in 2013.
- Risks to the outlook remain heavily skewed to the downside due to ongoing external uncertainties, including the extent and impact of the slowdown in China’s economy, the ongoing recession in the Euro Area, and the US “fiscal cliff”. Should these risks transpire, Indonesia’s growth rate could be considerably slower.
- Given persistent risks and elevated levels of uncertainty globally, Indonesia and other emerging economies need to prepare for the possibility of more economic weakness and volatile financial market conditions. Indonesia should continue to build on the progress already made in making its economy more resilient to shocks, and lifting the sustainable rate of growth. Improving the quality of spending will be particularly important, with energy subsidies still accounting for a sizeable share of government expenditures. In an environment of global uncertainty and fragile investor sentiment, maintaining a consistent policy reform framework will also be important, particularly in the run-up to the 2014 elections.
In addition to the economic update and outlook, this edition of the Indonesia Economic Quarterly includes topical analysis of the trends in Indonesia’s manufactured exports, and an overview of the Government’s proposed 2013 Budget. It also includes an analysis of the recently approved Higher Education Law and a look at the recent trends in government personnel expenditure.