Indonesia Economic Quarterly: Policies in Focus
December 17, 2012
- The economic outlook for Indonesia in 2013 remains positive despite a weak global economy, but maintaining strong investment growth is vital.
- The World Bank projects growth of 6.1 percent for Indonesia in 2012, with a marginal rise to 6.3 percent in 2013. This projection assumes that domestic consumption and investment growth remain strong, while improving growth in Indonesia’s major trading partners supports a modest recovery in exports.
- The global economic outlook remains relatively uncertain and vulnerable to shocks – the outcome of the “fiscal cliff” negotiations in the US; developments in the Euro area; and a further slowdown in China’s economy could potentially impact the World Bank’s baseline growth projections. Domestic investment growth – a crucial factor in Indonesia’s recent strong economic performance – also faces risks.
- Investment now accounts for a third of all spending on Indonesian goods and services. Investment was up 10 percent year-on-year in Q3 and was responsible for nearly 40 percent of Q3’s solid GDP 6.2 percent growth year-on-year. Since investment and global commodity prices tend to move in tandem, Indonesia’s investment outlook may weaken as weaker commodity-related earnings filter into the wider economy.
- A strong policy framework is key to facilitating investors’ ability to plan ahead and to maintaining the confidence in the future that motivates investment. Leading up to the 2014 general elections, Indonesia’s business and investment policies will be under particular focus. Continuing to improve the regulatory environment and effectively communicating new reforms are important steps which can support the investment outlook and continue to drive robust growth.
- On the fiscal side, the World Bank projects a full year 2012 deficit of 2.5 percent, slightly higher than the Government’s revised Budget target of 2.2 percent of GDP. Revenue growth has moderated but disbursements of capital and material expenditures are still behind their targets, despite strong nominal growth. Most notably, the opportunity cost of energy subsidies continues to rise.
- Given their importance for workers’ welfare and, potentially, for economic growth, the way in which minimum wages is negotiated could benefit from moving towards a more comprehensive, technical and inclusive approach to bargaining in the labor market, ensuring that all stakeholders, including informal sector workers, are represented.
- In terms of Indonesia’s medium-term development challenges, the recent Village Infrastructure Census shows different rates of progress across provinces and districts in the delivery of infrastructure, health and educational services.
- In terms of disaster risk preparedness, Indonesia’s successful recovery efforts following major natural disasters in Sumatra and Java provide examples of how to build resilience against disaster risks, including the risk of flooding in Jakarta.
For related analysis see:
- On jobs and labor market issues see the World Bank 2013 World Development Report on Jobs and the World Bank Indonesia Jobs Report, 2010.
- For further information on recent fiscal trends and the 2013 Budget see the October 2012 IEQ - Maintaining Resilience and on fuel subsidies in particular see the April 2012 IEQ – Redirecting Spending.
- For further information on Indonesia’s experience in disaster reconstruction and preparedness see the knowledge notes and other materials prepared for an international conference on “Lessons from Indonesia’s Experiences in Disaster Reconstruction and Preparedness” available on the websites of the Multi-Donor Fund for Aceh and Nias and the Java Reconstruction Fund.
- The final Village Infrastructure Census report will be made available from February 2013 on the websites of the PNPM Support Facility (PSF) and the National Team on Accelerating Poverty Alleviation.
Finally, on 11 December 2012 the World Bank Group’s Board of Directors discussed the latest Joint Country Partnership Strategy (CPS) for Indonesia for the period 2013 -2014 that outlines the Bank Group’s role in sharing development solutions for an emerging Indonesia. Visit this link for more details.