Jakarta, December 16, 2013 – Reversing the slower growth forecast for 2014 will require additional and more focused policy responses, says the World Bank’s latest Indonesia Economic Quarterly report, released today.
While policymakers in Indonesia have taken steps to encourage near-term macroeconomic stability, especially through monetary policy and exchange rate adjustments, further structural reforms are needed to support export performance and encourage long-term faster growth.
“With lower export demand and lower commodity prices, as well as market volatility and tighter external financing conditions, Indonesia has navigated well a difficult year. Prudent monetary policy helped the economy adjust to continuing pressures,” says World Bank Country Director for Indonesia, Rodrigo Chaves. “The economy would benefit from policymakers focusing on longer-term investment, as the country needs more investment. Monetary policy can not be the main policy response.”
The World Bank projects Indonesia’s GDP growth to slow to 5.3 percent in 2014, from 5.6 percent in 2013. Most of the slowdown has been driven by the softening of investment spending – growing by only 4.5 percent in the third quarter - reflecting mainly reductions in machinery and equipment investment.
Risks around the base line outlook remain high, and are skewed towards slower growth. The eventual phasing out of the US Federal Reserve’s asset purchase program (so-called “tapering”) continues to add to uncertainty, keeping global markets volatile and Indonesia’s external financing conditions tight. Private consumption growth—although notably resilient to date—may come under pressure. The fiscal outlook, burdened by fuel subsidy spending, remains vulnerable.
The current account deficit is projected to narrow from $31 billion (3.5 percent of GDP) in 2013 to $23 billion in 2014 (2.6 percent of GDP), due to slower import growth and a mild pick up of export demand.
In addressing the current account deficit, Indonesia’s challenge is not to reduce imports through regulatory measures, but to increase exports and to secure higher quality external financing, particularly foreign direct investment (FDI).
“Measures to improve the business environment are key in attracting investment. Easing trade regulations and and logistics would also deliver “quick wins” to lift exports,” says Ndiame Diop, World Bank Lead Economist for Indonesia .