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Indonesia Economic Quarterly: Enhancing preparedness, ensuring resilience

December 14, 2011

December 14, 2011

  • International financial markets remain turbulent, but Indonesia's economy is relatively well-positioned to weather future external shocks and steps have been taken to improve crisis preparedness such as increasing the flexibility of any fiscal response and the creation of a government bond stabilization framework.
  • Indonesia’s real economy continued to perform strongly in the third quarter, with real GDP increasing by 6.5 percent year-on-year for the third consecutive quarter. Private consumption growth remained strong as did real export growth, albeit slightly down on Q2. On the production-side, manufacturing continues to perform strongly. Recent GDP growth has been accompanied by robust job creation, with non-agricultural employment up 5.4 percent in the year to August 2011, although agricultural employment fell. Indonesia's real economy is still showing very few signs of having been impacted by the weaker external environment.
  • Due to weaker global growth prospects and continued global uncertainty, the World Bank’s baseline 2012 growth forecast for Indonesia is being lowered to 6.2 percent, marginally down from a projection of 6.3 percent in the October. The growth forecast for 2011 remains unchanged at 6.4 percent.
  • However, there is the risk of deterioration to more adverse scenarios, such as a major freezing up of international financial markets or a severe, prolonged downturn, encompassing the major emerging economies. A freezing up of international financial markets could prompt further adverse external shocks to Indonesian portfolio flows, and to commodity prices and demand.
  • FDI (Foreign Direct Investment) inflows declined in the last quarter but remained relatively strong, and are well above the average FDI inflows seen over the past two years.
  • Measures to support the future growth of the manufacturing sector and related services sectors can play an important role in promoting quality job creation, i.e. jobs with higher productivity and wages, and in absorbing the roughly two million Indonesians entering the labor force each year.
  • Access to finance, infrastructure and labor regulations are among the most significant constraints for firms in the manufacturing sector.
  • There are many reasons to be optimistic about Indonesia's manufacturing sector, like the rapidly growing domestic market and low labor costs compared to other countries in the region, reflected in a significant increase in investment - both domestic and foreign - in Indonesia.