Indonesia Economic Quarterly: Rising to present and future challenges

July 13, 2012


Indonesia’s growth performance remains solid, but with uncertainty over the international outlook the country needs to continue improving crisis preparedness.

  • The global growth outlook remains weak and financial markets turbulent.
  • However, to date Indonesia’s growth performance has remained solid. GDP growth in the first quarter of 2012 was 6.3 percent year-on-year, down slightly from 6.5 percent in 2011 as a whole. Consumption held up well in the first quarter of 2012, investment growth came down while net exports made a negative contribution to growth.
  • Indonesia is not though immune from spillovers from international developments through both the financial and trade channels.
  • Falling international commodity prices, and weaker volumes, contributed to a sharp slowdown in export growth in recent months and the narrowing in the trade surplus has seen the current account move into deficit.
  • Heightened international risk aversion in May was accompanied by portfolio capital outflows. Domestic asset prices declined and the portfolio outflows, plus weaker trade balance, put pressure on the Rupiah.
  • Reflecting the performance seen in the year to date, the baseline outlook is for growth of 6 percent in 2012 and 6.4 percent in 2013.
  •  However, in the event of a major freezing of international financial markets which contributes to a drop in trading partner growth, a fall in global commodity prices and reduced domestic investor confidence, similar to in 2009, it is projected that growth could slow to 4.7 percent in 2013.
  • In a scenario in which such a crisis was accompanied, or indeed precipitated, a severe, prolonged global downturn encompassing the major emerging economies, 2013 growth in Indonesia could drop to 3.8 percent.
  •  With risks in the global economy are high and expected to persist, emerging economies, including Indonesia, therefore face the twin challenges of enhancing crisis preparedness to deal with near-term shocks while at the same time putting in place policies to support medium-term growth in a weaker global environment.
  • Good progress has been made on crisis preparation but further work is required - there is no room for complacency in the current fragile market environment.
  • Indonesia, similar to other emerging economies, should prepare for a likely long period of global economic volatility and weaker high-income demand by re-emphasizing medium-term development strategies, focusing on productivity-enhancing reforms and infrastructure investment.

In addition to the economic update and outlook this edition of the Indonesia Economic Quarterly includes topical analysis of the trends in Indonesia’s current account and the challenges of budget execution for government infrastructure spending. It also includes an analysis of investment in the roads sector and a discussion of the linkages between global trade and investment and domestic competitiveness.