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Upward Trend Continues for Indonesia's Economy

December 16, 2009

Jakarta, December 16, 2009 – The World Bank’s Indonesia Economic Quarterly update states that Indonesia is closing the year on a positive note, with  the positive trends observed in the third quarter of 2009 continuing in to the fourth quarter, and expected to continue on its upward trajectory in 2010.  Domestic consumption has been the main driver of growth , but from Q3 onwards growth has become more broad-based. Q3 has seen pick-ups in:

  • Investment, particularly in buildings, machinery and equipment
  • Non-tradable outputs, particularly transportation and communications
  • Industrial indicators, particularly electricity consumption and cement production
  • Net exports, thanks to a recovery in global demand  and gains in global commodity prices

“The major drivers of Indonesia’s growth in 2010 are expected to continue to come from domestic demand, with support from a recovery in the external sector. Private consumption is expected to grow by around 5.1 percent in 2010  with moderate price growth and improving incomes,” said William Wallace, the World Bank’s Lead Economist for Indonesia. “Investment growth is expected to pick up in 2010 thanks to a projected increase in commodity prices and external demand, as well as easier access to finance. Greater spending on core government programs and better disbursement rates are also expected to boost government consumption. "In short the economy seems to be broadly back on track. But some questions do remain, stemming from the residual uncertainty about the sustainability of the global recovery and the timing and depth of future reforms.".”

The outlook for Indonesia’s economy has improved over the last three months. The economy is now expected to grow by 4.5 percent in 2009, higher than the previous forecast of 4.3 percent. The growth rate for 2010 is expected to rise to 5.6 percent (higher than the earlier forecast of 5.4 percent) and then to around 6 percent in 2011. The improved outlook follows the slightly stronger than expected Q3 GDP, which has returned to the near-pre-crisis average of 4.2 percent – up from 4.0 percent in Q2.

Indonesia’s export volumes are expected to return to pre-crisis levels in 2010, as the world gradually recovers and  commodity prices rise. In the interim, imports are expected to recover faster than exports, since the domestic economy is growing faster than Indonesia’s export destinations and the production of export items requires imported components.  With these developments, the 2009 trade surplus is expected to remain near USD 17 billion and narrow down to USD 10 billion in 2010.

“Indonesia’s real economy is remarkably stable compared to its regional neighbors, but financial markets have remained volatile. As the rupiah strengthened, significant capital inflows helped raise the price of government bonds, money market notes and equities,” said Shubham Chaudhuri, World Bank Senior Economist for Indonesia and lead author of the Indonesia Economic Quarterly series.

Ample domestic supplies and a strengthening rupiah led to an unexpected drop in inflation in October and November, making 2009 the lowest inflation year in almost a decade. Inflation is expected to pick up again in coming months with the accelerating economy and projected gradual rise in commodity prices. If  the rising inflation and energy pricing reforms are well managed, the growth acceleration could lead to over a two and a half percentage point drop in the poverty rate, from early 2009 to early 2011.

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Randy Salim
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Mohamad Al-Arief
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