Jakarta, December 16, 2010 – The latest Indonesia Economic Quarterly released by the World Bank today highlights the strengthening of capital flows into Indonesia through 2010 and the effect of recent increases in commodity prices.
Capital inflows, particularly portfolio flows, have been attracted by Indonesia’s higher yields, stronger growth prospects, and improving creditworthiness relative to higher-income economies. These flows bring benefits, such as lowering financing costs, but can also raise macroeconomic and prudential policy concerns. Meanwhile demand from rapidly growing emerging markets (especially China) coupled with monetary expansion in the US and other countries have helped to drive up global prices in non-energy commodities, including food and raw materials. Both of these global trends are supportive of Indonesia’s balance of payments position but present risks due to potential future reversals and rising inflation, especially in food.
“The challenge is to maximize the opportunities presented by capital inflows and rising commodity prices for Indonesia, while managing their risks” said World Bank Lead Economist for Indonesia, Shubham Chaudhuri. “These include, for example, enhancing incentives for foreign direct investment, to help to shift inflows towards longer-term investments”.
Growth in Indonesia softened in the third quarter, mainly due to domestic factors, such as weather-related disruptions to agriculture, mining and quarrying.As a result, the World Bank revised its 2010 growth forecast downward by 0.1 percentage point to 5.9 percent. These agricultural supply shocks and rising commodity prices fed into domestic food prices, contributing to a pick-up in headline inflation in November. Looking toward 2011, positive trends in investment and strength of private consumption are expected to continue, and the World Bank is forecasting a mild pickup in growth to 6.2 percent.
Over the medium term, to reach the Government target of 7 percent growth, Indonesia will need to invest in critical infrastructure and job-creating economic activities. The recently passed Budget for 2011 is a positive step with an increased allocation for capital expenditures, and additional measures to address impediments to spending execution are also welcome. With Indonesia moving to accelerate growth, foreign capital is likely to play an increasing role, especially if there is greater certainty and consistency in Indonesia’s regulatory system, and catalytic government investments are undertaken to improve connectivity – within and between Indonesia’s islands and internationally.
“Going forward, Indonesia could make growth more inclusive with policies that address vulnerability to poverty and improved access to basic services,” said World Bank Country Director for Indonesia, Stefan Koeberle. “This will require creating quality employment opportunities for the poor and near-poor, and providing a safety net for those hit by events affecting health, purchasing power, or livelihoods.”
In addition to covering recent economic developments and the outlook, this issue of the Indonesia Economic Quarterly analyzes a variety of topics related to different aspects of poverty and service delivery. These include the challenges of improving access to basic services such as water supply and sanitation and urban housing; the Jamkesmas health insurance for the poor program; the previous usage of the nationwide temporary cash transfer program for poor households, Bantuan Langsung Tunai; and, how monitoring and evaluation information can be used to increase our understanding of the Government’s ability to deliver goods and access to basic services.