Jakarta, October 4, 2011 – Despite the recent turbulence in its financial markets, Indonesia is in a strong position to weather the current international economic problems, says the World Bank in its latest Indonesia Economic Quarterly, released today. As in other emerging markets, the downgrading of the global growth outlook and developments in international financial markets contributed to the portfolio capital outflows and significant equity market falls seen in Indonesia over the past two months. International financial markets are likely to remain turbulent in the near term, but Indonesia’s domestic drivers of growth, its solid fiscal position, accumulation of reserves, and strengthened financial sector performance make it relatively well-placed to deal with external shocks.
“Like other countries in the region, Indonesia’s financial markets are not immune to external events. But while many countries across the world have seen their fiscal and private sector balance sheets weaken markedly since 2008, Indonesia has continued to be a strong economic performer,” says Shubham Chaudhuri, Lead Economist for the World Bank in Indonesia. “Indonesia’s solid macroeconomic fundamentals are some of the main defenses to weather ongoing market turbulence. In the current environment, it is even more important for Indonesia to avoid policy uncertainty and to take steps to increase further its resilience to financial market shocks.”
Indonesia’s domestic private consumption and investment supported GDP growth of 6.5 percent in each of the first two quarters of 2011. With food price inflation coming down over the year, headline inflation has moved to below 5 percent. The underlying strength of the domestic economy is one factor which attracted the sizeable inflows of FDI and portfolio capital over 2010 and the first half of 2011. Looking forward, the World Bank’s baseline projection is for growth of 6.4 percent in 2011 and a robust 6.3 percent in 2012. This slightly lower growth next year reflects the downgrade in external demand and moderation in international commodity prices.
“Indonesia’s direct trade exposure to the downturn in US and EU markets is relatively limited compared with other countries in the region. However, capital flows to Indonesia remain exposed to changes in investor sentiment. What can really put Indonesia on a stronger footing in this climate of global volatility is the quality of its policy response” says World Bank Country Director for Indonesia, Stefan Koeberle. “Continued progress on important structural reforms, such as energy subsidy reform and land acquisition, and upgrading the country’s infrastructure, can not only help move Indonesia’s growth trajectory upwards but can play a valuable role in supporting investor confidence in the near-term.”