Indonesia weathers global financial turbulence, but risks remain high

July 13, 2012

Jakarta, July 12, 2012 -- Indonesia is weathering the current global economic volatility with growth in 2012 projected at a solid 6 percent, according to a World Bank report released today. 

However, the volatility of recent portfolio capital outflows and of equity markets indicate that the economy is not immune from Eurozone market uncertainty.

The prices of some of Indonesia’s key commodity exports such as coal, rubber, palm oil and copper have also dipped, some by almost 20 per cent, contributing to a weakening in exports and the movement of the current account balance into deficit.  The rupiah has also continued to depreciate, down to around 10 per cent against the US dollar since August 2011.

"While Indonesia still enjoys robust growth compared to other emerging economies, thanks to the strength of domestic consumption and investment, it will not be spared from the impacts of a global downturn, especially if global commodity prices and demand from economies such as China were to take a hit," says World Bank Indonesia Country Director Stefan Koeberle.

For 2013, the baseline projection is for growth of 6.4 per cent.  However, a severe global downturn could push growth down to around 4 per cent.

With international financial market turbulence set to continue in the near-term, enhancing crisis preparedness should be a policy priority, cautions the July 2012 issue of the Indonesia Economic Quarterly.

The Indonesian Government is making important progress, such as in putting in place crisis management protocols and arranging contingent financing for the government in the event of tightening market conditions. But more work can be done, says the report.

Preparation of fiscal policy plans, for example, for spending to support the economy and protect the poor should start now so that they can be quickly implemented in the event of a crisis.

Clear and consistent policies also boost investor confidence, and recent trade and investment policy measures that restrict imports of certain goods and introduce new regulations instead run the risk of sending mixed signals about reforms.

"Indonesia faces the twin challenges of enhancing crisis preparedness to deal with near-term shocks, while at the same time supporting the drivers of medium-term growth. This would require keeping on track with key structural reforms and investments, which can support the confidence of investors at times when it may be needed most," says World Bank Lead Economist Shubham Chaudhuri.  "There is no room for complacency in the current fragile market environment."

The launching of the report was accompanied by a panel discussion on "Indonesia Rising in a More Volatile Global Environment" which included World Bank Managing Director Sri Mulyani Indrawati, Head of the Indonesian Investment Coordination Board, M. Chatib Basri, Indonesia's Vice-Minister for Finance Mahendra Siregar, and Sofyan Wanandi, Chairman of the Indonesian Employers’ Association.

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