Indonesia: Maintaining resilience amidst global uncertainty

October 16, 2012

Indonesia’s growth performance remains robust in the face of global economic weakness but resilience to future shocks can be further strengthened through continued crisis preparedness, and through improving the investment climate and the quality of public spending 

Jakarta, October 15, 2012
– Indonesia’s recent growth has so far proved robust to the weakness in the world economy, but with global uncertainty remaining elevated, the challenge is to maintain this resilience, according to a report by the World Bank released today.

Indonesia’s economic growth has remained strong, at 6.4 percent year-on-year in the second quarter of 2012, supported by buoyant private consumption and increased investment. However, Indonesia is clearly feeling the effects of the weaker external environment, reports the October 2012 issue of the Indonesia Economic Quarterly.

Central bank policy actions in the US, Japan and the Euro zone have helped calm international financial markets but global growth remains weak. Investment growth has slowed in China, with knock-on effects for commodity prices and demand.

Net exports were a significant drag on GDP growth in the second quarter of 2012.  Monthly export values have also continued to weaken, with resource-related exports seeing some of the largest falls. The decline in the goods trade surplus contributed to the widening in the current account deficit in the second quarter of 2012. However, some of the pressure on the trade balance may be partly self-correcting, as demand for intermediate and capital goods imports used as inputs for export production soon comes down.

 “Indonesia’s recent growth performance has been strong, but there remain considerable risks to the global economic outlook,” says Stefan Koeberle, World Bank Country Director for Indonesia. “Supporting investment by ensuring a predictable and consistent regulatory environment, and by further improving the quality of public spending, can help maintain Indonesia’s economic resilience.”

Balancing the weakness in the external environment against the strength of domestic demand, the World Bank projects Indonesia’s GDP to grow by 6.1 percent in 2012, moving up slightly to 6.3 percent in 2013. Risks to this baseline projection are to the downside, primarily due to ongoing uncertainties in the Euro zone, the extent of possible fiscal contraction in the United States, and the risk of further slowdowns in Indonesia’s other major trading partners, notably China.

“The policy challenge moving forward involves continuing to focus on short-term crisis preparedness, and on longer-term structural measures aimed at sustaining Indonesia's robust growth, like enhancing the implementation of planned investments in new infrastructure, supporting skills development, and enhancing social protection,” according to Ndiamé Diop, World Bank Lead Economist and Economic Advisor for Indonesia.

The Indonesian government has continued to improve crisis preparedness and boost investments in key development areas, but maintaining momentum is vital.  Spending on energy subsidies remain substantial, impeding more spending on social protection or infrastructure. More broadly, improving the quality of public spending -- its allocation, and efficacy of implementation and delivery -- would have immense impact. Finally, in an environment of fragile investor sentiment, the Government can support the resilience of domestic and foreign investment in Indonesia by maintaining clear, consistent and coordinated policy actions.

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