Indonesia: Policies in Focus Going into 2013

December 18, 2012

Jakarta, December 18, 2012 – The economic outlook for Indonesia in 2013 remains positive despite a weak global economy, but maintaining strong investment growth is vital, says a new report by the World Bank released today.

In the December 2012 edition of the Indonesia Economic Quarterly, the World Bank projects growth of 6.1 percent for Indonesia in 2012, with a marginal rise to 6.3 percent in 2013. This projection assumes that domestic consumption and investment growth remain strong, with gradually improving growth in Indonesia’s major trading partners also supporting a modest recovery in exports.

“The global economic outlook remains relatively uncertain and vulnerable to shocks, so it is not a time to be complacent,” says Stefan Koeberle, World Bank Country Director for Indonesia. “The outcome of the “fiscal cliff” negotiations in the US, developments in the Euro area, as well as any further slowdown in China’s economy, can impact our baseline growth projections. And investment growth domestically – which has been crucial for Indonesia’s recent strong economic performance – also faces risks.”

Following rapid growth in recent years, investment now accounts for a third of all spending on Indonesian goods and services. Investment was up 10 percent year-on-year in the third quarter and was responsible for nearly 40 percent of the solid GDP growth seen in the quarter of 6.2 percent year-on-year. Although investment has so far been resilient, investment and global commodity prices tend to move in tandem, so Indonesia’s investment outlook may weaken as weaker commodity-related earnings filter into the wider economy. A number of legal and regulatory announcements over the year have added to the risk of domestic policy uncertainty, potentially negatively impacting investor sentiment, which remains fragile across the globe.

“A strong policy framework is key to facilitating investors’ ability to plan ahead and to maintaining the confidence in the future that motivates investment” says Ndiamé Diop, World Bank Lead Economist and Economic Advisor for Indonesia. “Leading up to the 2014 general elections, Indonesia’s business and investment policies will be under particular focus. Continuing to improve the regulatory environment and effectively communicating new reforms are important steps which can support the investment outlook and continue to drive robust growth.”

The contentious and complicated annual process of setting minimum wages has also been in the spotlight. Given their importance for workers’ welfare and, potentially, for economic growth, the way in which minimum wages is negotiated could from moving towards a more comprehensive, technical and inclusive approach to bargaining in the labor market, ensuring that all stakeholders, including informal sector workers, are represented.

The December IEQ also addresses Indonesia’s medium-term development challenges, and what may be done to improve progress. For example, how to further enhance public service delivery and access across Indonesia, addressing the different rates of progress in the delivery of infrastructure, health and educational services, as shown in the recent Village Infrastructure Census.

The importance of disaster risk preparedness is also addressed in the report. For example, Indonesia’s successful recovery efforts following major natural disasters in Sumatra and Java provide examples of how to build resilience against disaster risks, including the risk of flooding in Jakarta.

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