Indonesia: Steady growth but pressures mounting

March 19, 2013

Indonesia posted steady growth in 2012, but mounting pressures could threaten momentum

Jakarta, March 18, 2013 – Indonesia’s economy grew at a steady pace throughout 2012, but the World Bank’s March 2013 edition of the Indonesia Economic Quarterly (IEQ) notes that domestic economic and policy pressures are mounting. Full-year GDP growth for 2012 came in at 6.2 percent, down slightly from 6.5 percent in 2011. The World Bank projects 6.2 percent growth in 2013 but moving growth significantly higher will be challenging.

Economic resilience has been Indonesia’s strength despite a weaker global economy,” says Stefan Koeberle, World Bank Country Director for Indonesia. “With the right policies in place, Indonesia could move growth higher, harnessing the forces of urbanization and rising incomes, while providing quality jobs for a growing labor force.”

With policy uncertainty remaining in the US and in the Euro Area, the World Bank expects only a slight uptick in global growth in 2013 – rising to 2.4 percent from 2.3 percent in 2012. Drops in key commodity prices and the weak external environment helped move Indonesia’s current account into a deficit of 2.7 percent of GDP in 2012, from a small surplus of 0.2 percent of GDP in 2011.

Fuel subsidies, which reached 2.6 percent of GDP in 2012, may have added to the pressure on the external trade accounts, and weighed substantially on the fiscal sector.

In launching the IEQ, the World Bank highlighted five emerging sources of pressure on the economic outlook. These were the cooling in investment growth, the possible implications of moderating measured real sales and nominal GDP growth, trends in the external balances, the continuing burden of energy subsidies, and the slowing pace of poverty reduction.

The biggest risk to near-term growth may come from domestic investment, which drove two-fifths of the growth seen in 2012.  Investment spending has slowed, particularly in capital-intensive resource sectors.  Fixed investment growth declined to 7.3 percent year-on-year in the fourth quarter of 2012, down from 12.5 percent in the second, and imports of capital goods have weakened. The investment climate would benefit from improved certainty in the regulatory environment.  

Appropriate policy responses to mounting pressures could also include increasing public infrastructure investment and focusing on trade competitiveness, as well as fuel subsidy reform.

“As pressures mount, global experience suggests that proactive policy responses help keep economies on track and avoid the growth hiccups that often characterize middle income countries. Recent developments warrant a particular focus on trade competitiveness and supporting private investment,” says Jim Brumby, World Bank Lead Economist and Manager for the Poverty Reduction and Economic Management sector in Indonesia.

Investment is also crucially needed in inadequate and ageing infrastructure which continues to constrain growth, causing bottlenecks and high logistics costs.  Infrastructure investment remains at around 3 to 4 percent of GDP, compared with pre-Asian crisis levels of around 7 percent.

The infrastructure challenge for many of Indonesia’s cities is particularly acute - more than half of Indonesia’s population live in urban areas, and the pace of urbanization remains high. Improving the level, quality and efficiency of infrastructure investment can help to unlock the economic benefits of urban agglomerations and support the quality of service delivery, particularly in mid-size cities that lag behind smaller urban centers and the “mega-cities”.

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