Indonesia: Resilience tested, adjustment continues

October 4, 2013

GDP growth seen moderating to 5.3 percent in 2014, as Indonesia adjusts to weaker commodity prices and tighter external financing conditions

Jakarta, October 4, 2013 – Indonesia’s economy continues to adjust, as weaker commodity prices, tighter international financing, and slowing domestic demand moderate the growth rate, to 5.6 percent for 2013, indicates the latest issue of the World Bank’s Indonesia Economic Quarterly, or IEQ.

Further moderation of growth – at 5.3 percent -- may be expected in 2014, with growth in high income economies firming but international market conditions likely remaining volatile. The government’s policy responses and implementation will be vital to avoiding risks of more adverse scenarios for Indonesia’s economy and in helping to achieve higher trend growth.

 “While its macro-economic outlook may look more subdued, Indonesia is taking appropriate steps in adapting its policy response to changing circumstances.  This response includes allowing the exchange rate to move and calibrating interest rates in order to help ease pressure on external accounts,” says new World Bank Country Director for Indonesia, Rodrigo ChavesMilestone policy shifts, such as the adjustment in subsidized fuel prices, are important key steps, and further reforms on fuel subsidies would better protect Indonesia from fiscal risks in the short term, as well as free up spending for vital long-term investments in infrastructure and social programs.”

 Successful reforms, however, will require two key elements: strong communication around policy changes, and committed implementation, reports the IEQ.

 “Investor confidence in Indonesia is being tested, but the lure of the country’s large domestic market and immense potential are not in dispute.  Reassuring investors and markets that recent turbulence is prompting greater focus on coordinated policy reforms will be decisive in encouraging much-needed foreign direct investment,” says Jim Brumby, World Bank Lead Economist and Manager for the Poverty Reduction and Economic Management sector in Indonesia.

 In August of this year, the Indonesian government unveiled a policy package that seeks to support investment and exports, by retracting some interventionist trade policies and addressing inefficiencies in the investment process. But shorter-term fixes that would boost competitiveness, such as improving logistics traffic at Indonesia’s gateway Tanjung Priok port, are equally important, says one analysis from the IEQ.

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