Global Volatility Constrains Economy in Indonesia: World Bank

October 22, 2015

More government action can accelerate growth, says new report

Jakarta, 22 October 2015 – Facing uncertain global conditions which constrain growth, ongoing government action such as stimulus measures, regulatory reforms and improved public spending will help Indonesia weather the year ahead, says a new World Bank report.

GDP growth remained at 4.7 percent for the second quarter of 2015, due to weakening global trade and lower commodity prices, as well as moderating fixed investment and domestic consumption, according to the October 2015 edition of the Indonesia Economic Quarterly, entitled ‘In Times of Global Volatility’.

“Indonesia faces challenges ahead along with its neighbors, as China rebalances its economy and the US Fed prepares to normalize monetary policy. But growth performance here remains better than other commodity exporters, and the government’s policy responses are pro-active. Effective implementation of these reforms will provide a much-needed boost to investor confidence,” says Rodrigo Chaves, World Bank Country Director for Indonesia.

For example, accelerating in the third quarter, public capital spending is estimated to have increased by 21.4 percent in real terms for the first nine months 2015, compared to the same period in 2014, providing support to growth. Additional government measures to improve project planning and implementation are expected to further improve the growth rate of fixed investment, at 3.2 percent in Q2. 

Currently, the World Bank estimates GDP growth of 5.3 percent for Indonesia in 2016. However, the forecast faces risks, which include the possible increase in US interest rates, continued slowdown in key trading partners including China, a weakened corporate sector due to currency depreciation and declining profit margins, and the drought caused by the weather pattern El Niño.  The impact of El Niño may increase rice prices by up to 10 percent for the year, and CPI inflation by at least 0.3 to 0.6 percentage points. Poor households spend a larger share of their income on food and may be impacted more by higher prices.

“Efforts to support businesses and people, as well as regulatory reforms that reduce red tape for investment and exports, are strong initiatives. Additional reforms will enhance the investment climate and accelerate growth. Further focus on the manufacturing sector and on tourism – both insufficiently tapped opportunities – would help boost incomes and prevent the current account deficit from rising again when growth strengthens,” says Ndiame Diop, World Bank Lead Economist for Indonesia.   

The October 2015 IEQ also takes a closer look at the national health insurance program launched in January 2014, and the challenges of achieving universal coverage and financial sustainability.  The constraints in delivering affordable housing – another government priority, as reflected in the One Million Homes initiative – is also discussed in this edition.


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