Reforms Strengthen Indonesia’s Economic Resilience: World Bank Report

June 20, 2016

Lower than Expected Global Growth Forecast Poses Risks to Stronger Domestic Economic Recovery

Jakarta, June 20, 2016: Indonesia’s economy continues to prove resilient with a forecasted GDP growth of 5.1 percent for 2016. But weaker than expected global economic expansion may moderate the growth recovery of Southeast Asia’s largest economy, according to a new World Bank report. The World Bank recently lowered its growth projections for the world by half a percentage point than previously expected, to 2.4 percent.

Private consumption and public capital spending are projected to support growth in Indonesia in 2016. Continued policy reforms can help counter the impact of slowing demand and financial market volatility globally, said the June 2016 edition of the Indonesia Economic Quarterly.

Prudent monetary policy, increased public investment in infrastructure, and policy reforms to improve the investment climate, are helping Indonesia maintain growth in the order of 5.1 percent,” said Rodrigo Chaves, World Bank Country Director for Indonesia. “But the anemic global economy is limiting much needed investment and continued reforms would help Indonesia to buoy investor confidence.”

Numerous policy reforms have been announced since September 2015, with some sectors – in particular, trade and investment policy – witnessing a shift towards deregulation, according to the report, entitled Resilience through Reforms. However, it is not yet known whether effective implementation of policy changes is taking place, and many sectors remain closed or partly closed to foreign investment.

Increased private sector investment is essential for Indonesia, as pressures on public revenue may curtail the government’s plans for much more infrastructure investments, which have supported economic growth. However, even with a lower revenue forecast and a larger fiscal deficit of 2.8 percent of GDP, World Bank calculations show that 90 percent of the original 2016 Budget investment target could be achieved.

While private consumption growth remained resilient at 5 percent year-on-year, slowing growth in fixed investment due to reduced government spending has contributed to Indonesia’s real GDP growing at 4.9 percent year-on-year in the first quarter of 2016.  Weak global demand continues to put pressure on exports.

Faced with the continued decline of the commodities sector, Indonesia can seize the opportunity to expand the manufacturing and services sector. Indonesia’s global share of manufacturing has stagnated at around 0.6 percent over the last 15 years.

This is a critical opportunity for Indonesia to implement further reforms that will enhance the competitiveness of its manufacturing and services sectors, especially tourism. In addition to ongoing reforms, a sound industrial strategy will be key, focused on technology transfer or capacity development in terms of product design, engineering and development in promising industries. To upgrade industries and climb the technological ladder, a strong partnership with the private sector will be crucial,” said Ndiame Diop, World Bank Lead Economist for Indonesia.

Currently, Indonesia’s manufacturing exports are dominated by ‘low-tech’ products and operations are focused mainly on blending and assembly, making the country vulnerable to changes in a multinational corporation’s location strategy.

In addition to providing an overview of the challenges of Indonesia’s manufacturing sector, this edition of the IEQ also analyzes the increase in trade deregulation and how further trade liberalization can impact living costs, including food prices. The report also explains how bank income and expenditure, shallow financial markets, and competition from the Government for funds, have contributed to higher interest rates in Indonesia. 

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