Indonesia’s economy continued to grow at a steady pace in the final quarter of 2012, taking full-year GDP growth to 6.2 percent. This was only a modest reduction from the 6.5 percent growth recorded in 2011 - a resilient performance considering the weak global environment and unsettled financial market conditions which prevailed for much of the year. Looking ahead, Indonesia should be able to maintain a solid pace of growth, but there is no room for complacency, as a number of pressures are mounting which could move the economy off this trajectory. Global economic uncertainties remain elevated, Indonesia’s investment growth has moderated and, as highlighted in the December 2012 IEQ, the quality of domestic policies is increasingly in focus, particularly in the run-up to the 2014 elections. Even if growth of 6.0 to 6.5 percent is maintained, there is a risk that, without more progress on policy reform and implementation, the opportunity could be missed to boost growth at a time when the economy is benefiting from a growing labor force and the agglomeration effects of urbanization. Future appointments to key economic policy roles, following the nomination of the Minister of Finance as the next Governor of Bank Indonesia (BI), will also frame the macroeconomic policy environment going forward.

The final quarter of 2012 remained challenging for many of Indonesia’s major trading partners; growth in the US and Japan was flat and the Euro Area recession deepened, though growth in China firmed. Moving into 2013, global growth remains subdued but international economic conditions have turned somewhat more supportive for growth in Indonesia. Global industrial production is increasing at a modest pace, and global trade is expanding again, with broad-based increases for developing countries’ exports. Commodity prices have also generally posted modest gains since December, including those of some of Indonesia’s key export products like copper, rubber and palm oil. The improved global economic data, and diminishing fears over the risks of extreme adverse scenarios in the Euro Area, US and China, coupled with accommodative monetary policy in most high income economies, have been broadly supportive of financial markets. Global equity markets rallied in the final two months of 2012 and have generally held these gains, with some developed country equity indices at or near record highs in nominal terms. Emerging market sovereign credit spreads have widened so far in 2013 but still remain close to their tightest levels since the global financial crisis.

The World Bank expects global growth to increase only slightly in 2013, rising to 2.4 percent from 2.3 percent in 2012, before moving up to 3.1 percent in 2014. Even this modest growth is subject to risks, with significant policy uncertainty still clouding the outlook. While the US skirted the “fiscal cliff” at the start of the year, the extent of fiscal consolidation is not yet clear and will depend on how long-lived the sequester spending cuts prove to be. Economic conditions in the Euro Area remain extremely challenging. The pick-up recorded in China’s growth rate has been a major bright spot amongst the world’s biggest economies but has come with a rapid expansion in credit and property values.

Economic growth in Indonesia in the final quarter of 2012 continued the recent pattern of remaining steady despite challenging external conditions. GDP expanded by 6.1 percent year-on-year (yoy), down just slightly from 6.2 percent in Q3, and accelerating in sequential terms to a seasonally adjusted 1.7 percent quarter-on-quarter (qoq) compared with 1.3 percent in Q3. Private consumption, accounting for 55 percent of GDP, made the biggest contribution to growth. Government consumption, however, contracted, reflecting in part spending restraints imposed in mid-2012. Central government capital spending continues to grow strongly, with the provisional 2012 Budget outturn showing a 19 percent annual increase in nominal terms (though the disbursement rate relative to the significantly increased revised Budget allocation was only 80 percent). However, public investment spending accounts for only a small share of total fixed investment, the growth of which has slowed markedly, to 7.3 percent yoy in Q4, down from the 12.5 percent yoy peak recorded in Q2 2012. The major recent drag on growth has been net exports, which reduced growth in 2012 by 1.5 percentage points, reflecting weak exports and strong import growth.

The current account deficit widened to 3.6 percent of GDP in Q4 2012, taking the deficit for 2012 as a whole to USD 24.2 billion, or 2.7 percent of GDP (compared with a 0.2 percent surplus in 2011). Through mid-2012 most of the decline came from a rapidly shrinking non-oil and gas trade surplus, followed in recent months by a widening of the oil deficit, which reached a record USD 23 billion for 2012. The overall balance of payments remained in surplus in Q4, on the back of strong net capital inflows, with inbound Foreign Direct Investment (FDI) as measured by BI rising 3 percent over 2011 to USD 20 billion. However, the basic balance (current account balance plus net direct investment) remains negative, implying a continued reliance on potentially volatile portfolio investment. In addition, external debt has risen quite significantly over the past year, and while debt sustainability metrics remain strong, gross external financing needs have grown as a result. There is therefore a need to continue increasing FDI, and supporting portfolio inflows, to meet financing needs.

To read the complete report, click here.

Discuss