The World Bank listed various reasons to underpin its revision: higher inflation, slowing domestic demand, lack of improvement in global commodity prices, as well as concerns about the country's financial and capital markets.

Lead economist and economic adviser of the World Bank in Indonesia, Ndiame Diop, said that higher inflation is caused by the increase in price of subsidized fuel in late June. The World Bank believes that inflation will rise to 7.2 percent at end 2013 (from its previous forecast of 5.5 percent in March 2013). Higher inflation will trigger slower domestic demand, particularly within the poorer segments of Indonesia's society. Domestic demand is expected to rise by 4.8 percent only this year, from 5.0 percent in 2012.

"However, higher inflation and slowing domestic consumption is believed to be of a temporary nature and should not be too alarming," said Diop at the press release of the IEQ July report.

Diop reminded that the global economy is also not back on track yet, which means that commodity prices remain weak. This subsequently impacts negatively on the value of Indonesia's exports. Compared to January 2011, prices of coal, palm oil, crude oil, rubber and copper have experienced declines of about 21 percent are expected to remain weak in the foreseeable future.

Weak exports are also caused by slowing economic growth in Indonesia's major trading partners, such as China, Japan and Europe. The World Bank expects major trading partner growth to reach 3.4 percent this year, lower than its forecast in March (3.7 percent).

Pressures also arise from shocks in the country's capital markets. The intention of the Federal Reserve to withdraw the quantitative easing program towards mid-2014 will result in higher yields on US government securities. This will spur investors to sell assets in emerging markets which brings market turmoil, including in Indonesian markets. As a result emerging currencies will depreciate against the US dollar. Similarly, the stock markets in emerging economies will loose a significant amount of foreign funds. Results have been visible since mid-June 2013 when the main stock index of Indonesia (IHSG) was corrected downwards and the IDR rupiah depreciated  steadily.

Besides the above matters, the World Bank also expects a slow down in investments in Indonesia. This trend is already visible in lower imports of machinery as well as industrial and transportation equipment. Moreover, slowing investments have been seen starting from Q1-2013 when growth of investments only amounted to 5.0 percent, significantly lower than Q1-2012 (9.9 percent).

Nevertheless, the World Bank notes a significant growth in Indonesia's agriculture sector in 2013. This sector is expected to grow 4.1 percent, much higher than the forecast in March (2.8 percent). However, the industry and services sectors will post declining growth figures this year. In fact, Indonesia's industry sector growth is expected to slow down to 2014.

World Bank Projections

     2012     2013¹     2014¹
Agriculture    4.0%     4.1%     3.1%
Industry    5.2%     4.5%     3.1%
Services    7.7%     7.5%     8.0%

annual percentage growth
indicates the revised forecast
Source: World Bank

     2011    2012    2013¹    2014¹
Gross Domestic Product
   6.5%    6.2%    5.9%    6.2%
Inflation    5.4%    4.3%    7.2%    6.7%
Major Trading Partner Growth    3.6%    3.4%    3.4%    4.0%
Exchange Rate       -    9419    9750    9700

annual percentage growth except exchange rates
indicates the revised forecast
Source: World Bank