20 January 2020 (closed)
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In the World Bank’s East Asia and Pacific Economic Update, released on Monday (13/04), the Washington-based institution revised down its economic growth forecast for Indonesia to 5.2 percent (y/y) in 2015, down from 5.6 percent in its October 2014 Update. Main reasons for this downgrade is that Indonesia’s export performance remains weak amid the sluggish global economy, including weak demand from China (Indonesia’s largest trading partner). Meanwhile, Indonesia’s domestic consumption is curtailed by high interest rates.
Being an important commodity producer and exporter, Indonesia is plagued by current low global commodity prices as the value of exports declined drastically in recent years. Problematically, however, commodity price pressure is likely to continue this year according to the World Bank. The institution expects that Indonesia’s exports to China will decline, particularly coal exports. China has been experiencing a period of slowing economic growth and this has serious spill-over effects on the rest of the East and Southeast Asian region.
The economy of China is estimated to grow 7.1 percent (y/y) in 2015 and 7.0 (y/y) in 2016, down from the 7.4 percentage point (y/y) growth in 2014. This slowing growth trend is also partly the result of Chinese policymakers’ intention of turning the economy of China from being ‘export-driven’ to ‘consumption-driven’.
Based on the latest data from Statistics Indonesia (BPS), Indonesia’s exports totalled USD $12.29 billion in February 2015, down 16.02 percent (y/y), constituting the largest drop in nearly three years. Indonesia’s export performance was plagued by low global petroleum and commodity prices. Meanwhile, severe rupiah depreciation against the US dollar failed to support the country’s export. Instead rupiah depreciation in fact exacerbated the situation as it brought ‘imported inflation’.
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia
Theoretically, sharp rupiah depreciation against the US dollar should boost Indonesian exports. However, this effect has been largely absent due to weak global demand for commodities as well as Indonesia’s rising wages and other factors, such as infrastructure and bureaucracy, that hampered the country’s manufacturing exports (as it leads to weak competitiveness). Moreover, due to high Indonesian inflation, the rupiah’s real trade-weighted exchange rate has in fact strengthened.
Apart from weak export performance, Indonesia’s economic growth is also curbed by the higher interest rate environment. Starting from June 2013, Indonesia’s central bank (Bank Indonesia) has introduced a higher interest rate environment (gradually) in an effort to combat inflation (which had accelerated after several subsidized fuel price hikes), curb the country’s wide current account deficit, support the Indonesian rupiah, and curtail capital outflows amid monetary tightening in the USA. Currently, the key interest rate of Bank Indonesia stands at 7.50 percent (significantly higher than 5.75 percent in June 2013). Today (Tuesday 14 April 2015), Bank Indonesia will hold another policy meeting in which it discusses the country’s interest rate environment. Most analysts expect that the central bank will maintain its key interest rate (BI rate) at 7.50 percent.
Sharp rupiah depreciation continues to plague Indonesia and leads to reduced investor confidence in the financial fundamentals of Indonesia. The latest World Bank report suggests that Indonesia needs to tackle structural impediments in order to create rapid and structural growth, necessary to generate (high-quality) jobs and to support poverty reduction.