Rising private sector investment and strengthening commodity prices are the correct ingredients that can trigger accelerated economic growth in several Southeast Asian nations in 2017. In a report entitled "Global Economic Prospects: Weak Investment in Uncertain Times", which was released on Tuesday (10/01), the World Bank set its forecast for Indonesia's economic growth at 5.3 percent year-on-year (y/y) in 2017, followed by a 5.5 percent (y/y) growth rate in both 2018 and 2019, up from an estimated growth rate of 5.1 percent (y/y) in 2016.
Direct investment, both foreign and domestic, is expected to strengthen in Indonesia in 2017, encouraged by the country's accelerating economic growth (implying people's improving purchasing power), while the central bank of Indonesia (Bank Indonesia) has been able drastically cut its interest rate environment over the past year due to low inflation, a relatively stable rupiah exchange rate and an under-control current account deficit. In fact, private investment could be the second-largest engine of overall economic growth of Indonesia in 2017, after household consumption (which accounts for about 55 percent of Indonesia's GDP).
However, the Indonesian government should continue to improve the quality of the investment climate, especially now investors are concerned about rising political, ethnic and religious tensions in Southeast Asia's largest economy.
Meanwhile, the modest recovery of global crude oil prices encourages other commodity prices to go upward (for example coal and crude palm oil) and those countries that export a significant amount of natural resources will therefore experience better times. The World Bank expects recessions in Brazil and Russia to end.
Jim Yong Kim, President of the World Bank Group, said it is currently the right time to raise investment in infrastructure and human resources in order to seek structural, inclusive growth and combat poverty. He added that after years of disappointing global economic growth, there are now stronger economic prospects on the horizon. The World Bank put its outlook for global economic growth at 2.7 percent (y/y) in 2017 and 2.9 percent (y/y) in 2018 and 2019, up from an estimated 2.3 percent (y/y) in 2016.
Global trade, however, remains plagued by uncertainty, not the least because of the uncertain policy direction of the USA. President-elect Donald Trump, who beat Hillary Clinton in the 2016 US presidential race, will be inaugurated later this month and will most likely cut taxes, boost government spending on infrastructure and seek a more protectionist approach in terms of trade. Being the world's number one economy and a key trading partner of many countries, US trade protectionism can have a negative impact on economic growth of other countries.
Although on the one hand, Trump's policies are expected to lead to higher US economic growth (and thus a boost for global economic growth), on the other hand the implementation of more US interest rate hikes will lead to a stronger US dollar and could trigger capital outflows from emerging markets. This is particularly a problem for those country that rely on external financing. Indonesia is one of these examples as it has to cope with a structural current account deficit at between 2 - 3 percent of gross domestic product (GDP).
China, the world's second-largest economy, will have to face the continuation of slowing economic growth according to the World Bank. This is also what undermines overall economic growth of East Asia and the Pacific.
World Bank Economic Growth Projections (%)
Source: World Bank