The World Bank released the June 2016 edition of its Indonesia Economic Quarterly (IEQ) report on Monday (20/06). Recently, the Washington-based institution took a rigorous step by downgrading its 2016 global economic growth forecast from 2.9 percent (y/y) to 2.4 percent (y/y). This is a significant downgrade that was primarily due to the weak performance of commodity exporters. Despite this downgrade the World Bank still sees a resilient Indonesian economy, reflected by a GDP growth forecast of 5.1 percent (y/y) in 2016 and 5.3 percent (y/y) in 2017.
The sluggish global context is unfortunate for Indonesia because the country needs much more private investment to supplement public investment as the latter has been under pressure due to weak government revenue amid weaker-than-estimated tax revenue and low commodity prices. However, the World Bank remains optimistic and claims that the current global economic context should be regarded as an opportunity as it is now the right timing for Indonesia to conduct reforms that can improve the nation's competitiveness in manufacturing and services (the World Bank says Indonesia has enormous potential in these two areas). The deepening of industrialization will also reduce Indonesia's traditional dependence on commodity exports.
The World Bank further stated that Indonesia needs a sound industrial strategy where emphasis is put on technological innovation, product development, hence climbing the technological ladder. This requires a strong partnership between the public and private sector.
Some Key Points in the June 2016 IEQ:
- Pro-active policies have supported Indonesia’s economic resilience, which includes prudent monetary policy, higher public infrastructure spending, and deregulation measures to improve trade and investment. However downside risks have intensified - both international and domestic risks.
- The World Bank expects Indonesia's GDP growth at 5.1 percent (y/y) in 2016 and 5.3 percent (y/y) in 2017 - unchanged from the preceding IEQ. Private consumption in Indonesia is expected to pick up slightly in the period ahead. The outlook will depend more on private investment growth as it responds to the recent economic reform packages.
- Indonesia's exports and imports continue to fall, both in volume and value. However, the nation's imports have dropped faster than exports, thus helping to narrow the current deficit account to 2.1 percent of Indonesia's GDP.
- Revenue collection has fallen as well, while at the same time expenditures rose. Responding to the weaker revenue outlook, the government has submitted a draft 2016 Revised Budget which anticipates significant revenues from the tax amnesty. Should inflows from the tax amnesty be less than anticipated, additional expenditure cuts may follow.
- Consumer price index inflation of Indonesia stood at 3.3 percent (y/y) in May. The relatively modest inflation rate has masked high food price inflation. While global food prices have declined, the food price in Indonesia remains high. Policy reforms can help to ease food price inflation.
- This edition also discusses the challenges to revive Indonesia’s industrial competitiveness, particularly with the decline of revenues from commodities. The report also highlights how fiscal policy can help reduce inequality in the country. Savings from reallocation of fuel subsidies in 2015 has helped, but more can still be done.
Further Reading: Indonesia Economic Quarterly (June 2016)