The World Bank released its latest Indonesia Economic Quarterly report on 18 March 2015. In this report, entitled ‘High Expectations’, the World Bank states that it praises the early reform progress in several key areas such as fuel subsidies as well as more key reforms that are underway. This raises high expectations about the Indonesian economy in the middle and longer term. However, the government also faces challenges to implement further complex structural reforms amid subdued growth prospects.
Rapid economic growth for Southeast Asia’s largest economy is unlikely to occur before 2016 as investment growth remains sluggish and global commodity prices remain low (due to the economic slowdown in China) hence limiting Indonesia’s export performance. Considering this context, the World Bank believes that the only way to trigger speedy economic growth is by doubling government spending in infrastructure immediately (causing a multiplier effect by lifting demand and accelerate fixed investment spending), which currently stands at 4.3 percent (y/y). Indonesia is plagued by weak infrastructure thus resulting in high logistics costs and making Indonesian businesses less competitive.
Rodrigo Chaves, World Bank Country Director for Indonesia, said that the Indonesian government deserves praise for imposing key reforms, such as the fuel subsidy reforms. However, amid low global oil prices and weak tax compliance, savings from subsidy reforms have eroded hence requiring sustained public policy action.
The World Bank confirms that domestic consumption in Indonesia continues to constitute the main driver of growth (contributing more than half of total economic growth). However, risks caused by relatively tight credit, higher import costs and profit margin pressures may dampen domestic spending and investment. As such, the World Bank advises the government to continue efforts to improve the investment climate and boost infrastructure spending. The launching of the integrated one-stop service center (Pelayanan Terpadu Satu Pintu, abbreviated PTSP) at the Indonesia Investment Coordinating Board (BKPM) is a step in the right direction but full implementation will require time.
Key Findings in the March 2015 edition of the Indonesia Economic Quarterly:
• Bold fuel subsidy reforms have paved the way for the revised 2015 Budget to shift spending allocations decisively towards development priorities, especially capital expenditures, which are budgeted to double compared with the 2014 outturn.
• Revenues are under pressure. The country’s oil & gas revenues are projected to decline 57 percent in 2015. This makes a significant increase in total revenues from 2014 levels unlikely, in contrast to the 14.6 percent rise in budgeted revenues.
• Consequently, government capital expenditure (capex) is not likely to rise as much as budgeted, constrained not only by execution challenges but also by budget cuts in some areas to meet the de facto fiscal deficit limit of 2.5 percent of GDP. Higher infrastructure spending by state-owned enterprises could provide an additional boost to fixed investment, but the quantity and quality of this spending are uncertain.
• Indonesia’s economy continues to face pressures from lower global commodity prices and demand, notably from China, contributing to a moderation in GDP growth to 5.0 percent in 2014. The World Bank expects GDP to accelerate only modestly, to an average of 5.5 percent through 2016, led by a pick-up in fixed investment growth, helped by rising infrastructure spending (albeit short of targeted levels). Exports are expected to recover slowly but, with investment also pushing up imports, net exports are not expected in the base case to be a major growth driver.
• A considerable portion of the growth slowdown since 2012 can be attributed to a reduction in the potential growth rate to an estimated 5.5 percent or less, not just a cyclical dip in growth, due in part to lower commodity prices. This edition of the IEQ examines the role of Indonesia’s natural resource sector over the commodity boom period, and assesses the more challenging outlook. For Indonesia’s natural wealth to play a stronger role in development, progress on sound policy and regulatory frameworks for, and effective public management of, the natural resources sector will be critical.
• The current account deficit is expected to remain close to 3.0 percent of GDP on average, due to structural factors, sluggish exports, and some pick-up in imports associated with stronger investment. The sharp reduction in global oil prices since mid-2014 is reducing the trade deficit, but lower net oil imports are expected to be offset increasingly by lower natural gas export revenues.
• Rice prices spiked in February, highlighting structural issues in Indonesia’s rice market, the management of which creates distortions and is hampered by a lack of timely, accurate data. The wider headline CPI index has fallen, due mainly to lower retail fuel prices since January, though core inflation has been sticky, at 5.0 percent (y/y).
• Like the currencies of most other emerging market economies, the Indonesian rupiah exchange rate has depreciated significantly against the US dollar, but since mid-2014 has appreciated in real trade-weighted terms. The new fuel pricing system reduces direct fiscal risks from further US dollar strength, so long as it is consistently implemented.
• The government’s ambitious reform agenda has scored some important early successes and raised expectations. Sustainably accelerating growth and poverty reduction will now require a focus on implementation. For example, the government is prioritizing streamlining procedures for business licensing, and has established strong initial momentum, but making the reform operational faces complex challenges.
• World Bank Indonesia Economic Quarterly ‘High Expectations’ (March 2015)
Pertumbuhan ekonomi yang cepat di negara dengan ekonomi terbesar di Asia Tenggara ini sepertinya tidak bisa terjadi sebelum tahun 2016 karena pertumbuhan investasi yang tetap lambat dan harga berbagai komoditi dunia yang tetap rendah yang membatasi performa ekspor Indonesia. upcoming ico oix.li Indonesia dihalangi oleh infrastrukturnya yang lemah yang menyebabkan biaya logistik yang tinggi dan membuat bisnis di Indonesia menjadi kurang kompetitif.