June 28, 2011

• Indonesia’s economic performance remains positive, and future potential is even greater, but recent developments have highlighted ongoing challenges and risks around the outlook

• Growth moderated slightly in Q1 2011 but still came in at a robust 6.5 percent year-on-year

• Portfolio capital inflows have been strong and foreign direct investment inflows have continued to grow

• The baseline projections for Indonesia’s growth are unchanged from the March 2011 IEQ at 6.4 percent for 2011 and 6.7 percent for 2012 although uncertainty has risen

• Recent turbulence in financial markets related to the Euro zone debt crisis is a key source of this uncertainty and a reminder of Indonesia’s sensitivity to movements in short-term capital flows

• High oil prices highlight the opportunity cost of Indonesia’s energy subsidies while the savings from reforms could be used to limit their impact on vulnerable households

• Weak government disbursement rates illustrate the constraints on improving public service delivery and infrastructure provision

• The poor quality of infrastructure is one of the biggest obstacles to firms operating in Indonesia

• As emphasized by the Government’s Master Plan 2011-2025, improving connectivity is a key ingredient for Indonesia to reach its future growth potential

• Successful implementation of the Master Plan can be supported through the prioritization of policies and investments along with the political commitment and coordination to implement the necessary reforms

In addition to the usual economic update and forecasts, Section B of this Indonesia Economic Quarterly examines in more detail some topical issues, namely Indonesia’s Chairmanship of ASEAN and the recent rise in foreign direct investment inflows. Section C looks to the medium-term and considers how addressing Indonesia’s infrastructure challenges can enhance competitiveness and growth. It then provides an overview of the Government’s recently released Master Plan for the “Acceleration and Expansion of Indonesia’s Economic Development 2011-2025” (MP3EI), with particular focus on the issue of connectivity which is a central pillar of the plan.